Fitch Affirms Grupo IDESA's IDR; Outlook Revised to Negative
The revision of the Outlook reflects the likelihood that the company will increase its debt to fund additional investments at its joint venture with Braskem, S.A. (Braskem-IDESA) related to the construction of Etileno XXI. Over the next 12 - 18 months, Fitch believes IDESA will need to contribute about USD150 million of incremental cash to support its 25% share of the joint venture. This plant will produce 1.05 million tons per year of polyethylene from an integrated ethane-based cracker.
Fitch assumes that IDESA will drawdown a USD130 million committed credit line with Banco Inbursa, S.A., Institucion de Banca Multiple, Grupo Financiero Inbursa to fund its equity contribution. This could result in the company's leverage hitting 5.5x in 2015 and around 6.5x by 2016. This high level of debt makes it critically important that Etileno XXI ramps-up without delays. Equity contributions from current or new shareholders to support a stronger capital structure during the next few months would be viewed positively and could result in the Outlook being revised to Stable.
KEY RATING DRIVERS
High Reliance on Commodity Chemicals
IDESA has limited pricing power with its suppliers and customers, as the company's main product prices are based on international reference prices and have declined as they are somewhat correlated to the price of oil. Positively, the price of ethane-based ethylene oxide (EO) -- IDESA's main raw material -- has also declined with lower natural gas prices, contributing to relatively stable profitability compared to a year ago. Fitch expects only modest upward pricing pressure in EO for the next few years due to the wide availability of ethane in North America.
Country, Production Site and Supplier Concentration
About 90% of IDESA's total revenues come from the Mexican domestic market. Production capacity is heavily concentrated in its Coatzacoalcos plant, which is dependent on smooth operations at Pemex Petroquimica (PPQ), IDESA's sole supplier of EO. IDESA's participation in Etileno XXI should significantly diversify IDESA's cash flow sources and is considered positive for long-term credit quality.
Strong Business Position Domestically
IDESA generates the majority of its existing EBITDA from ethylene glycols (EG) and ethanol amines (EA), product lines in which the company maintains a dominant position. In EG, where domestic demand outstrips supply, the company is Mexico's largest producer, with 33% of domestic market share. In EA, IDESA serves 62% of the domestic market, exporting over 60% of its production to Europe, Asia and South America.
Regional, Product and End-Market Diversification
The revenue and cash flow generation capacity of IDESA are supported by its national footprint, adequate product diversification and exposure to the relatively resilient Mexican, consumer-driven end markets. Strategically, the company expects to continue to gain market share in high-growth industries such as automotive, oil and gas, and building materials.
Leverage Expected to Increase
IDESA's leverage is likely to increase significantly over the next 12 - 18 months as the company draws from its USD130 million credit line in order to finance additional investments in the Etileno XXI project. IDESA's gross leverage was 4.1x at year-end 2014 and is projected by Fitch to reach 5.5x in 2015 and to 6.5x in 2016 before declining significantly to levels commensurate with the BB- ratings as material joint venture cash flows are received.
--Revenues in USD fall about 10% during 2015 reflecting weak product pricing, partially offset by stronger sales volumes in distribution. For 2016 - 2017, revenues increase mid-single digits trending upwards with Fitch's Brent oil price deck expectations of USD65 and USD75, respectively.
--EBITDA contracts to USD66 million in 2015 and stays relatively stable during 2016-2017 reflecting weaker margins in petrochemical spreads somewhat partially mitigated by stronger margins in IDESA's distribution business.
--Relevant cash flows received from joint ventures during 2017.
--Full drawdown of USD130 million committed credit line by 2016.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Material project ramp-up delays in Etileno XXI or low operating rates that result in lower than expected cash flows to IDESA and high leverage for a longer than expected period of time.
--Reduced financial flexibility, material contraction in product-to-feedstock margins or volumes that results in material deterioration of FCF, higher capital outlays or cash distributions would also be viewed negatively.
Future developments that may, individually or collectively, lead to a positive rating action include:
-- Capital infusions that result in gross leverage levels at or below 4.5x would likely result in the Outlook being revised to Stable.
IDESA's liquidity is adequate given its cash balance, cash flow from operations (CFFO) and debt maturity profile relative to projected interest payments of USD24 million per year and joint venture disbursements of about USD200 million to be invested during 2015-2016. As of June 2015 IDESA had USD59 million in cash and marketable securities and for the LTM it generated USD42 million in CFFO. The company's main debt obligation is its USD300 million senior unsecured notes due in 2020. IDESA's contracted USD130 million committed credit line also provides liquidity support and is expected to rank equal to existing unsecured debt. Interest payments for these loans are due at maturity in 2020 and do not capitalize to principal which should provide additional short-term financial flexibility.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following:
--Long-term foreign currency IDR at 'BB-';
--Long-term local currency IDR at 'BB-';
--USD300 million senior unsecured notes due 2020 at 'BB-'.
The Rating Outlook has been revised to Negative from Stable.