MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Bio-PAPPEL, S.A.B. de C.V. (Bio-Pappel) at 'B'. Fitch has also affirmed the company's USD200 million senior notes due 2016 at 'B/RR4'.
The Rating Outlook has been revised to Positive from Stable.
The Outlook revision reflects Bio-Pappel's low leverage and improved cash balance due to favorable market conditions that have resulted in strong cash flow from operations. In Fitch's opinion, operational efficiencies have also bolstered profitability and have somewhat diminished the company's sensitivity to raw material and energy cost increases. The revised Outlook also reflects the company's USD50 million prepayment of its USD250 million notes due 2016.
KEY RATING DRIVERS
Bio-Pappel's ratings incorporate its leading market position in the paper and packaging sector in Mexico, geographical diversification of revenues, low level of environmental/political risks, and improved EBITDA generation due to operational efficiencies, more cogeneration of energy, and a favorable operating environment. The ratings are constrained by Bio-Pappel's leverage relative to the stress upon its cash flow when raw material and energy costs increase. Concerns about the company's weak debt repayment record and past corporate governance continue to result in a lower rating than peer companies with similar credit metrics. Additional concerns include the company's small scale when compared to international players and the tough competitive environment in Mexico.
Positively, Bio-Pappel has improved its cost structure and better positioned itself to withstand future cyclical downturns through its increased use of recycled fiber and cogeneration. These initiatives, in addition to favorable market conditions, have expanded the spread between its average sales price and the cost of its main inputs, namely recycled paper products such as old corrugated containers (OCC), old newspaper (ONP), and energy.
Prices for the company's products have remained broadly stable, and volumes have kept mostly flat as a result of a stalled economic activity in Mexico, particularly in the first half of 2014. The spread has averaged USD138 per ton for the Last 12 Months (LTM) ended in 2Q'14. During this period, Bio-Pappel has generated about USD135 million of EBITDA. These results are lower than those registered during the same period in 2013 when the spread averaged USD143 per ton and EBITDA was about USD141 million, due to a non-recurring, non-cash charge to EBITDA of USD10.5 million in 2Q'14. EBITDA for 2Q'14 LTM would have been USD146 million otherwise.
The volatility in Bio-Pappel's operational performance over the past 10 years has reflected the company's limited ability to pass through cost increases. Prices for OCC and ONP have increased in Mexico and the U.S. due to purchases by Chinese manufacturers. Energy is Bio-Pappel's second most important input cost after recycled fiber, and management has undertaken several initiatives seeking to mitigate its exposure to it, including investments in cogeneration. The ratings factor in this continued vulnerability to rising raw material and energy costs.
Going forward, Fitch expects that leverage ratios should fluctuate as EBITDA generation is still sensitive to the industry's cyclicality and the price and cost spread. Total debt to EBITDA for the LTM ended June 30, 2014 was 1.6 times (x), while net debt to EBITDA was 0.9x. Bio-Pappel's EBITDA to interest expense ratio was solid at 5.4x.
Near-term liquidity risk is low however refinancing risk in 2016 is a concern. The company currently pays 10% of interest on the 2016 notes (approximately USD20 million per year) a step-up from 2013's 7% rate. Currently, Bio-Pappel has close to USD104 million in cash and marketable securities, which supports short-term liquidity.
A factor that could lead to an upgrade of the company's rating would be the successful refinancing of its 2016 maturity. Improved EBITDA margins through all parts of the cycle (including when OCC and ONP prices are elevated) would also be viewed favorably as that would demonstrate a sustained lower cost structure.
Factors that would negatively affect creditworthiness include inability to refinance its senior notes by the end of 2015, a consistent weakening of the spread between price and cost per ton, resulting in lower cash generation below USD 50 million, as well as sustained gross leverage (Total Debt/EBITDA) above 4.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage', May 28, 2014;
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers', Nov. 19, 2013;
--'Evaluating Corporate Governance', Dec. 12, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Evaluating Corporate Governance