Fitch has raised the credit rating of Mexican cement firm Grupo Cementos de Chihuahua (GCC) to BB-, in both local and foreign currency, with a stable outlook.
Fitch said in a statement that ratings upgrade reflects GCC's strong operating performance over the past several quarters, its significantly improved credit profile following debt repayments during 2014 and the successful debt refinancing during 2013. The upgrade takes into consideration the improvement in the US cement market and an improving outlook for the company's EBITDA and cash flow considering continued robust credit fundamentals. “These factors have reduced GCC's refinancing risk, improved company liquidity and lowered the financing cost at which the company can refinance existing debt,” the rating’s agency noted.
Key rating's drivers
Solid US operating performance
Fitch believes robust volumes and improved pricing in the US will likely support GCC's operating results and outweigh sluggish demand growth for cement in the cement producer’s domestic market of Mexico. In the first nine months of 2014, the company's total cement volumes grew nine per cent mainly due to a 12 per cent increase in US volumes. This compares favourably to 2013, when total volumes grew a modest one per cent and US volumes grew two per cent. Price increases announced industry-wide in 2014 in the US have gained traction and several producers have announced pricing increases for 2015.
The majority of GCC's markets have shown above-average volume recovery in 2012, 2013 and first nine months of 2014, partly due to their direct and indirect exposure to the agriculture and oil and gas sectors which have shown positive momentum. In Fitch's view, less diversified states such as North Dakota could see lower demand for cement due to cuts to energy infrastructure spending. Cement demand in the larger, more diversified states such as Colorado and Texas is expected to remain robust.
Leading market shares
GCC is the largest cement producer in the state of Chihuahua in northern Mexico across all product segments. It also has strong cement market positions in Colorado, New Mexico, North and South Dakota, and in the El Paso, TX, area. “GCC's contiguous North American footprint allows for economies of scale, distribution optimization and international trading capabilities,” Fitch states. According to the Portland Cement Association (PCA), a majority of the states where GCC has presence have a better-than-average outlook for the medium term. The company has an installed cement capacity of 4.4Mta of which 2.2Mta are distributed among three plants in the US states of New Mexico, South Dakota and Colorado and 2.2Mta in the state of Chihuahua.
Positive FCF through the cycle
Fitch projects CFFO for 2014 to be close to US$87m primarily due to solid performance of the U.S. division. Free cash flow (FCF) in 2014 should be about US$30m and about US$10m in 2015, as recovery in GCC's main markets continues and the company invests in deferred maintenance, upgrades and required renovations.
Leverage improved ahead of expectations
GCC's total debt/EBITDA ratio as of 30 September 2014 was 3.3x. Since demand for cement plummeted in the US in 2009, this is the first time the company's leverage has dropped below 4x. Considering debt repayment for the full year of US$20, GCC's 2014 total/debt to EBITDA will be at or below 3.2x, outperforming Fitch's previous expectations and significantly below the 4.3x and 4.1x registered at the end of 2013 and 2012, respectively.
The company continues to maintain adequate liquidity as a result of its capacity to generate CFFO, which together with cash and cash equivalents of US$78m, and available undrawn committed credit lines of US$20m, should be sufficient to cover US$53m of principal payments due in 2015. G