Fitch Ratings has upgraded the Foreign and Local currency Issuer Default Ratings (IDRs) of Trinidad Cement Ltd (TCL) to 'B-' from 'D' and assigned an expected rating to the company's proposed senior secured term loan of 'B-(EXP)/RR4'. The rating Outlook is Stable
The upgrade reflects the restructuring steps TCL has taken under the increased ownership, support and strategic guidance from Cemex (Cemex; 'B+'/Stable Outlook) following the default on its bank loans in September 2014. Fitch expects that the company will refinance its existing bridge loan with a long-term financing agreement within the next three to six months.
TCL's 'B-' ratings also reflect its business position in the relatively small Caribbean cement market, high leverage, weak liquidity, and volatility of its cash flow generation due to the cyclicality of the cement industry.
Fitch believes the company will be able to slowly deleverage through improved operating cash flow driven by higher volumes and sales price increases. Further factored into the ratings is the favourable outlook for the Caribbean cement industry over the medium term driven by the region's positive macroeconomic and business environment.
Increased ownership and support from Cemex
Fitch views the increased ownership by Cemex as tacit support for TCL and its strategic market position. Cemex increased its ownership in TCL following the company's rights issue for its existing shareholders on March 31, 2015 at TT$2.90 per share. Cemex's ownership increased to 39.5 per cent from 20 per cent at a cost of US$44.8m (total equity injection of US$57m from rights issue).
In addition, Cemex entered into a Technical Services Agreement with TCL on April 23, 2015 which provides TCL with a restructured management team, technical assistance to support the operations of TCL's trading and shipping departments, along with additional support. The agreement has a three-year term.
Restructuring following default in September 2014
TCL has undergone numerous changes over the last nine months, following the moratorium the company gave to its creditors. The default in September 2014 was the result of a failed bond issuance, weak liquidity, and an unfavourable ruling which resulted in labour backpay of US$23m. Following the default, TCL took numerous steps including hiring a new management team, an equity rights issue, negotiating with labor unions, and refinancing its previous debt with a bridge loan. The ratings for TCL reflect the expectation of a successful refinancing of its bridge loan which matures in February 2016.
Improved credit metrics expected
Fitch projects TCL will achieve a total debt/EBITDA ratio of around 3.3x during 2015, an improvement on 4.6x in 2014, contingent upon a successful refinancing of its bridge loan. TCL's free cash flow (FCF) was approximately US$20m during 2013 and 2014, and should remain positive over the near term. TCL's net leverage peaked at 18.5x at 31 December 2011, and declined to 13.2x at 31 December 2012, and eventually to 4.3x at 31 December 2014. The high leverage in 2011 and 2012 was attributable to the poor macroeconomic environment during the period. This resulted in the first of two legal defaults in the last five years for all loan agreements on 31 December 2011.
Weak liquidity projected to remain
Fitch projects TCL's cash balance to be approximately US$40m by 31 December 2015. Liquidity will likely remain weak over the next four years as projected positive FCF generation is used to service debt obligations on its expected term-loan refinancing. TCL reported cash and cash equivalents of approximately USD86 million compared to total debt of US$245m as of 31 March 2015.
Leading Caribbean cement producer
TCL is the leading producer of cement with eight operating companies in Trinidad, Barbados, Guyana, Jamaica and Anguilla. TCL has a dominant market position in the CARICOM region and 100 and 82 per cent of the market share in Trinidad and Jamaica, respectively. The region had annual total cement demand of 11.4Mt in 2014, and the Caribbean Development Bank is projecting regional economies to grow by an average of two per cent in 2015.
Significant barriers to entry
A majority of the demand for shipments of cement to Caribbean islands is for smaller quantities and, coupled with the shallow ports at most of the islands, makes it cost prohibitive for many of the larger cement players to penetrate the market. The small size of the cement market in the Caribbean, as well as the difficulty of logistics in this region, has limited the impact of imports and provided TCL with an EBITDA margin of 19 per cent for 2014. TCL's strategic locations and strong reputation in the region translate into cost advantages that are difficult for competitors to replicate.