-- We are assigning our 'B+' ratings to Peru-based fishing company
Pesquera Exalmar and its proposed $200 million senior unsecured notes due 2023.
-- The stable outlook reflects our expectation that the company's
liquidity and credit measures will remain relatively stable during the next
two years, despite its large capital expenditures for 2013 and the challenges
associated with the start-up of its new business segment.
On Jan. 18, 2013, Standard & Poor's Ratings Services assigned its 'B+'
long-term corporate credit rating to Pesquera Exalmar S.A.A. (Exalmar).
At the same time, we assigned our 'B+' issue-level rating to Exalmar's proposed
$200 million senior unsecured notes due 2023. The outlook is stable.
The ratings on Exalmar reflect our assessment of the company's "weak" business
risk profile, "aggressive" financial risk profile, "less-than-adequate"
liquidity, and "fair" management.
Our assessment of Exalmar's business risk profile as "weak" reflects the
company's business concentration exclusively in the catch of anchoveta fish
along the Peruvian coast. It also reflects the inherent volatility of the
fishing industry, and exposure to adverse weather conditions, industry
regulations, and global demand. The company is also exposed to international
trade barriers from the countries to which it exports. The ratings also
consider high working-capital requirements associated with the nature of
Exalmar's business, which could result in sudden liquidity pressures,
particularly during periods of limited cash availability. In addition, the
volatility of international prices for Exalmar's core products hinders its
ability to maintain a stable and predictable cash flow stream. The relatively
small scale of Exalmar, as the fourth-largest fishmeal producer in Peru, also
constrains the rating. Offsetting factors are the company's favorable
geographic location, as Peru is the main producer of fishmeal and fish oil
worldwide, with around 20% of world output. Additionally, favorable demand
growth prospects for fishmeal and fish oil consumption, coupled with the
company's gradual diversification into the direct human consumption (DHC)
segment support the long-term sustainability of its business model. Moreover,
Exalmar maintains a competitive cost structure thanks to its operating
vertical integration, benefits from a positive and long-term track record in
the fishing industry, and maintains sound and reliable relationships with
Following the government's regulatory initiative to ensure the preservation of
the anchoveta species, fishing companies in Peru have been operating under an
individual transferrable quota (ITQ) since 2009. During the first half of
2012, Exalmar maintained a 6.45% quota in the North-Center region and 4.34% in
the South region. Despite the volume catch limitations, the company has been
able to successfully execute its growth strategy through M&A activity that has
gradually increased its ITQ, third-party catch purchases to achieve economies
of scale in its manufacturing facilities, and the recent diversification of
the product portfolio into the DHC segment. The company's growth strategy,
coupled with a favorable pricing environment in recent years, has resulted in
EBITDA margins of about 30% during the last three years. In 2010, however,
unfavorable weather conditions reduced Exalmar's fishmeal production volumes
by 30%, resulting in an EBITDA margin of about 26%.
We estimate Exalmar's operating efficiencies, such as gradual modernization of
its fleet and increasing economies of scale, will maintain its EBITDA margins
close to 30% in 2013. In our view, the favorable trend on fishmeal and fish
oil prices should also help the company's profitability. We believe Exalmar's
production efficiencies, coupled with the start-up of the DHC segment, would
partly mitigate potential cash flow volatility associated with abrupt changes
in the pricing environment.
Our assessment of Exalmar's financial risk profile as "aggressive" reflects
our expectation that leverage ratios will trend to the mid-2x area, the
volatility in the quarterly results, and the company's focus on consolidating
its operations and developing the DHC business segment, which should lessen
cash flow volatility.
In our base-case scenario, we assume:
-- Fishmeal price increase during the second half of 2012, to around
$1,700/ton because of lower volumes produced in Peru, but declining about 20%
-- Capital investments of $85 million in 2013 to continue supporting
growth in the DHC segment. After 2013, the company should use most of its
capital expenditures to support maintenance activities.
-- Revenue growth of 26.4% in 2013 associated with the increase of ITQ,
and more than 7% through 2016 due to the expansion of the DHC segment.
We expect the company to continue seeking potential ITQ quota acquisitions in
the Peruvian market, which would result in incremental debt. After 2013 we
expect Exalmar to fund most of its growth with internal cash generation. We
estimate annual cash flow from operations of about $50 million, which the
company will use to support its investment needs, thus maintaining a capital
structure consistent with its current financial profile. Our baseline forecast
for 2013 assumes that Exalmar's total debt to EBITDA will be 3.0x, EBITDA
interest coverage of 4.2x, and funds from operations (FFO) to total debt of
16.8%. Due to the seasonality of Exalmar's business, we factor in the rating
the potential for high cash flow volatility, which requires its financial
metrics to be stronger than those of companies with more stable cash flows.
Based on its likely sources and uses of cash during the next 12-18 months, our
performance expectations, and pro forma for the transaction, Exalmar has
"less-than-adequate" liquidity. Our assessment of Exalmar's liquidity
considers the high working-capital requirements and the absence of committed
lines of credit. Other relevant factors include the following:
-- Sources of liquidity to exceed uses by at least 1.0x;
-- Positive net sources; and
-- Pro forma for the transaction, the company faces a smooth debt
maturity profile for 2013-2016.
As of Sept. 30, 2012, Exalmar's liquidity sources include a cash balance of
approximately $28.9 million, and we estimate FFO of $47.2 million for 2013.
Under our base-case scenario, we have incorporated capital expenditures of
approximately $85.8 million in 2013, including the acquisition of small-size
ITQ quotas. We also expect the company to use the proceeds to refinance
existing debt and for general corporate purposes, including capital
investments. We believe part of the capital expenditures for 2013 are
discretionary, and expect management to reduce them if operating performance
is below expectations, or if the company does not issue the proposed notes. We
expect Exalmar to have working-capital needs at about $11.4 million in 2013,
and we expect it to maintain cash balances above $10 million.
The company has an outstanding syndicated bank loan that incorporates a 3.0x
maximum consolidated leverage ratio and 1.25x debt service coverage ratio. We
believe Exalmar maintains sufficient cushion to comply with its covenants.
The stable outlook reflects our expectations that Exalmar's operating
efficiencies will keep EBITDA margins at around 30%, despite potential
volatility in the company's production volumes or abrupt changes in the
pricing environment. We could downgrade Exalmar if weak operating results--due
to adverse weather conditions or a significant drop in volume demand and
prices---result in debt to EBITDA of more than 4x, or if cash flow pressures
deplete its liquidity. In our view, the volatility of the fishing industry,
combined with the company's limited scale and narrow geographic and product
diversification, somewhat limits a positive rating action in the near term.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Key Credit Factors: Business And Financial Risks In The Branded
Consumer Products Industry, Sept. 10, 2008
-- Standard & Poor's Revises its Approach To Rating Speculative-Grade
Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios and Adjustments, April 15, 2008
Pesquera Exalmar S.A.A.
Corporate Credit Rating B+/Stable/--
Senior Unsecured B+
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com.