January 18, 2013 / 8:26 PM / 5 years ago

TEXT-S&P rates Pesquera Exalmar, and notes 'B+'

     -- 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.

Rating Action
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 
third-party suppliers.

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% 
in 2013.
     -- 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

Ratings List

New Rating

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.
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