Fitch Affirms Grupo IDESA's IDR at 'BB-'; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has affirmed Grupo IDESA, S.A. de C.V.'s (IDESA) ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BB-';

--Local currency long-term IDR at 'BB-';

--USD300 million senior unsecured notes due 2020 at 'BB-'.

The Rating Outlook is Stable.

The ratings reflect IDESA's strong business position, low relative cost base, long-term relationships with customers and suppliers, and history of conservative financial management. The ratings also reflect IDESA's new scale and ability to integrate acquisitions and the increasing contribution of its distribution division.

Factored into the ratings is the company's current high debt level and its history of positive free cash flow (FCF) generation. Fitch expects recent investments in non-consolidated joint ventures to start contributing to FCF only in the long term. IDESA's ability to service its debt will continue to depend primarily on current operations.

KEY RATING DRIVERS

Strong Business Position Domestically

IDESA generates the majority of its EBITDA from ethylene glycols (EG) and ethanol amines (EA), product lines in which the company maintains a dominant position nationally. In EG, where domestic demand outstrips supply, the company is Mexico's largest producer, with 36% of domestic market share. In EA, IDESA serves 62% of the domestic market, exporting over 60% of its production to Europe, Asia and South America.

High Reliance on Commodity Chemicals

IDESA has limited pricing power with its suppliers and customers, as the company's main product prices are highly correlated to the price of oil. In Fitch's view, absent a rebound in demand growth or supply disruptions at competitors' facilities, sustained pricing weakness in oil markets will likely pass through to IDESA's main products and pressure its credit metrics. Positively, Fitch does not expect upward pricing pressure on ethane-based ethylene oxide (EO) -- IDESA's main raw material -- until late 2016 and 2017 when demand for ethane could increase as planned ethylene capacity additions in North America begin operations.

Country, Production Site and Supplier Concentration

IDESA's low geographic diversification and scale relative to rated chemical companies and its supplier concentration for key raw materials limit its ratings. About 90% of IDESA's total revenues come from the Mexican domestic market. Production capacity is heavily concentrated in its Coatzacoalcos plant, which is dependent on smooth operations at Pemex Petroquimica (PPQ), IDESA's sole supplier of EO.

Regional, Product and End-Market Diversification

The revenue and cash flow generation capacity of IDESA are supported by its national footprint, adequate product diversification and exposure to the relatively resilient Mexican, consumer-driven end markets. Strategically, going forward, the company expects to continue to gain market share in high-growth industries such as automotive, oil and gas, and building materials.

Scale Momentum

Fitch expects that IDESA's involvement in high-profile joint ventures, its available capacity in some petrochemical product lines, as well as expected growth in its distribution segment will support continued cash flow growth. In Fitch's view, IDESA stands to benefit from energy reform in Mexico through greater availability of feedstock and robust demand for chemical handling and distribution services.

High leverage

Fitch expects capacity utilization and sales volumes in key product lines to remain stable over the next 18 months. Therefore, changes in leverage will be mostly driven by product-to-feedstock spreads. Year-end 2014 debt/EBITDA will likely be around 4.2x below the 4.6x registered in 2013 mainly as a result of favorable spreads and lower debt balances. Fitch does not anticipate material deleveraging for the next 18-24 months but leverage metrics could strengthen in the years after as current projects and investments materialize.

Positive FCF

Factored into the ratings is IDESA's history of positive FCF generation and the expectation that the company's ability to service debt will depend on its current operations, as recent investments in nonconsolidated joint ventures will begin to contribute to FCF only in the long term. In the latest 12 months (LTM) ending June 30, 2014, IDESA generated MXN898 million of EBITDA. Fitch projects IDESA's midcycle EBITDA to be between MXN850 million and MXN900 million. Fitch estimates IDESA's cash flow from operations (CFFO) after interest payments in the range of MXN400 million-MXN500 million which together with maintenance capex of MXN70 million and conservative dividend payments of about MXN27 million allow the company to generate positive FCF through the cycle. For the LTM ending June 2014, IDESA generated MXN128 million in FCF.

Adequate Liquidity

IDESA's liquidity is adequate given its debt maturity profile. The company's main debt obligation is its USD300 million senior unsecured notes due in 2020 with yearly interest payments of 7.875%. As of June 2014, IDESA had MXN855 million in cash and marketable securities. Interest coverage defined as EBITDA to gross interest expense was 2.8x and FCF plus cash and marketable securities to debt service coverage was 4.1x.

RATINGS SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

Reduced financial flexibility, material contraction in product-to-feedstock margins or in FCF, or larger-than-expected leverage, higher capital outlays or cash distributions.

Future developments that may, individually or collectively, lead to a positive rating action include:

Fitch does not expect positive rating actions in the medium term. However, deleveraging, robust operating rates, diversification, conservative capital spending, increased size and tangible benefits from joint venture investments could have positive implications for the ratings.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=934595

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Contacts

Fitch Ratings
Primary Analyst:
Gilberto Gonzalez, CFA, +52-81-8399-9100
Associate Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst:
Alberto Moreno, +52-81-8399-9100
Senior Director
or
Committee Chairperson:
Sergio Rodriguez, CFA, +52 81 8399 9100
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Gilberto Gonzalez, CFA, +52-81-8399-9100
Associate Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst:
Alberto Moreno, +52-81-8399-9100
Senior Director
or
Committee Chairperson:
Sergio Rodriguez, CFA, +52 81 8399 9100
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com