Fitch upgrades Mexican paper and paperboard producer Bio-Pappel's ratings to B from CCC, upgrades company's notes due in 2016 and assigns stable rating outlook on improvement in company's liquidity
CHICAGO and MONTERREY, Mexico
August 27, 2010
– Fitch Ratings has upgraded the foreign and local currency Issuer Default Ratings (IDRs) of Bio-PAPPEL S.A.B. de C.V. (Bio-PAPPEL) to 'B' from 'CCC'. In conjunction with this rating action, Fitch has upgraded the company's notes due in 2016 to 'B/RR4' from 'CCC/RR4'. Fitch also has assigned a Stable Rating Outlook to Bio-PAPPEL.
Fitch's rating actions are a result of an improvement in the company's liquidity due to the favorable operating environment during the last 12 months (LTM) ended June 30, 2010. This has allowed the company to generate USD54 million of cash flow from operations (CFFO) during the LTM and build its cash position to USD88 million as of June 30, 2010. This compares with USD266 million of total debt, of which USD 250 million is related to the senior guaranteed step up notes that mature Aug. 27, 2016.
During 2010, Fitch projects that Bio-PAPPEL will generate between USD65 million and USD70 million of EBITDA. The company's strong year is a result of a healthy spread between its average sales prices and the prices it pays for energy and recycled paper products such as old corrugated containers (OCC) and old newspaper (ONP). This spread has averaged about USD63 per ton during the first semester of 2010, a sharp improvement versus 2008 when the spread averaged about USD40 per ton and the company generated only USD26 million of EBITDA.
Bio-PAPPEL is expected to pay about USD18 million of interest expense on its debt during 2010, foregoing an option to make a partial PIK payment on its 2016 notes. With working capital expenses expected to increase in line with volume growth, the company should end the year with about USD35 million to USD40 million of CFFO. Bio-PAPPEL is expected to spend most of its CFFO on capital expenditures, resulting in net leverage remaining in the range of USD190 million. This would result in a total debt/EBITDA ratio for Bio-PAPPEL during 2010 of 4.0 times (x), a net debt/EBITDA ratio of 2.8x and a CFFO leverage ratio of 7.3x.
The ratings continue to take into consideration the leverage of the company relative to the stress upon its cash flow when its costs rise. The situation has been compounded in recent years when prices for OCC and ONP increased sharply in Mexico and the United States due to purchases by Chinese manufacturers, while prices for linerboard and corrugated boxes stayed stable or declined in Mexico and the United States. Energy is Durango's second most important production cost after recycled fiber. The ratings factor in the company's continued vulnerability to rising electricity and natural gas costs. The company is seeking to mitigate this exposure with investments in cogeneration. Finally, the ratings take into consideration Bio-PAPPEL's vulnerability to a sharp devaluation of the Mexican peso due to the majority of its costs being linked to dollars - recycled fiber and energy - and more than 80% of its revenues being generated in Mexican pesos.
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