(The following statement was released by the rating agency)
-- 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
-- The negative outlook reflects the potential decline of Mastellone's
credit quality due to the company's high refinancing risk and limited funding
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-'.
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.
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.
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.
-- 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
Mastellone Hermanos S.A.
Issuer Credit Rating CCC+/Negative/-- B-/Negative/--
Global Scale Rating CCC+ B-
National Scale Rating raBB+ raBBB-
(Caryn Trokie, New York Ratings Unit)