Fitch assigns BBB- rating to Mexichem's proposed US$350M senior unsecured notes issuance due 2019, says outlook stable

Liling Tan

MONTERREY, Mexico , October 19, 2009 (press release) – Fitch Ratings has assigned a 'BBB-' rating to Mexichem, S.A.B. de C.V.'s (Mexichem) proposed US$350 million senior unsecured notes issuance due 2019. The rating incorporates the assumption that the proceeds from the proposed issuance will be mainly used to complete a potential acquisition which will be integrated into Mexichem's production chains. Fitch believes that in the absence of the aforementioned transaction, funds from the proposed issuance will be used in a large proportion to repay debt.

In addition, Fitch has affirmed the following ratings for Mexichem:

--Issuer default rating (IDR) at 'BBB-';

--Local currency IDR at 'BBB-';

--National scale long-term rating at 'AA-(mex)';

--MXP2,500 million Local Certificados Bursatiles issuance MEXCHEM 09 due in 2014 at 'AA-(mex)'.

The Rating Outlook is Stable.

Although the proposed senior notes issuance will increase Mexichem's total indebtedness, Fitch believes the company will be able to absorb and rapidly integrate the expected new operation into its business platform, given the strategic fit with Mexichem's operating structure and its management's success in the past in integrating prior acquisitions. Fitch assumes that this transaction will be consistent with the company's vertical integration strategy focused on adding value to its raw materials' strategic position. Fitch expects that Mexichem's leverage will remain consistent with management's long-term target of Net Debt to EBITDA below 2.0 times (x). If the final terms of the acquisition result in higher levels of leverage, the company's credit quality could be affected.

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 Mexichem's competitive cost structure and solid financial profile.

Mexichem 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. 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. Future acquisitions financed with increased indebtedness could pressure the company's credit quality.

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 [[[favorable???]]]labor and geographic conditions.

Mexichem cash flow generation is strong and is reflected in its relatively stable credit metrics, despite unfavorable economic conditions. Pro-forma total debt to EBITDA after the proposed senior notes issuance could rise to 2.6x. , Fitch's expectation, however, including the potential acquisition's operating results, is that during 2010 the company will return to levels close to 2.2x, similar to those observed in June 2009. Moreover, the company should be able to fund its maintenance and replacement capex with internally generated cash flow. 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 10.1x 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 has improved. 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 Mexichem carried out an equity rights offering to its shareholders for US$173 million. Proceeds were used to prepay US$50 million of debt related to the Tubos Flexibles acquisition and the remaining balance will be used to fund pending acquisitions. In conjunction with this, Mexichem issued certificados bursatiles in the local market for approximately US$188 million, which were used mostly to refinance short-term debt, which now represents approximately 15% of total debt.

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