-- On Dec. 14, 2012, GRUMA S.A.B. de C.V. announced the completion of its
acquisition of the 23.16% stake that Archer Daniels Midland Co. and its
affiliates held in GRUMA.
-- We are affirming our 'BB' issuer credit rating on GRUMA. The outlook
-- At the same time, we are also affirming our 'BB' rating the company's
senior unsecured perpetual bonds.
-- The stable outlook reflects our expectation that GRUMA'S management
will remain committed to deleveraging the company following the recent
On Dec. 17, 2012, Standard & Poor's Ratings Services affirmed its 'BB' issuer
credit rating on Gruma S.A.B. de C.V. (GRUMA). The outlook remains stable. At
the same time, Standard & Poor's affirmed its 'BB' rating the company's senior
unsecured perpetual bonds. The recovery rating on the bonds remains unchanged
The rating on GRUMA reflects the company's "aggressive" (as our criteria
define the term) financial policy, despite the consistent improvement in its
credit metrics. The rating also reflects the company's "significant" financial
profile, which includes our assessment of the increase in the company's
leverage, its intensive working capital needs, and its exposure to volatile
raw materials prices. Partly mitigating these risk factors are the company's
"satisfactory" business profile, which is based on its leading position as a
corn flour and tortilla producer (staple products) in Mexico, its strong brand
recognition, and its geographically diverse cash flow.
On Dec. 14, 2012, GRUMA announced the completion of its acquisition of the
23.16% stake that Archer Daniels Midland Co. (ADM; A/Watch Neg/A-1) and its
affiliates held in GRUMA. The transaction, which will be financed with debt,
will result in a deterioration of GRUMA'S key financial metrics by year-end
2012. Although this leveraged buy-out of ADM's stake was not incorporated in
our base case scenario when we upgraded GRUMA in March 2012, we see this
decision as strategic and not a deviation in the company's commitment to a
more prudent financial strategy. We expect that GRUMA will continue to
generate positive free operating cash flow (FOCF) in the next few years and
use these resources to pay down debt, returning the company's total
debt-to-EBITDA ratio to less than 3x by 2014.
The acquisition of ADM's stake in GRUMA consisted of an upfront payment of
$450 million and an additional payment of up to $60 million in 3.5 years,
subject to certain conditions. GRUMA used the proceeds from a $400 million
senior unsecured bridge loan and $50 million available under its $250 million
committed credit line facility to fund the transaction.
For the 12 months ended Sept. 30, 2012, GRUMA'S total debt to EBITDA (adjusted
for operating leases and postretirement pension liabilities), funds from
operations (FFO) to total debt, and EBITDA interest coverage were 2.7x, 22%,
and 5.9x, respectively. After the transaction, we expect the company's total
debt to EBITDA to increase to 3.9x by year-end 2012, and the FFO to total debt
and EBITDA interest coverage ratios to weaken to 13.5% and 5.4x, respectively.
The cash flow contribution from the company's operations in Venezuela remains
uncertain, given the expropriating measures the government of Bolivarian
Republic of Venezuela (foreign and local currency ratings B+/Stable/B) has
enacted since 2010. The Venezuelan government has not taken operational or
managerial control of GRUMA, and the company continues to operate in the
ordinary course of business. However, our base case scenario assumes that the
company would receive some compensation if expropriation occurs, and that it
would use the proceeds to support its deleveraging strategy. Still, we will
continue to monitor the impact of the potential expropriation will have on the
company's financial metrics.
Our base case scenario for the next two years assumes that management will be
highly focused on improving profitability and using FOCF to reduce leverage.
The company has established specific measures to achieve this, such as
reducing capital expenditure mainly only for maintenance and improvements on
certain facilities, eliminating certain products that have lower margins,
increasing operating efficiencies, and making no dividend payments until 2016.
We expect that the implementation of these strategies will lead to FOCF
generation of about $130 million and $150 million in 2013 and 2014,
respectively, and total debt to EBITDA ratio lower than 3.0x by 2014.
We have revised our assessment of GRUMA'S liquidity position to "less than
adequate" from "adequate." Our assessment incorporates the following
-- GRUMA will be able to refinance the $400 million short-term bridge
loan during the next few months, though the company still faces some
-- GRUMA'S sources of liquidity, including cash in hand, the committed
credit facility, and FFO, may fall to less than 1.2x during the next 12 months
to 18 months, especially if the company faces certain volatility in its
working capital requirements, which could also lead to sources minus uses of
-- GRUMA has sufficient covenant headroom to comply with its financial
covenants--even if EBITDA declines by 10%. However, in order to execute the
acquisition from ADM, the company was granted covenant amendments in
connection with its credit facilities. These amendments include a change in
the leverage covenant to a maximum total debt to EBITDA of 4.75x from 3.5x.
-- GRUMA has $157 million of short-term debt, which mostly comprises
revolving credit lines, which we believe that it will be able to refinance.
GRUMA has demonstrated adequate access to bank lines, as evidenced by the bank
loans it recently obtained to finance the acquisition.
The stable outlook reflects our expectation of GRUMA'S management commitment
to deleverage following the recently announced acquisition. We could lower the
rating if management's commitment to improve the company's financial profile
is not evidenced during the quarters following the transaction, or if the
potential expropriation of the company's operations in Venezuela results in a
further deterioration of its credit metrics, with total debt to EBITDA of more
than 4.0x on a consistent basis. We don't anticipate an upgrade in the near
term, since the company's aggressive financial policy limits the rating.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Methodology and Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The Branded
Consumer Products Industry, Sept. 10, 2008
-- 2008 Corporate Ratings Criteria, April 15, 2008
GRUMA S.A.B. de C.V.
Corporate Credit Rating BB/Stable/--
Senior Unsecured BB
Recovery Rating 3