-- We view the credit quality of Mexico-based petrochemical holding company Alpek as intertwined with that of its main subsidiary, Grupo Petrotemex.
-- We are assigning our global scale ‘BBB-’ issuer credit rating on Alpek and its proposed up to $600 million 10-year senior unsecured notes due 2022.
-- We are raising our global scale rating on Petrotemex to ‘BBB-’ from ‘BB+’ and global scale rating to ‘mxAA’ from ‘mxAA-'.
-- The stable outlook reflects our expectation that Alpek will maintain its key financial ratios in line with its modest financial risk profile.
On Nov. 8, 2012, Standard & Poor’s Rating Services assigned its ‘BBB-’ global scale rating on Alpek S.A.B. de C.V. and its proposed issuance of up to $600 million 10-year unsecured notes. At the same time, we raised our global scale rating on Petrotemex to ‘BBB-’ from ‘BB+’ and global scale rating to ‘mxAA’ from ‘mxAA-'.
The outlook on both ratings is stable.
The ‘BBB-’ ratings on Alpek and its wholly-owned subsidiary, Petrotemex, reflect our assessment of their “fair” business risk profile and “intermediate” financial risk profile. Following Alpek’s April 2012 IPO, subsequent $279 million capital infusion at Petrotemex to reduce debt, and Alpek’s current plans to issue up to $600 million long-term notes to repay Petrotemex’s debt, we think that the credit quality of both companies is highly intertwined and are now following a consolidated approach for the ratings. This is because we consider that Alpek drives the Alfa group’s petrochemical business division main financial strategies and takes the key financial decisions on cash and debt management.
As a result, we consider that Alpek and Petrotemex have the same default risk. We expect Alpek to use the proceeds from its proposed notes to prepay Petrotemex’s syndicated loan for about $545 million, which will improve its debt maturity to about seven years from three. Alpek will use the proceeds in the form of an intercompany loan. The notes will benefit from upstream guarantees from Petrotemex’s main operating subsidiaries. We consider these factors to mitigate potential structural subordination, and therefore, we are not notching down the rating on the notes.
Prior to today’s upgrade, the positive outlook on Petrotemex reflected the potential for an upgrade following further improvement of its main credit metrics on a stand-alone basis. We are now focusing our analysis on Alpek’s consolidated figures (Petrotemex accounts for more than 70% of consolidated EBITDA) and we expect credit metrics to benefit from the consolidation of its other plastics and chemicals business segments aside from Petrotemex. Therefore, we expect the group’s main cash-flow protection and leverage metrics to be comfortably aligned with our expectations for its “intermediate” financial risk profile. The ratings on Alpek and Petrotemex, reflect the group’s lower vertical integration, compared with its peers’, its high concentration in polyester production, its geographic concentration in the North American Free Trade Agreement (NAFTA) region, the commodity-like nature of its product portfolio, and its exposure to price volatility.
The offsetting factors include the company’s significant market share through its operating subsidiaries, with leading positions in North America; the resilience of most of its end markets (food and beverages); its long-term relationship with customers and suppliers; and its strong liquidity and comfortable debt maturity profile. We believe that the North American polyester industry will grow modestly or in tandem with the region’s GDP--even with any capacity expansions presenting profitable opportunities for the purified terephtalic acid (PTA) sector, given the small number of producers and capacity concentration. We also believe that the industry’s high consolidation levels and the antitrust regulations in the region may constrain the companies that are seeking to expand through acquisitions.
For the 12 months ended Sept. 30, 2012, Alpek’s consolidated debt to EBITDA were 1.4x, funds from operations (FFO) to debt of 61.4%, and EBITDA interest coverage of 5.9x, which compare well with the 2011 levels. Under our base-case scenario, we estimate that Alpek will post debt to EBITDA of at least 1.2x, FFO to debt of 40%-50%, and EBITDA interest coverage of 7.0x-9.0x in 2012-2013. These assumptions primarily reflect the following:
-- Annual revenue growth of about 20% in 2012 due to the consolidation of Eastman Chemical Co.’s and Wellman Inc.’s operations, coupled with increased prices and volumes, particularly in the polyester chain;
-- Prepayment of the $545 million syndicated loan, the issuance of up to $600 million 10 year unsecured notes due 2022 with bullet payment, and no additional debt;
-- No additional significant acquisitions;
-- Capital expenditures of about $166 million in 2012 and $145 million in 2013 mainly for energy cogeneration plants, which will start operating in 2014, and PET plants expansion projects;
-- Annual dividend payment of about $100 million; and
-- No changes in the PTA “cost plus” formula. Liquidity We view Alpek’s liquidity as “strong,” reflecting our expectation that consolidated cash flow generation and liquidity sources will be sufficient to cover debt service, expected capital expenditures, and dividends. In our view, the company’s debt maturity schedule is comfortable thanks to the refinancing of existing debt with the proposed unsecured notes which will extend the maturity of total debt after 2014. Our liquidity assessment incorporates several assumptions and observations.
-- Consolidated sources of liquidity will exceed uses by at least 1.5x during the next two years and liquidity sources will exceed uses even if consolidated EBITDA declines by 30%;
-- The company’s generally prudent risk management arises from its financial policy of maintaining a net debt to EBITDA of less than 2.5x, funding of capital expenditures through internal cash flow generation, and flexible dividend policy subject to growth plans;
-- Consolidated liquidity sources of about $462 million in unrestricted cash and equivalents as of Sept. 30, 2012, and about $276 million in available committed credit lines. The approximately three-year weighted average life of these liquidity sources is sufficiently long, in our view. This compares favorably with the company’s consolidated, pro forma after the notes issuance, short-term maturities of about $19 million, $35 million, and $183 million in 2012, 2013, and 2014, respectively;
-- Well-established and solid relationships with banks, and its generally satisfactory standing in the credit markets (based on its successful placement of debt issues in international market, as well as its recent syndicated loan amendment and successful IPO in the Mexican Stock Exchange);
-- Dividends payments of about $100 million per year, in line with historical levels;
-- Capital expenditures of about $166 million in 2012 and $145 million in 2013; and
-- Comfortable headroom under its financial covenants and no debt at the holding company level.
The stable outlook incorporates our expectation that Alpek will maintain its key credit ratios in line with its intermediate financial risk profile, including debt to EBITDA of less than 1.5x and FFO to debt of more than 40% in 2012 and 2013 following the reduction of debt and strengthening of its capital structure and liquidity; moderate financial policies; strong competitive position in the NAFTA region; and ability to successfully consolidate acquired companies into its operations. We believe that the these factors will at least partially offset volatile oil and raw materials prices and weaker economic conditions over the next two years. Rating upside is constrained by the company’s business risk profile, particularly by the inherent volatility in raw materials prices and limited product and geographic diversity. Our base-case scenario excludes additional debt-funded acquisitions; however, we don’t rule them out.
We could lower the rating if additional leverage and/or deterioration of operational performance deteriorate key credit metrics, such as debt to EBITDA above 2.5x and FFO to debt below 40%.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business and Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April, 15, 2008
-- Criteria For Reliance On Upstream Guarantees Modified In Response To Legal Reforms In Latin America, Oct. 25, 2005
Alpek S.A.B. de C.V.
Corporate Credit Rating BBB-/Stable/--
Senior Unsecured BBB
Petrotemex To From
Corporate Credit Rating
Global Ratings Scale BBB-/Stable/-- BB+/Positive/--
National Scale Ratings mxAA/Stable mxAA-/Positive Senior Unsecured BBB- BB+