Fitch Affirms Masisa's IDRs at 'B+'; Outlook Negative
The Negative Outlook continues to reflect concerns about economic weakness in Latin America and Fitch's expectation that the company will continue to struggle in this market during 2016 and 2017. Potential cash flow relief provided by the completion of Masisa's new MDF plant in Mexico is not projected to offset the substantial decline in Brazilian operations until 2018. During 2015 and first-half 2016 (1H16), Masisa sold about USD121 million of non-core assets, which contributed to reduce debt and extend debt amortization profile. Additional measures to bolster Masisa's capital structure and reduce leverage, in the absence of stronger cash flow generation, are necessary to prevent negative rating actions.
KEY RATING DRIVERS
Weak Brazilian Operations
Brazil's EBITDA contribution significantly deteriorated and Fitch expects EBITDA below USD5 million in 2016, excluding the sale of non-core assets. In the latest 12 months (LTM) ended June 2016, Brazilian recurring EBITDA was only USD5.4 million. Excluding Venezuela, Brazil represented 4.5% of recurrent EBITDA in the period, down from 9% in 2015 and 27% in 2014. Masisa had generated more than USD40 million of EBITDA in this market in the past.
Contribution from Mexico to Gradually Increase
Recurring EBITDA from Mexico represented about 15% of total recurring EBITDA, excluding Venezuela, in the LTM June 2016. This figure should gradually increase following the startup of the new MDF plant in June 2016. The mill, which has an annual capacity of 220,000 cubic meters of MDF, including 100,000 cubic meter of melamine capacity, is expected to add USD5 million to EBITDA during 2016 as it ramps-up production and has the potential to increase consolidated EBITDA by over USD20 million going forward. Investments in the project totalled USD123 million.
Leverage increased due to weak results from Brazil and sluggish economic growth throughout the region, while the company's debt levels remain elevated due to a number of recent investments. Fitch's base case expectation is that net leverage will peak at 6.5x in 2016 and slowly reduce to about 6.0x during 2017. These ratios compare with 5.3x in LTM ended June 2016. Masisa's net debt was USD711 million at the end of June 2016. This compares unfavorably with USD707 million in December 2015 and USD655 million in December 2014. Fitch's base case excludes non-recurrent items in EBITDA, such as the sale of wood, as well as the company's Venezuelan operations.
Significant Presence in Venezuela and Argentina
Masisa has diversified operations in Latin America, with a presence in Chile, Brazil, Mexico, Argentina and Venezuela. Masisa is exposed to exchange controls in its Venezuelan operations, although its operations are self-sufficient in the country. Restrictions imposed by the Venezuelan Central Bank have limited the U. S. dollar supply in that country, which constrains the repatriation of available cash. Venezuela represented about 17% of total recurring EBITDA in the LTM ended June 2016. About 33% of Masisa's total recurring EBITDA are related to its Argentine operations.
Still Weak Operational Cash Flow
Fitch expects Masisa to generate about USD115 million of recurring EBITDA in 2016 and USD140 million in 2017, and includes Venezuela's EBITDA. The company generated recurring EBITDA of USD159 million and cash flow from operations of USD45 million in the LTM ended June 2016. Recent initiatives to reduce operational costs and working capital needs positively impacted the company's cash flow generation capacity. However, results remain pressured by declining demand for wood boards in Latin America and weak currencies in several markets.
Lower investments and dividends contributed to free cash flow (FCF) of negative USD44 million in the LTM ended June 2016, compared with negative USD120 million and USD90 million in 2015 and 2014, respectively. The company invested USD43.6 million in the LTM June 2016, after investing USD364 million between 2013 and 2015. Masisa has some flexibility to lower its maintenance capex for a couple of years to improve FCF.
Fitch's key assumptions within the rating case for Masisa include:
--Sale of non-core assets of USD45 million in 2016, not included in EBITDA;
--Investments around USD70 million per year between 2016 and 2018;
--Weak operational performance in Brazil in 2016 and 2017;
--EBITDA contributions from Mexico operations of around USD20 million in 2016 and USD28 million in 2017;
--Dividends distribution of 30% of net income.
Future developments that may individually or collectively lead to a negative rating action include:
--Downturn of Fitch's expectation of improved profitability in Mexico;
--Net debt/recurring EBITDA ratio, excluding Venezuela, above 7.0x.
Future developments that may individually or collectively lead to a positive rating action include:
--Material reversal of EBITDA generation, reducing net debt/recurring EBITDA ratio, excluding Venezuela, to close to 5.0x, the Negative Outlook would likely be revised to Stable;
--Reduction of net debt/recurring EBITDA ratio, excluding Venezuela, to below 5.0x, an upgrade would be likely.
LIQUIDITY AND DEBT STRUCTURE
Masisa's liquidity position is manageable for operational purposes with USD66.2 million of cash and equivalents, of which USD65.6 million was held outside Venezuela as of June 30, 2016, compared with USD110 million as of Dec. 31, 2015. Masisa made a non-recurring sale of non-core assets for USD120 million, which benefited the company's liquidity. Additionally, Masisa has USD70 million in committed credit lines, with USD15 million currently not used.
Masisa had USD777 million of total debt as of June 30, 2016, of which USD590 million consisted of long-term debt, mainly related to USD516 million of bonds, USD47 million of bank debt and USD25 million hedging liabilities.
In August 2016, Masisa concluded a USD100 million syndicated loan due in five years. Proceeds will be used to extend debt maturity profile, reducing refinancing risk in the short term. On a pro forma basis, Masisa had USD58 million of debt maturing in the 2H16, USD56 million in 2017 and USD55 million in 2018. The company has higher debt maturities of USD254 million only in 2019.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--Long-Term Foreign and Local Currency IDRs at 'B+';
--National scale rating of Bond Line No. 356, No. 439, No. 560, No. 724, and No. 725 at 'BBB(cl)';
--Long-term National Scale rating at 'BBB(cl)';
--USD300 million senior unsecured 9.5% notes due 2019 at 'B+/RR4'; the notes are unconditionally guaranteed by Forestal Tornagaleones and Masisa Forestal;
--National Short-term rating at 'N2(cl)'.
The Rating Outlook remains Negative.