-- The financial performance of Mexico's phosphate-based-fertilizers producer Fertinal deteriorated during the first half of 2012, due to operating difficulties at its Lazaro Cardenas plant.
-- Despite the deterioration, we are affirming 'B+' rating on the company, given the company's production has not been affected.
-- The stable outlook reflects our expectation that Fertinal will maintain its key financial ratios in line with its "significant" financial risk profile.
On Sept. 27, 2012, Standard & Poor's Ratings Services affirmed its 'B+' corporate credit rating on Grupo Fertinal S.A. de C.V. (Fertinal). The outlook is stable. The rating affirmation is part of our regular annual review.
Despite Fertinal's weaker financial performance during the first half of 2012 due to operating difficulties at its industrial complex, we are affirming our rating on the company based on the following factors:
-- We believe that the main operating issues at the Lazaro Cardenas plant were resolved, and Fertinal's two plants are operating under normal capacity since July 2012 at production rates of more than 1,800 metric tons (MT) per day.
-- The company's main leverage and cash-flow protection metrics would remain aligned with its "significant" financial risk profile assessment.
Our rating on Fertinal continues to reflect our assessment of the company's "vulnerable" business risk profile and "significant" financial risk profile.
The company's business risk profile assessment is primarily based on: the inherent volatility in fertilizer prices; its small scale relative to peers; and its single-asset operations. The positive rating factors are: Fertinal's vertical integration; its entrenched position in the Mexican west coast market; and our expectations that its operating performance will improve. Fertinal's financial risk profile assessment is primarily based on a volatile cash generation, high-interest burden, a relatively large capital-expenditures plan, and limited financial flexibility, offset by relatively strong financial metrics and adequate liquidity, with no principal maturities until 2015.
For the 12 months ended June 30, 2012, Fertinal's total debt to EBITDA weakened to 3.1x, from 1.8x in 2011, and funds from operations (FFO) to debt to 22.1% from 38%. We don't expect these measure to improve significantly for the full year.
However, under our base-case scenario, we estimate that the company's total debt to EBITDA will improve to 2.5x in 2013, FFO to debt to 25%, and an EBITDA margin should be 15%-17%, mainly due to lower fertilizers prices, still high ammonia prices of about $335 per metric ton, and a near 100% utilization rate of installed capacity, which will slow sales volume growth.
We view Fertinal's liquidity as "adequate," reflecting our belief that the company's cash flow generation and liquidity sources will be sufficient to cover debt service, expected capital expenditures, and dividends for the next 12-18 months. We also consider the company's debt maturity schedule as being comfortable, with all of its outstanding debt maturing in 2015--which in our view provides the company some financial flexibility.
Our liquidity assessment incorporates several assumptions and observations:
-- Sources of liquidity exceeding uses by at least 1.2x during the next two years;
-- Liquidity sources exceeding uses even if EBITDA declines by 15%;
-- Generally prudent risk management, based on the company's efforts to revamp operations following the emergence from bankruptcy and implementation of international financial reporting standards even though the company is not public;
-- Scarce banking relationships and low track record in the credit and capital markets;
-- Adequate headroom under some incurrence financial covenants;
-- No dividends throughout the projected period, as it is constrained by its loan agreements;
-- Annual capital expenditures of about $78 million in 2012 and 2013, 65% of which is for power generation projects and expansion of its plants; and
-- No additional debt.
The stable outlook reflects our expectation that Fertinal would be able to maintain its "significant" financial risk profile even amid potentially softer conditions in the industry and volatile raw materials prices. This scenario incorporates total debt to EBITDA of less than 3x and FFO to debt of more than 20%. A persistently weaker financial performance could lead us to lower the rating. The company's business profile somewhat constrains rating upside, but we could consider an upgrade if Fertinal is able to further improve its operating scale and profitability, coupled with a stronger financial performance.
Related Criteria And Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011.
-- Matrix Ratings List Ratings Affirmed
Grupo Fertinal S.A. de C.V.
Corporate Credit Rating B+/Stable/--