Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Grupo
IDESA, S.A. de C.V. (IDESA) at 'BB-'. The Rating Outlook has been
revised to Negative from Stable. A complete list of ratings actions
follows at the end of this press release.
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
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
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,
--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
--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.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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