TEXT - S&P cuts Mastellone Hermanos S.A. rating to 'CCC+'

Tue Dec 11, 2012 3:03pm EST

(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)