November 1, 2016 / 8:07 PM / 2 years ago

Fitch Affirms Mexichem's IDRs at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, November 01 (Fitch) Fitch Ratings has affirmed Mexichem, S.A.B. de C.V.'s (Mexichem) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) at 'BBB'. In addition, Fitch affirms the company's Long-Term National Scale ratings at 'AA+(mex)'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release. The ratings reflect Mexichem's geographically diversified operating base and strong business position in polyvinyl chloride (PVC) pipes throughout Latin America and Europe, as well as its strong position in fluorspar globally. The company's financial profile is underpinned by high profitability and strong cash flow generation. Further factored into Mexichem's ratings are its strong liquidity position and its manageable debt amortization schedule. The ratings are tempered by the company's exposure to volatile industries such as infrastructure and construction, as well as by its somewhat higher leverage relative to peers and to historical levels. KEY RATING DRIVERS Strong Business Position Mexichem is a large producer of PVC resins and pipes and one of the world's largest producers of fluorspar and hydrofluoric acid. The company is also the largest producer of high-density polyethylene (HDPE) conduit and pressure pipes and a leading European producer of high-impact suspension PVC resins. Its strong market position coupled with vast vertical integration, which extends from the mine to the final consumer, provides it with increased business flexibility and expanded cross-selling opportunities. These features support long-term revenue and cash flow expansion and have given the company relatively high operating margins. Improving Vertical Integration Mexichem has taken significant steps to benefit from the wide availability of natural gas coming from shale gas developments in North America. Its joint venture (JV) with Occidental Chemical Corp (Oxy), to build an ethane-based ethylene cracker is scheduled to begin production in early 2017. The cracker's full capacity of 550,000 metric tons per year is equivalent to around two-thirds of the company's needs for the base chemical ethylene, an important building block in the production of many of the company's intermediate raw materials such as VCM (vinyl chloride monomer), PVC resin, and polyethylene. Balanced Funding Strategy Mexichem has maintained a solid credit profile. While executing its growth strategy, management has maintained financial discipline by funding growth through a combination of debt, equity, internal cash generation and asset sales. Fitch believes Mexichem should continue generating strong cash flows to support operations, working capital requirements, capex and dividend payments, while improving credit metrics over the next two years. Leverage Should Trend Downward As of Sept. 30, 2016, Mexichem's total debt including financial leases was USD2.4 billion, slightly below the USD2.5 billion registered as of year-end 2015. Fitch expects the company to generate close to USD900 million of Operating EBITDA as calculated by Fitch for 2016, similar to the USD902 million registered during 2015. This despite lost EBITDA resulting from an explosion at one of its plants. Operating EBITDA in 2017 should approach USD1 billion as the new ethylene cracker ramps up. Net debt-to-operating EBITDA, including financial leases, is projected to decline below the 2x registered as of Sept. 30, 2016. Capex Should Moderate in 2017-2018 Fitch estimates Mexichem's funds from operations (FFO) will be around USD550 million during 2016 and over USD600 million in 2017, primarily due to the contribution from the company's ethylene project. Free cash flow (FCF) should be neutral to negative as the final portion of contractual capex to the JV with Oxy is paid. Mexichem's total capex was around USD700 million during 2015 and is expected to be below USD600 million during 2016, which should result in neutral to negative FCF. More moderate capex in the years after coupled with FFO growth should result in expanding FCF. KEY ASSUMPTIONS --Revenue grows mid-single digits during 2017-2018 mainly due to a shift in mix to higher value-added products and modestly rising demand for pipes & fittings. --EBITDA remains around USD900 million in 2016 and expands to around USD1billion in 2017 primarily due to the start-up of the ethylene cracker and higher consolidated volumes. --Capex declines in the intermediate term. --Yearly dividends of around USD70 million or below. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a negative rating action include: --Slowdown in construction and infrastructure industries in Latin America, increased competition, or change in fluorspar dynamics globally, which affect the company's profitability, cash flow and leverage levels. This includes expectations of EBITDA margins consistently below 15%; meaningful erosion of FCF that compromises financial flexibility; leverage significantly above 2.5x on a gross basis and 2x on a net basis. --Large acquisitions or investments financed mostly with debt resulting in an expectation of higher leverage levels in the mid- to long-term. Future developments that may, individually or collectively, lead to positive rating action include: --A rating upgrade is unlikely in the medium term given the company's operating environment, total and net leverage levels, current capex plans, and acquisitive nature which could limit FCF strength. Expectations of total debt/operating EBITDA consistently below 2x; capital spending discipline which generates consistent positive FCF margins above 3%, and significant increase in operating EBITDA to levels greater than USD1.5 billion would be viewed positively. LIQUIDITY Mexichem's liquidity is strong. The company faces no large debt maturities until 2022 when USD926 million of capital market debt is due. As of third-quarter 2016, cash on hand was USD651 million, which adequately covers USD114 million of short-term debt maturities (including financial leases) and around USD100 million of committed capex. The company's liquidity is further supported by a USD1.5 billion undrawn committed credit facility maturing in 2019. This facility is contingent upon Mexichem maintaining a total debt/consolidated EBITDA ratio below 3x. FULL LIST OF RATING ACTIONS Fitch affirms Mexichem's ratings as follows: --Long-Term Foreign Currency IDR at 'BBB'; -- Long-Term Local Currency IDR at 'BBB'; --Long-term National Scale rating at 'AA+(mex)'; --USD350 million senior unsecured notes due 2019 at 'BBB' (outstanding balance USD83 million); --USD750 million senior unsecured notes due 2022 at 'BBB'; --USD400 million senior unsecured notes due 2042 at 'BBB'; --USD750 million senior unsecured notes due 2044 at 'BBB'; --MXN3,000 million Local Certificados Bursatiles due 2022 at 'AA+(mex)'. The Rating Outlook is Stable Contact: Primary Analyst Gilberto Gonzalez, CFA Associate Director +1-312-606-2310 Fitch Ratings, Inc. 70 W Madison Street Chicago, IL 60602 Secondary Analyst Rogelio Gonzalez Director +52 81-83-999-100 Committee Chairperson Alberto Moreno Senior Director +52 (81) 8399 9100 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1014157 Solicitation Status here Endorsement Policy here 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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