S&P: Grupo Idesa S. A. de C. V. Downgraded To 'B+' From 'BB-' On Weaker Credit Metrics; Outlook Negative
OREANDA-NEWS. S&P Global Ratings said today that it lowered its corporate credit rating on Grupo Idesa S. A. de C. V. (IDESA) to 'B+' from 'BB-'. At the same time, we lowered our issue-level rating to 'B+' from 'BB-' on the company's $300 million 144A/Reg. S senior unsecured notes due 2020. The '4' recovery rating on the debt, indicating our expectation of an average (30%-50%, in the higher band of the range) recovery in the event of a payment default, remains unchanged. The outlook on the corporate credit rating is negative. The downgrade reflects IDESA's weaker credit measures as a result of continued low oil prices, which have impaired the company's petrochemical revenues and EBITDA margins. IDESA's continues to work on capital raising alternatives to improve its credit metrics which were due to occur in 2016, and has been postponed, we now expect that the company will finalize the process in 2017. The capital increase will be used to pay down debt. However, we're uncertain that capital increases will occur in 2017 because it will ultimately depend on market conditions. While we believe that IDESA's adjusted debt to EBITDA will be close to 10.0x through 2016, we expect the company to benefit from in the following years from additional cash flow from its investment in Braskem IDESA which recently began operations, as well as the CyPlus IDESA project that is expected to start operating in the third quarter of 2016. The rating reflects the company's leading market position in the Mexican chemical and petrochemical markets. IDESA enjoys leading market shares in ethylene glycols, ethanol amines, phtalic anhydride, alkyl amines, and chemicals and petrochemicals distribution. However, its product portfolio is concentrated in ethylene glycols and ethanol amines, which represent about 20% and 11% of its total sales volumes, respectively, as of June 30, 2016. Its end-market concentration (with about 46% of total sales volume in the petrochemical business segment for the polyethylene terephtalate [PET] and polyester fiber industry) and the concentration of its operations in Mexico, with exports representing 10%-15% of sales, also mitigate the rating strengths. The commodity-like nature of IDESA's products and its exposure to price volatility, along with high supplier concentration, weaken its business risk profile. State-owned oil and gas company Petroleos Mexicanos purchases significant portion of IDESA's petrochemical products. We revised our assessment of the company's financial risk profile to highly leveraged from aggressive, reflecting our expectation that its leverage metric will remain close to 10.0x for the remainder of the year. For the 12 months ended June 30, 2016, IDESA posted adjusted debt to EBITDA of 9.1x, funds from operations (FFO) to debt of 3.8%, and EBITDA interest coverage of 1.5x, compared with 3.6x, 19.9%, and 2.6%, respectively, during the same period in 2015. Given the recent cash flow from Braskem IDESA and expected start of operations of Cyplus IDESA projects starting in September 2016 and the potential capital increase, the company's key credit metrics should strengthen in 2017. Our base-case scenario: Mexico's GDP growth of 2.5% in 2016 and 2.9% in 2017, resulting in modest demand conditions. A Brent price assumption of $40 per barrel in 2016 and $45 per barrel in 2017, which indicates that a modest recovery in oil prices next year will benefit petrochemical product prices, given their correlation with oil. Natural gas (Henry Hub) will be $2.5 per million British Thermal Unit (BTU) for the remainder of 2016 and $2.75 per million BTU in 2017, indicating that natural gas prices will remain at low levels, benefiting producers that use it as feedstock. MXN18.3 per $1 in 2016 and MXN18 per $1 in 2017.Revenues growth of about 0.8% in 2016 mostly due to lower sales prices as a result of depressed oil prices. A revenue growth of about 8.2% in 2017 mainly due to an expected recovery in the oil prices, resulting in higher prices in the petrochemicals and distribution business segments. A drop in EBITDA in 2016 as a result of lower product pricing. However, EBITDA should improve in 2017 as a result of expected recovery in oil prices. Disbursement of the $130 million credit line from Banco Inbursa. As of June 30, 2016, the company has received $106 million. Capital increase in 2017, mostly which the company plans repay the credit line from Banco Inbursa. Capital expenditures (capex) of about MXN250 million in 2016 and MXN400 million in 2017. No further investments from the company in Braskem IDESA and a contribution of approximately MXN$180 million to CyPlus Idesa project during the second half of 2016., andNo dividend payments. Based on these assumptions, we arrive at the following credit measures:Adjusted Debt to EBITDA of about 9.3x in 2016 and 3.8x in 2017;FFO to debt of about 3.2% in 2016 and 10.5% in 2017; andEBITDA interest coverage of about 1.4x and 2.2x, respectively. IDESA's potential capital increase in 2017, together with additional cash flow from the already completed projects, will improve its key leverage metrics significantly in that year and beyond. As a result, we expect the company's debt to EBITDA of less than 4x in 2017. Therefore, we asses our comparable rating analysis as positive, based on our view that future metrics will be more indicative of the company's financial risk profile assessment, bolstering IDESA's anchor score. The negative outlook on IDESA reflects the uncertainties regarding its challenge to reduce its debt significantly for the next 12 months. We could lower the rating if the company does not complete a capital increase in 2017 to reduce its debt, which could result from tightening markets conditions. Additionally, we could also lower the rating if additional leverage or a further weakening in operating performance undermines key credit metrics, particularly if adjusted debt to EBITDA remains higher than 5.0x and FFO to debt is below 12% in the next 12 months. We could revise the outlook to stable if the company reduces debt significantly and its cash flow generation improves at a higher pace than expected as a result of market growth, expansion initiatives, price improvements, and/or joint ventures, resulting in adjusted debt to EBITDA below 4.0x and FFO to debt exceeding 20% in the next 12 months.