Fitch rates Mexichem's issuer default rating 'BBB-,' says outlook stable on competitive cost structure, solid financial profile

Liling Tan

MONTERREY, Mexico , August 4, 2009 (press release) – Fitch Ratings has assigned the following ratings to Mexichem, S.A.B. de C.V. (Mexichem):

--Foreign currency Issuer Default Rating (IDR) 'BBB-';

--Local currency IDR 'BBB-'.

The Rating Outlook is Stable.

Mexichem's ratings are supported by the company's business profile as a leading vertically integrated chemical and petrochemical company in Mexico, with important market shares and presence in Latin America, which in turn translates into geographic revenue diversification. The ratings are also supported by the company's competitive cost structure and solid financial profile. The ratings incorporate Fitch's expectations that Mexichem's management will maintain its long-term target of Net Debt to EBITDA below 2 times (x).

The company segments its operations into three production chains: chlorine-vinyl, fluorine, and transformed products (basically polyvinyl chloride-PVC pipes and fittings), which mainly target the construction, agricultural and industrial sectors. The company benefits from its vertical integration which serves different segments along the value chain and allows it to focus its development toward value-added products. In addition, these factors create barriers of entry to other market participants.

Balanced against this is the company's relatively aggressive expansion program, which has included in recent years the acquisition of complementary operations, competitors and new business lines in order to add value to its main production chains. These transactions have been financed mainly with debt and, in a lower proportion, equity and asset sales. Going forward, the company's strategy is focused on organic growth and selective acquisitions. In past years, the company has invested approximately US$1.6 billion in order to implement its vertical integration strategy. Fitch expects that in the following years Mexichem's capex program will be limited to maintenance, modernization and replacement of current installed capacity, at levels similar to annual depreciation and amortization charges. Mexichem's revenues are closely linked to the U.S. dollar; 40% of consolidated sales are denominated and paid in U.S. currency, 40% is referenced to the dollar and paid in local currencies, and 20% is domestic. As of June 2009, 80% of Mexichem's US$213 million cash balance is in U.S. dollars. Mexichem has gained economies of scale and geographic scope, and to date exports its products to over 50 countries and has manufacturing facilities in 14 countries.

In addition, Mexichem has developed in-house technology and has a low production cost given that its manufacturing facilities benefit from labor and geographic conditions. Mexichem cash flow generation is strong and is reflected in its relatively stable credit metrics, despite unfavorable economic conditions. For 2009, management has been actively implementing initiatives to optimize working capital and has kept strict control over costs and expenses. For the latest 12 months (LTM) ended June 30, 2009, EBITDA coverage of Interest was 10.1 times (x) compared to 9.1x in fiscal 2008 and 8.0x in fiscal 2007. Total Debt to EBITDA for the same period was 2.2x, compared to 2.4x at the end of 2008 and 2.0x in 2007. EBITDA margin was 19% for the LTM at June 2009 versus 16.8% in fiscal 2008 and 18.9% in fiscal 2007. The recent improvement in margins reflects lower input costs and relatively stable prices.

Mexichem's liquidity risk is moderate. At June 30, 2009, the company had a total debt balance of US$993 million, where 30%, or US$299 million, is short-term. At the same date the company had cash and equivalents equal to US$213 million. During the third quarter of 2009 the company plans to propose an equity rights offering to its shareholders of approximately US$170 million and proceeds are expected to be used to fund pending acquisitions. In conjunction with this, Mexichem is evaluating different alternatives to refinance short-term debt in order to improve its current debt maturity profile.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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