TEXT-S&P rates Mexichem's proposed $1 billion notes 'BBB-'

Fri Sep 7, 2012 3:22pm EDT

Overview
     -- Mexico-based chemicals and petrochemicals producer Mexichem has 
recently announced a funding plan consisting of issuing $1 billion in notes 
and an equity add-on of $1 billion.
     -- We are assigning our 'BBB-' global scale rating to the proposed debt 
issuance. 
     -- We are affirming our ratings on Mexichem, including the 'BBB-' global 
scale and 'mxAA/mxA-1+' national scale corporate credit ratings.
     -- The stable outlook reflects our expectation that Mexichem's business 
strategies, moderate financial policy, and solid key financial indicators will 
support the ratings over the next few years.


Rating Action
On Sept. 7, 2012, Standard & Poor's Ratings Services assigned a 'BBB-' rating 
to Mexichem S.A.B. de C.V's proposed $1 billion 144 A/Reg S senior
unsecured notes. The notes will be issued in two tranches: $700 million 10-year
senior notes due 2022 and $300 million 30-year senior notes due 2042. 

At the same time, we affirmed our 'BBB-' global scale and 'mxAA/mxA-1+' 
national scale corporate credit ratings on the company. The outlook is stable. 
The company will use the proceeds for refinancing outstanding debt, working 
capital, capital expenditures, and corporate uses.

Rationale
The ratings on Mexichem continue to reflect our assessment of the company's 
business risk profile as "satisfactory" and its financial risk profile as 
"intermediate." 

In our view, Mexichem will maintain its "satisfactory" business profile in the 
coming years through the full integration of its recent acquisition, Wavin, 
and investments into its existing operations. We believe that the company will 
continue acquiring assets and carry out investments that strengthen its 
vertical integration and competitive position, as well as incorporating more 
value-added products into its portfolio. In our view, Mexichem's business 
profile has benefited from recent acquisitions, as it has significantly 
diversified its geographic footprint while somewhat equalizing sales from its 
operations in North America, South America, and Europe, with the exception of 
Asia. The company's very strong market position, extensive vertical 
integration along its three product chains (chlorine vinyl, transformed 
products, and fluorine) and its proven ability to integrate acquired 
businesses should allow it to maintain relatively stable margins despite some 
inherent industry volatility. 

We assess Mexichem's financial risk profile as "intermediate." Despite having 
a somewhat acquisitive profile, we do not expect material shifts in the 
company's financial policies and main target ratios, particularly its 
intention to keep net debt to EBITDA below 2x. This constitutes a key rating 
factor. 

For the next two years, we expect Mexichem to maintain its main leverage and 
cash-flow protection metrics in line with its financial risk profile. We 
expect the company to post debt to EBITDA in the 2x-3x range and funds from 
operations (FFO) to debt in the 30%-40% range. Our base-case scenario for 2012 
assumes a sales volume growth of about 14% to 3.7 million tons of 
petrochemical products due to expected increases in all three product chains, 
particularly the integral solutions chain following the incorporation of 
Wavin, and a sales price increase of about 30%, mainly propelled by the 
fluorine chain. We also incorporate gradual improvements in cash flow 
generation and synergies from the consolidation of recent acquisitions. In 
addition, we are expecting capital expenditures of about $492 million in 2012 
and $644 million in 2013, and the company will devote half of these amounts 
for expansion projects to strengthen its product chains. We expect no 
additional debt to fund these capital expenditures or to significant 
acquisitions. In our view, the proposed issuance of the $1 billion notes will 
have no effect on the company's debt given that it will use this amount to 
refinance its outstanding debt. In our view, the equity add-on will strengthen 
the company's capital structure and reduce somewhat the use of debt to carry 
out potential new acquisitions. 

For the 12 months ended June 30, 2012, Mexichem's financial performance was in 
line with our expectations, which exclude a full year of Wavin's operations. 
The company posted debt to EBITDA of 2.9x, FFO to debt of 26.8%, and EBITDA 
interest coverage of 7.0x. We believe that the company will remain active in 
seeking additional acquisitions and orienting them toward strengthening its 
business position, vertical integration, and geographic diversification, and 
complementing its business chains. 

Liquidity
We assess Mexichem's liquidity as "adequate," reflecting our belief that its 
cash flow generation and liquidity sources will be sufficient to cover debt 
service, expected capital expenditures, and dividends. We also consider that 
the company's debt maturity schedule is comfortable, with about 90% of debt 
maturing after 2013, which compares favorably with expected cash flow 
generation for the next few years. Pro forma after the proposed debt issuance, 
about 73% of debt will mature after 2015. Our liquidity assessment 
incorporates the following assumptions and considerations:

     -- Sources of liquidity exceeding uses by at least 1.2x during the next 
two years;
     -- Liquidity sources exceeding uses even if EBITDA declined by 15%;
     -- Generally prudent risk management based on a financial policy of 
maintaining net debt to EBITDA at less than 2.0x;
     -- Positive free operating cash flow generation of about $64 million in 
2012 and $140 million in 2013, based on the half-year consolidation of Wavin's 
operations in 2012 and the closing of other acquisitions in 2012. We assume 
acquisitions for about $1 billion;
     -- Comfortable headroom under its financial covenants (i.e. maximum net 
debt to EBITDA and minimum EBITDA interest coverage of 3.0x for both);
     -- Annual dividends of about $60 million;
     -- Capital expenditures of about $492 million during 2012 and $644 
million in 2013;
     -- Liquidity sources of about $509 million in unrestricted cash and 
equivalents as of June 30, 2012, and $618 million in availability under 
committed credit lines which are mostly due 2014, which compare favorably with 
projected short-term maturities of about $26 million due 2012 and $65 million 
due 2013; and
     -- On a pro forma basis, the largest maturity is $484 million due 2015, 
which we are comfortable in the company's ability to repay, given its cash 
balance position, cash flow generation, sound bank relationships, and 
satisfactory standing in credit and capital markets. 


Outlook
The stable outlook on Mexichem reflects its moderate financial policies, 
particularly net debt to EBITDA of less than 2.0x, which we believe will keep 
supporting our investment-grade ratings on the company. After the add-on, we 
expect that Mexichem will continue to make acquisitions with lesser use of 
debt to improve its business segments through geographic diversification and 
increasing its vertical integration through complementary investments.

The company's credit measures will likely continue to meet our expectations, 
even amid soft economic conditions in much of the developed world. 
Nonetheless, we could lower the ratings if Mexichem's financial profile 
deteriorates, particularly if it posts debt to EBITDA of more than 3.0x and 
FFO to debt consistently below 30% on a trailing 12-months basis, which could 
result from new acquisitions and/or significant investments, and/or a delay in 
synergies. An upgrade is less likely at this point, but we might consider it 
if the company continues to strengthen its business profile while maintaining 
total debt to EBITDA of about 2.0x and/or FFO to total debt of 40%.


Related Criteria And Research
     -- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity 
Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008


Ratings List
New Rating

Mexichem S.A.B. de C.V.
 $700 million 10-year senior notes due 2022       BBB-
 $300 million 30-year senior notes due 2042       BBB-               

Ratings Affirmed

Mexichem S.A.B. de C.V.
 Corporate Credit Rating                          BBB-/Stable/--     
 Caval - Mexican Rating Scale                     mxAA/Stable/mxA-1+ 
 Senior Unsecured                                 mxAA               

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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