CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Grupo Cementos de Chihuahua, S.A.B. de C.V.'s (GCC) Long-Term local and foreign currency Issuer Default Ratings (IDRs) at 'BB'. Fitch has removed the IDRs from Rating Watch Negative and assigned a Stable Outlook.
The removal of the Rating Watch Negative follows the announcement that GCC concluded the acquisition of USD306 million in assets previously owned by Cemex, S.A.B. de C.V. The assets involve a cement plant in Odessa, TX; two cement distribution terminals located in Amarillo and El Paso, Texas; and concrete, aggregates, asphalt and building materials businesses in El Paso, Texas and Las Cruces, New Mexico.
The Stable Outlook reflects Fitch's expectations of pro forma debt/EBITDA leverage remaining close to 3.5x in 2017 before declining around 3.2x by 2018. GCC's ratings reflect the company's solid business position in the cement, ready mix and aggregates segments in the regions where it has a presence; diversified operations in Mexico and the U.S. in the non-residential and residential sectors; as well as positive free cash flow generation through the recent industry cycle. The ratings are limited by the company's scale relative to industry peers' and by the cyclicality of the cement industry.
KEY RATING DRIVERS
Leading Market Shares
GCC is the largest cement producer in the state of Chihuahua across all product segments. It also has strong cement market positions in Colorado, North and South Dakota, Wyoming, New Mexico and Western Texas. Its contiguous presence from Chihuahua in northern Mexico to North Dakota and efficient distribution and logistics allow GCC to serve markets in 14 states across the U.S. Midwest, and the Southwest and Rocky mountain regions.
Cemex's Assets in Texas
The purchase of Cemex's assets was financed through incremental debt of about USD250 million and cash. The purchase involved a cement plant in Odessa, TX with an annual production capacity of 514,000 tons as well as other ready-mix, aggregates and asphalt assets. Debt maturities of the new debt will be low during the first couple of years as most of the company's cash flow from operations (CFFO) will be used to finance the expansion to its South Dakota cement plant. This expansion will increase plant capacity by 440,000 tons per year.
Sound Operating Performance
Net sales during 2014 and 2015 remained relatively stable at around USD750 million and declined modestly to USD740 million on a LTM basis to Sept. 30, 2016, mostly reflecting a weaker Mexican peso and stable consolidated volumes at robust levels. Operating EBITDA strengthened to USD182 million as of LTM to Sept. 30, 2016 from USD166 million in 2015 and from USD148 million due to strong pricing and lower fuel, freight and electricity expenses.
Solid Cash Flow Generation
GCC's CFFO was USD122 million during 2015, above the USD108 million registered during 2014, and significantly higher than the USD60 million?USD80 million per year for 2010?2013, primarily due to solid performance of GCC's U.S. division. Fitch projects organic CFFO to remain around USD130 million over the next two years, reflecting modest volume declines in Mexico due to lower infrastructure spending and flat volumes in the U.S., offset by a robust pricing environment in both countries. An improved product mix in Chihuahua into higher margin retail cement should also be positive.
Manageable Exposure to Oil and Gas
The majority of GCC's markets showed above-average volume recovery from 2011?2014, partly due to their direct and indirect exposure to the agriculture and oil and gas sectors, which showed positive momentum. In Fitch's view, a slowdown in cement demand related to cuts in energy infrastructure spending should be manageable for GCC as residential construction is projected to expand at a faster pace in most markets. Public construction spending should also counter some of the negative effect.
High Pro Forma Leverage
GCC's debt/EBITDA leverage as of third-quarter 2016 was 2.6x. Pro forma total debt should be around USD700 million and gross leverage close to 3.5x in 2017. Meaningful deleveraging to below 3x should occur by 2019 as the company is in the midst of a USD90 million expansion to its South Dakota plant. The expansion is expected be completed during 2018 and should be financed organically, leaving only inorganic cash flow generation to support only modest deleveraging during 2017.
KEY ASSUMPTIONS
--Revenues measured in U.S. dollars grow double digits in 2017 mainly reflecting the acquisition of Cemex assets, and high single-digits in 2018 reflecting the additional capacity;
--EBITDA rises above USD200 million in 2017 and strengthens further in 2018;
--Debt increases about USD250 million during 2016 to fund the acquisition;
--Capex is financed mostly through internal cash flow generation and available cash;
--Dividends remain low in the USD10 million?USD15 million per year range.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--Weak operational results reflecting increased price competition, market share loss or a material slowdown in cement demand on GCC's key markets of Chihuahua, Colorado, Western Texas, South Dakota and New Mexico;
--A large debt-financed acquisition that increases total leverage above 3.5x;
--A down turn industry cycle that causes net debt/EBITDA to rise above 3.0x;
--Sustained negative FCF generation.
A rating upgrade in the near term is unlikely considering the company's business profile, target capital structure and current credit metrics. A return to positive FCF after its South Dakota expansion project, together with a track record of maintaining total leverage levels at or below 2x and a strong liquidity profile would be considered positive for credit quality.
LIQUIDITY
GCC's liquidity is sound. The company's pro forma cash position as of Sept. 30, 2016 is estimated at around USD130 million and Fitch expects its FCF to be neutral during 2017 and positive in 2018. This compares to debt maturities of USD4 million for 2017 and USD16 million for 2018 under the new bank debt. Committed credit facilities of USD15 million maturing over the next year provide additional short-term liquidity support. GCC's total debt as of Sept. 30, 2016 was USD442 million and its net debt/EBITDA leverage was 1.4x.
The company maintains good access to bank lending as evidenced by debt refinancing during 2013, 2015 and 2016.
FULL LIST OF RATING ACTIONS
Fitch has affirmed GCC's ratings as follows:
--Long-term foreign currency Issuer Default Rating (IDR) at 'BB';
--Long-term local currency IDR at 'BB';
--USD260 million senior notes due 2020 at 'BB'.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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