Fitch Rates Kuo's USD250MM Proposed Senior Notes 'BB(exp)'
Fitch Ratings has assigned an 'BB(exp)' rating to Grupo Kuo, S.A.B. de C.V.'s (Kuo) proposed Senior Notes issuance up to USD250 million due in 2022. Proceeds from the issuance are expected to be used primarily to refinance existing indebtedness.
The ratings reflect Kuo's strong operating performance in recent years, stable financial profile, solid liquidity and adequate debt maturity schedule. The company has maintained organic growth across business segments despite a challenging economic environment in conjunction with acquisitions to strengthen its business lines. Recent acquisitions have been funded with a combination of internal cash generation and debt; Fitch expects consolidation and integration of these operations in 2012 as well as the deployment of announced expansions and new facilities in Asia to complement the company's portfolio.
Kuo's ratings are supported by its diversified revenue stream. Hard currency generation represented 49% of total sales for the latest 12 months as of Sept. 30, 2012 (48% in FY2011), coming from exports and subsidiaries located outside of Mexico and by joint ventures (JVs) with international industry leaders. The ratings incorporate the company's exposure to volatility in demand and input costs related to commodity prices across business lines. The ratings consider Kuo's management long- term target of net debt to EBITDA between 1.5x and 2.5x.
Strong Operating Performance
Kuo's revenue growth has been supported mainly by acquisitions and organic growth; while profitability has shown a slight improvement. For the latest 12 months as of Sept. 30, 2012, revenues grew 15% to MXN29.2 billion, while EBITDA increased 22% to MXN2.7 billion, when compared to the same period last year. Despite sharp increases in raw materials across all divisions, the EBITDA margin reached 9.1% higher than 8.6% of the previous year same period. Fitch expects profitability will remain relatively stable across Kuo's business segments in the following quarters.
According to Fitch's calculations, annual Free Cash Flow (FCF) after dividends, acquisitions and divestitures was negative for approximately MXN910 million, as a result of increased working capital requirements and capex. Fitch anticipates that Kuo's FCF for the next 12 - 24 months to be from negative to neutral as it deploys its investing plan.
Consistent Business Strategy
Kuo continued its investment plan based on a dynamic business portfolio. Capex during the year was dedicated to optimize operations across operating segments. In addition, during the past year, Kuo made acquisitions or entered in new JV's in its automotive and consumer divisions. The company recently increased its equity stake in Kuo Divgi Automotive Private Limited to 96.5%, its transmissions and transmission's components business in India, through its subsidiary Kuo India, S.A. de C.V. Fitch expects that Kuo will continue with the strategy observed in past years oriented to developing high value added products with attractive returns, through a combination of internal growth and acquisitions.
Improved Credit Metrics
Kuo's credit metrics have been gradually improving following the acquisitions in 2011 and 2012. For the latest 12 months as of Sept. 30, 2012, total debt to EBITDA and net debt to EBITDA were 2.3x and 1.9x, respectively, which compare favorably to 2.5x and 2.3x at year end 2011. Fitch anticipates KUO will maintain these stable ratios in the absence of debt financed acquisitions. The company's total debt balance as of Sept. 30, 2012, was MXN6 billion, with minimal short-term debt of 1% of total debt.
Solid Liquidity and Adequate Debt Profile
Liquidity is ample, and the company's debt maturity profile is manageable. As of Sept. 30, 2012, Kuo's had a cash balance of MXN960 million, available committed credit lines of approximately USD60 million and short- term debt of MXN64 million. The company's financial strategy includes prepaying the USD 250 million of senior notes due in 2017 with the proceeds from the proposed issuance. The next significant debt amortizations of Kuo are in 2015 and 2016 when MXN700 million of Certificados Bursatiles and MXN1.1 billion of bank loans come due, respectively.
Key Rating Drivers
Positive factors for the ratings include a combination of stable profitability across business segments, neutral to positive FCF generation through the cycle and consistent leverage below current levels. In contrast, negative ratings actions could arise by a combination of sustained deterioration of volume demand and profitability, or large debt financed acquisitions, leading to a net leverage above the company's long- term target.
Fitch currently rates Kuo as follows:
--Long-term Foreign Currency Issuer Default Rating (IDR) 'BB';
--Long-term Local Currency IDR 'BB';
--Long-term National Scale Rating 'A(mex)';
--USD250 million Senior Notes due 2017 'BB';
--MXN700 million Certificados Bursatiles due in 2015 'A(mex)'
--MXN700 million Certificados Bursatiles due in 2019 'A(mex)'
The Rating Outlook is Stable
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
Alejandro Garcia, CFA
Elizabeth Fogerty, +1-212-908-0526