KEY RATING DRIVERS
The upgrade of Mastellone’s ratings reflects the company’s improving credit metrics on the back of Arcor SAIC’s (Arcor; ‘B+’/ Outlook Stable) and Bagley Argentina S.A.’s (Bagley), Arcor’s subsidiary, purchase of a 25% stake in December 2015 which has improved the company’s liquidity position. The upgrade also reflects the expected continued improvement in credit metrics despite a slightly negative consumption environment as Mastellone continues to lower costs through more efficient distribution and expanded facilities. Mastellone’s ratings reflect its operating environment in Argentina, which contributed over 80% to sales and 85% to EBITDA as of year-end 2015 as well as its exposure to the country’s production of raw milk. Mastellone is the largest dairy company and the leading processor of dairy products in Argentina.
Improving Credit Metrics
Fitch expects net leverage to improve to 2.0x by 2018. As of the LTM ended June 30, 2016, Mastellone’s net leverage ratio was 2.3x. The lower average price paid for raw milk in 2015 as well as price increases led to an increase in EBITDA to ARS722 million from ARS363 million in 2014; EBITDA was ARS1.2 billion as of LTM June 30, 2016. Liquidity has also improved; in December 2015 Arcor and Bagley paid USD50 million total for a 25% stake in the company. Mastellone used the cash to pay down short-term debt, to complete expansion projects and to update technology at its facilities.
Cash Flow Concentrated in Argentina
In 2015, cash flow generated in Argentina contributed 87% to total sales of ARS14 billion and 85% to EBITDA of ARS722 million. Its next most important market is Brazil, which comprised 5% of total sales and 15% of EBITDA. The company is exposed to double-digit inflation in Argentina and other direct and indirect sovereign-related risks, including devaluation and refinancing risks.
Exposure to Currency Risk
Mastellone’s debt is USD-denominated and creates currency risk as company sales are mainly in Argentine pesos. The company has not entered into any agreements to hedge its exposure to devaluation risk.
Volatility of Raw Milk Production
Mastellone’s business is divided between sales to the Argentine and Brazilian domestic markets and exports; the excess between raw milk supply and domestic sales is exported. A shortage of raw milk production could lead to the interruption of the company’s export business (3% of sales) or an increase in production costs.
Strong Business Position: Mastellone is the largest dairy company and the leading processor of dairy products in Argentina. Mastellone is first in the fluid milk market in terms of physical volume with a market share of approximately 66%. The company maintains the first and second market position in most of its product lines. Its strong market shares allow it to benefit from economies of scale in the production, marketing and distribution of products. Mastellone purchases about 16%-18% of raw milk production in Argentina, which provides it with a degree of negotiating power.
KEY ASSUMPTIONS
Fitch’s key assumptions within the rating case for Mastellone include:
— Revenue growth slightly below inflation in 2016 and 2017, and 10% in 2018 and 5% in 2019;
— EBITDA margin improves to close to 6% in 2016 and remains relatively stable from 2017-2019;
— EBITDA of about USD70 million in 2016 and USD80 million in 2017;
— Capex of around USD30 million in 2016, USD35 million in 2017 for expansion of San Luis facility;
— Arcor pays USD35 million in early 2017 to increase its stake to 35%;
— Expansion of Trenque Lauquen plant will be completed and facility will begin operating in first quarter 2017, for a cost savings of USD3 million per year;
— Net leverage ratio to about 2.0x by 2018.
RATING SENSITIVITIES
Mastellone’s ratings would be negatively impacted by a downgrade of Argentina’s country ceiling rating. Furthermore, a sustained deterioration in cash flows or an increase in leverage for a prolonged period of time could negatively impact Mastellone’s credit rating.
A sustained improvement in net leverage below 2.0x as well as further geographic diversification reducing the importance of cash flow from Argentina could result in a positive rating action. In addition, Arcor’s increased ownership in the company would result in a positive rating action if there are strong legal and operational ties between the two companies.
LIQUIDITY
Mastellone reported cash and equivalents of about ARS387 million (USD28 million) as of June 30, 2016, down slightly from 2015 due to increased capex and the cancelation of short-term debt. Under Fitch’s methodology, ARS174 million is readily available cash. The company’s total debt of ARS2.9 billion (USD211 million) as of June 30, 2016, is mainly comprised of its USD200 million senior unsecured notes that mature on July 3, 2021. The company has not entered into any agreements to hedge its exposure to devaluation risk. Mastellone has available lines of credit, of which half are pre-export facilities with local and international banks, and are collateralized by inventories. As of June 30, 2016, no amounts were outstanding.
Source: BusinessWire
Link: http://www.businesswire.com/news/home/20161020006412/en/Fitch-Upgrades-Mastellones-IDRs-B–Outlook-Stable
