TEXT - S&P cuts Mastellone Hermanos S.A. rating to 'CCC+'
(The following statement was released by the rating agency) Overview -- We have revised our assessment of Argentina-based dairy products producer Mastellone Hermanos S.A.'s liquidity profile to "weak" from "less than adequate," mainly due to its increased short-term debt maturities. -- We believe that the company greatly relies on exogenous factors to meet its short-term debt payments, particularly those scheduled for June 2013. -- We are lowering our issuer credit rating on Mastellone to 'CCC+' from 'B-'. -- The negative outlook reflects the potential decline of Mastellone's credit quality due to the company's high refinancing risk and limited funding sources. Rating Action On Dec. 11, 2012, Standard & Poor's Ratings Services lowered its issuer credit rating on Mastellone Hermanos S.A. to 'CCC+' from 'B-'. The outlook is negative. At the same time, Standard & Poor's lowered its issue rating on the company's senior unsecured notes to 'CCC+' from 'B-'. Rationale The downgrade reflects our view of Mastellone's ability to meet its short-term debt payments, which has led us to revise our assessment of its liquidity profile to "weak" from "less than adequate." We believe that the company depends significantly on exogenous factors to honor its financial obligations, including access to new financing and the extension of credit from its suppliers. According to our base case scenario, the company's sources of funds for the next 12 months fall short of uses by $30 million. Although Mastellone could count on some bank financing and eventually tap the local debt markets to cover this funding gap, we believe that the company's ability to refinance its maturities is scant due to the limited financial flexibility of issuers in the Republic of Argentina (unsolicited foreign and local currency ratings B-/Negative/B). In addition, we expect that it will be very difficult for Mastellone to sustain the extension of credit from its suppliers, which has led to a material cash inflow in 2012. Our rating on Mastellone also reflects its "vulnerable" (as our criteria define the term) business risk profile, "highly leveraged" financial risk profile, "weak" liquidity, and "fair" management and governance. Our assessment of Mastellone's business risk profile reflects its high exposure to Argentina, where the company has asset and cash flow concentration. Argentine corporates face elevated business risks and challenging refinancing conditions, in our view, given the sovereign's declining credit quality and the high inflation and regulatory risks. Furthermore, Mastellone is exposed to the volatility inherent to the dairy industry. The company's profits greatly depend on the availability and price of raw milk, which is susceptible to uncontrollable factors such as weather and global demand and supply. These factors are partly offset by Mastellone's sound competitive position both as a dairy products marketer and as a raw milk procurer in Argentina. The company also has the leading market share in several dairy products in Argentina, owns one of most recognizable brands in the country (La Serenisima), and has an efficient distribution network with nationwide coverage. As the largest buyer of raw milk in Argentina, Mastellone has a high bargaining power with dairy farmers. We assess Mastellone's financial risk profile as "highly leveraged," based on the company's high refinancing and foreign exchange risks. We believe that the short-term debt could potentially be refinanced at an expensive cost, which would hurt prospective cash flow generation and cause the credit metrics to deteriorate. Moreover, given that the bulk of Mastellone's debt is denominated in U.S. dollars and the cash flows are mostly generated in Argentine pesos, a depreciation of the Argentine peso would cause the capital structure to deteriorate even though Mastellone's exports have been increasing. These factors are offset to some extent by the company's current credit metrics, which could be in line with an "aggressive" financial risk profile, with debt to EBITDA and funds from operations (FFO) to debt of 4.8x and 14.0%, respectively, for the 12 months ended Sept. 30, 2012. Under our base case scenario, we estimate EBITDA generation of about $60 million in 2012, which is lower than the $78 million in 2011. Despite the recovery in second-half 2012, which fully captured the price increases that took place in June, we believe that Mastellone will post EBITDA margin of 3.5% in 2012, which is less than the 5.2% in 2011. This reflects the significant delays in sales price increases. We expect stable EBITDA generation and profitability in 2013, compared with 2012, mainly due to the difficulty the company will likely face in increasing its prices above inflation. We believe that Mastellone's profits and cash flow generation will remain highly exposed to the timing and magnitude of its sales price adjustments. Liquidity We consider Mastellone's liquidity as "weak" under our criteria. We expect that the company's liquidity sources will fall short of uses over the next 12 months, thus exposing the company to high refinancing risk. The sources of liquidity include cash of $35 million as of Sept. 30, 2012, and FFO of about $30 million in the next 12 months. The cash uses include $65 million of short-term debt maturities, including the roughly $20 million principal payment of the E bullet notes maturing in June 2013. Furthermore, cash uses comprise maintenance capital expenditures of $25 million and working capital outflow of approximately $5 million during the next 12 months. Our base case scenario includes a working capital outflow, since we expect that it would be very difficult for Mastellone to sustain the extension of credit from its suppliers, which has led to a material cash inflow in 2012. Outlook The negative outlook reflects our expectation that Mastellone will remain exposed to high refinancing risk in the coming months as it faces limited funding sources. The company greatly relies on exogenous factors to meet its short-term debt maturities. We could lower the rating if we see further pressure on liquidity due to negative free operating cash flow generation or dwindling cash balances, for instance. We would also lower the rating if the company does not have a viable strategy to refinance its debt maturities. Although unlikely in the near term, we could revise the outlook to stable or even raise the rating if the company is able to address its short-term maturities and improve its debt maturity profile. Related Criteria And Research -- Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 -- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011 -- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Ratings Criteria, April 15, 2008 Ratings List Downgraded To From Mastellone Hermanos S.A. Issuer Credit Rating CCC+/Negative/-- B-/Negative/-- Senior Unsecured Global Scale Rating CCC+ B- National Scale Rating raBB+ raBBB- (Caryn Trokie, New York Ratings Unit)