Fitch Expects to Rate Arcor's Proposed Sr. Unsecured Bond Issuance of up to USD350MM 'B+/RR4'
OREANDA-NEWS. Fitch Ratings expects to assign a rating of 'B+/RR4' to Arcor S. A.I. C.'s (Arcor) proposed senior unsecured bond issuance of up to USD350 million. The proposed bond is the first under the company's USD800 million issuance program. Proceeds will be used to refinance Arcor's USD200 million senior unsecured bond due in 2017 and local debt in Argentina as well as for working capital requirements and other corporate purposes.
The notes rank pari passu in priority of payment with all other Arcor senior unsecured debt. The company's operations abroad as well as its export operations allow the company's 'B+' Local and Foreign Currency Issuer Default Ratings (IDRs) and the proposed issuance to be rated one notch higher than Argentina's 'B' country ceiling. Arcor's Local Currency IDR is supported by the company's strong capital structure and solid business position.
KEY RATING DRIVERS
Arcor's ratings reflect the company's strong business position as a leading producer of confectionary and cookie products in Latin America supported by its strong market share and brand recognition and its solid financial profile underpinned by a conservative capital structure. The company's ratings are tempered by Argentina's challenging macro-economic environment, including high inflation and steep currency devaluation.
STRONG BUSINESS POSITION
Arcor is a leading producer of confectionary and cookie products in Latin America, and is vertically integrated to ensure quality of supplies as well as availability of main inputs. Arcor's brand names and distribution platform have supported leading market shares in chocolates, candies and cookies in its main market of Argentina. Arcor also has operations in Brazil, the Andean region and Mexico, among others. Arcor's brands reach consumers in 120 countries. Fitch expects the company to continue to solidify its market leadership in Argentina and in the countries in which it operates by replicating its strategy in Argentina.
ROBUST FINANCIAL PROFILE
Arcor's gross and net leverage ratios are strong for the 'B' rating category; as of the LTM ending March 31 2016, these ratios were 2.3x and 1.6x, respectively. Arcor has historically maintained a cash balance above USD100 million for investments and to cope with any operational/regulatory risks; as of March 31, 2016 the company had cash of ARS2 billion (USD154 million). Arcor's financial profile is among the strongest of the Fitch-rated Argentine portfolio and other FB&T companies in the regional portfolio.
At the end of 2015, Arcor & Bagley Argentina (its JV with Danone) paid USD50 million in cash for a 20% share (capital increase) in Mastellone Hermanos S. A. (Mastellone) and also paid USD10 million for an additional 5% share. The purchase included options to buy an additional 10% for USD35 million in 2017 and up to 100% by 2025. Mastellone will use the USD50 million to complete projects that previously placed on hold mainly due to its liquidity position: a milk drying plant at its Trenque facility and expansion into the San Luis province to produce and distribute fluid milk in the center of the country. Fitch views Mastellone's acquisition as strategic. The company has well-known brands and quality products, and its incorporation would convert Arcor into a leading consumer foods company.
SOLID OPERATING PERFORMANCE
Arcor has a solid operational track record, with consistent revenue and EBITDA growth, supported by its geographical diversification, strong brand recognition and vertically integrated production model. Arcor reported ARS9 billion in sales during the first quarter of 2016, an increase of 33% mainly due to increased prices and a more favorable product mix. Arcor had ARS28 billion in sales during 2015. Consolidated volumes have remained relatively flat, as increases in Argentina have offset declines in Brazil and Chile.
The company has demonstrated its ability to consistently raise prices to mitigate pressures from high inflation and local currency devaluation. Arcor is vertically integrated in the production process in Argentina, providing the company with a significant competitive advantage. Arcor produces corn syrup, sugar, milk, and corrugated cardboard and prints flexible films; this production supplies a substantial portion of raw material needs. This integration allows the company to lower production costs and mitigate its exposure to variations in commodity prices, while offering competitive prices. EBITDA was ARS4 billion as of LTM ended March 31, 2016.
OPERATIONS CONCENTRATED IN ARGENTINA
Arcor's operations are concentrated in higher risk Argentina and the company's cash flow is exposed to variations in the Argentine economy. As of March 31, 2016, 70% of sales were generated from the company's Argentine operations, with the remainder coming from Arcor's international operations, principally Brazil and Chile. Argentina (including exports to third parties) contributed 70% and 99% to Arcor's revenues and EBITDA generation as of March 31, 2016 followed by the Andean region (11% and 4%) and Brazil (11% and negative 4%).
Fitch's key assumptions within the agency's ratings case for the issuer include:
--Revenue growth in line with inflation;
--EBITDA margin remains between 8% - 9%;
--Net leverage below 1.5x.
Arcor's ratings could be negatively affected by a combination of the following: a downgrade of Argentina's sovereign ratings; introduction of adverse regulatory or government measures that would materially affect the company's market share and cash flow generation.
Arcor's ratings could be positively affected by a continued conservative capital structure and an upgrade of Argentina's country ceiling; increased geographical cash flow diversification in higher rated countries would also be viewed as a positive.
Arcor had cash of ARS2 billion (USD154 million) as of March 31, 2016. The company has committed revolving short-term credit lines for over ARS1 billion as of March 31, 2016. The company's debt is currently concentrated in the short-term, which is common for Argentine corporates, reflective of the financing available in the market. Arcor plans on using the proceeds of the proposed bond to extend its debt maturity profile by refinancing its USD200 million senior unsecured bond and existing short term debt as well as for working capital requirements, and other corporate purposes.