Fitch Ratings affirms Copamex, S.A. de C.V.'s (Copamex) ratings as follows:
--Foreign Currency Issuer Default Rating (IDR) at 'B+';
--Local
Currency IDR at 'B+';
--National scale long-term rating at
'BBB(mex)';
--National scale short-term rating at 'F3(mex)';
--Short-term
local 'Certificados Bursatiles' program at 'F3(mex)';
The Rating Outlook is Stable.
Copamex's ratings reflect its leading market positions, business profile and moderate leverage. The company's credit quality was recently strengthened by the closing of a long-term syndicated loan and the extension of a revolver facility backed by accounts receivable. This new syndicated loan allowed Copamex to pay short-term debt, improving the liquidity and financial flexibility. This positive event is balanced against the recent divestiture of the diaper business unit, which will result in less revenue diversification and increased leverage (pro forma 2010, excluding the diaper unit) to levels ranging from 4.5 times(x) to 5.0x. The proceeds obtained from the divestment will be mainly used for capital expenditures that will improve the company's profitability. Fitch estimates that leverage should gradually decline to levels of around 4.0x, as the capital expenditures bring higher operating cash flows.
In addition, Copamex's ratings are limited by factors in the industry in which it operates. Among those is price volatility in commodities such as cellulose and energy. For the latest 12 months (LTM) ended June 30, 2010, fiber materials represented about 40% of the company's costs. The Mexican paper industry usually delays the pass-through of cost increases to customers, due to the lack of correlation between fiber prices and the growth of the Mexican economy. The company's cost exposure to natural gas and energy has also led to margin pressures because of high commodity prices, as reflected in 2008. For the LTM ended June 30, 2010, Copamex's EBITDA was MXN514 million, lower than the MXN527 million reported over the same period in the previous year.
Fitch expects Copamex's EBITDA for full year 2010 will be close to MXN440 million, including results from nine months of operation of the diaper business unit before its divestiture. Excluding the diaper business, pro forma EBITDA for full year 2010 is expected to be approximately MXN360 million. The decline in EBITDA compared to 2009 reflects higher input costs for the notebook and printing business in the first half of 2010. The company's strategy is focused on operational efficiency improvements, development of new higher-margin products, as well as organic growth, the latter supported by moderate capex levels, which should allow Copamex to generate free cash flow to invest in new projects.
Some potential factors that could negatively affect Copamex's credit quality are: A failure to decrease leverage, measured as total debt-to-EBITDA, to about 4.0x in the next two years, as well as a sustained weakening of operating cash flow generation due to business conditions, pricing pressures or raw materials' price volatility. Conversely, a strong liquidity position, as well as a sustained total debt-to-EBITDA ratio below 4.0x over a period of time could support a rating upgrade or revision to a Positive Outlook.
Looking forward, Fitch expects debt levels to remain stable, so that leverage reductions will be driven by EBITDA increases. As of June 2010, total on-balance sheet debt was MXN 1,899 million. This amount included several short and long-term CB issues, which have already been paid with the proceeds from the syndicated loan signed with Rabobank. After this transaction, the company's debt maturity profile has improved substantially, allowing Copamex to have virtually no short-term debt as of Oct. 25, 2010. Taking into account the debt refinancing, the company's debt is MXN1,818 million, and is comprised of the syndicated loan (MXN1,188 million) and the accounts receivables-backed facility (MXN625 million). The first one matures in 2015 and has an 18-month grace period, while the second one comes due in 2016.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology', Aug. 13, 2010;
--'National Ratings - Methodology
Update', Dec. 18, 2006.
Applicable Criteria and Related Research:
National Ratings -
Methodology Update
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=305544
Corporate
Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
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Contacts:
Fitch Ratings
Primary Analyst:
Sergio Rodriguez, CFA,
+52-81-8399-9100
Senior Director
Fitch Mexico S.A. de C.V.
Prol.
Alfonso Reyes 2612
Monterrey, Mexico
or
Secondary Analyst:
Alberto
Moreno, +52-81-8399-9100
Senior Director
or
Committee
Chairperson:
Victor Villarreal, +52-81-8399-9100
Senior
Director
or
Media Relations, New York
Brian Bertsch,
+1-212-908-0549
brian.bertsch@fitchratings.com