Fitch Places Cementos de Chihuahua on Rating Watch Negative on Assets Purchase

martes 3 de mayo de 2016 12:06 GYT
 

(The following statement was released by the rating agency) CHICAGO, May 03 (Fitch) Fitch Ratings has placed Grupo Cementos de Chihuahua, S.A.B. de C.V.'s (GCC) Long-Term local and foreign currency Issuer Default Ratings (IDRs) of 'BB' on Rating Watch Negative upon the announcement that it has reached a preliminary agreement to acquire USD400 million of assets from CEMEX, S.A.B. de C.V. (Cemex). The purchase includes two cement plants in the U.S. with a combined production capacity of 1 million metric tons per year as well as other assets. Fitch anticipates a one-notch downgrade to 'BB-' upon completion of the acquisition, assuming the asset purchase is financed with a combination of available cash and new debt. Under this scenario, GCC will have meaningfully higher leverage for two to three years which would reduce its financial flexibility to levels more consistent with a 'BB-' credit profile. The transaction is pending regulatory approvals and other customary conditions but is expected to close before year-end 2016. KEY RATING DRIVERS Pro forma Leverage to Increase Meaningfully GCC's total debt as of March 31, 2016 was USD453 million and its total debt/EBITDA leverage was 2.6x. Fitch estimates that absent equity contributions, GCC's pro forma total leverage would approach 4x. Meaningful deleveraging to below 3x is expected to occur until 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 modest deleveraging during 2016-2017. Transaction Should Strengthen Business Position GCC is the largest cement producer in the state of Chihuahua across all product segments. It also has strong cement market positions in the U.S., in Colorado, North and South Dakota, Wyoming, New Mexico and the El Paso, TX, area. Its contiguous presence from Chihuahua in northern Mexico to North Dakota and efficient distribution and logistics allow GCC to serve markets in 13 states across the U.S. midwest, and the southwest and mountain regions. The potential transaction involves two cement plants in Colorado and Western Texas which together with its South Dakota expansion plans should strengthen GCC's business position in most of its markets. During 2015 GCC generated about 73% of its revenues from the U.S. Solid Demand in Mexico Cement sales volumes of GCC's Mexican operations grew 6% during 2015 after growing 7% in 2014. Prices also rose and the company benefited from increased cement exports to the U.S. Fitch believes the company could continue to benefit from residential construction growth due to increased manufacturing activity in Northern Mexico and falling unemployment. Growth in middle-income housing and available credit should help to mitigate a projected slowdown in public infrastructure spending in Chihuahua by replacing some of the lost lower-margin bulk volume with higher-margin retail cement sales. Sound U.S. Operating Performance U.S. cement sales volumes grew 2% during 2015, holding at the already robust levels of 2014 when the company's U.S. capacity utilization was strong at around 90%, and cement volumes grew 10% from the prior year. Robust volumes coupled with better cement and ready-mix pricing, and lower freight and fuel costs as a result of cheaper natural gas and gasoline in the U.S. contributed to consolidated EBITDA margin expansion and healthy EBITDA growth. In 2015 EBITDA grew to USD165 million from USD148 million a year ago, and EBITDA margins expanded to 21.8% from 19.7%. Organic Operating Cash Flow Expansion Should Slow GCC's cash flow from operations (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 USD110 million over the next two years, reflecting modest volume declines in Mexico due to lower infrastructure spending and flat volumes in the U.S., partially offset by a benign pricing environment in both countries, and an improved product mix in Chihuahua. KEY ASSUMPTIONS Fitch's key assumptions for GCC on a standalone basis before the Cemex assets acquisition include: --Revenues measured in USD grow by mid-single digits, mostly reflecting price gains; --EBITDA hovers around USD165 million for the next few years and margins remain above 21%; --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 Negative: Fitch anticipates that any downgrade would likely be limited to one notch once the acquisition closes. 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 in GCC's key markets of Chihuahua, Colorado, South Dakota and New Mexico; --Sustained negative free cash flow generation. A rating upgrade in the near term is unlikely considering the company's, business profile, targeted capital structure and already strong credit metrics. LIQUIDITY GCC will need to secure external sources of funding to finance the USD400 million acquisition of Cemex assets. As of Mar. 31, 2015, GCC's cash position was USD119 million which compares favorably to USD73 million a year ago despite debt payments of about USD12 million. Committed credit facilities of USD30 million maturing over the next two years also provide additional short-term liquidity support. The company maintains good access to bank lending as evidenced by its July 2015 USD194 million refinancing of syndicated bank debt. FULL LIST OF RATING ACTIONS Fitch has placed the following ratings on Negative Watch: --Foreign currency Issuer Default Rating (IDR) 'BB'; --Local currency IDR 'BB'; --USD260 million senior notes due 2020 'BB'. Contact: Primary Analyst Gilberto Gonzalez, CFA Associate Director +1-312-606-2310 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Javier Rios Associate Director +52 81-8399-9100 Committee Chairperson Joe Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Additional Disclosures Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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