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January 28, 2008 |
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INDUSTRIAS UNIDAS: Moody's Lowers Senior Notes Rating to Caa1 Moody's Investors Service has downgraded its ratings on the US$200 million in Guaranteed Senior Unsecured Notes due in 2016 issued by Industrias Unidas, S.A. de C.V.'s to Caa1 from B3. At the same time, Moody's downgraded the company's corporate family rating to B3 from B2 and assigned a negative outlook to all ratings. The rating actions were driven by weaker credit protection metrics and liquidity than anticipated and likely continued sales volume and margin pressure for the next couple of years, due to persistent weakness in United States housing starts and commercial construction. These ratings were affected: -- Industrias Unidas, S.A. de C.V. Corporate Family Rating: B3 -- US$200 million of Gteed. Senior Unsecured Notes due 2016: Caa1 The outlook on the ratings is negative. The rating on the notes is Caa1 because Moody's is concerned that the issuer and the guarantors of the notes may not have sufficient cash and operating cash flow to fund all coupon payments due over the next two years. The rating also incorporates Moody's expectation that Industrias Unidas is unlikely to receive dividends or other cash transfers from subsidiaries that do not provide guarantees for the notes. Finally, the Caa1 rating considers that assets reported by the company and the guarantors provide more than three times coverage of total debt outstanding, although Moody's expects that their market value would be substantially less than their book value. When first rating the company and its notes back in October 2006, Moody's anticipated that 2007 could present slower sales growth and thus impact operating margins. However, "actual results were worst than expected and during 2007 Industrias Unidas faced lower MOM (margin over metal), operating margins and sales volumes due to unfavorable market conditions, especially in the U.S.", said Moody's senior analyst Nymia Almeida. Over 65% of the company's sales are to end markets in the U.S. and most are related to the construction industry. Specifically, 36% of U.S. sales are related to housing construction and 35% are related to commercial construction. As a consequence, credit metrics have deteriorated. Leverage skyrocketed and interest coverage, as per adjusted EBIT to interest expenses, fell from 2.9 times in 2006 to negative 0.5 times in the last twelve months ending on Sep. 30, 2007. Under current market conditions for copper prices and the construction industry, Moody's believes that interest coverage will remain low, although possibly positive, over the next couple of years. In addition, Industrias Unidas' liquidity position is worrisome. Despite the fact that the company's cash position as of September 2007 of US$66 million represented over 2.0 times short term debt, interest payments of approximately US$36 million in 2008 will compromise its cash position, especially when considering only cash held by the company and the guarantors of the notes. The company's ongoing efforts to reduce working capital needs are positive for the ratings, with a 20% reduction in average inventories in 2007, from 31,000 tons in December 2006 to 24,000 tons in December 2007. In addition, the fact that 70% of the group's sales are denominated in U.S. dollars is positive since this may provide a natural hedge for U.S. dollar denominated debt if volumes do not drop materially. The negative outlook reflects Moody's concerns that the negative operating income at Industrias Unidas and the guarantors may not allow for sufficient accumulation of funds for interest payments on the notes and the likely expected continued deterioration in the company's end markets in the U.S.construction industry. A downgrade of the rating on the notes would be likely if the cash balance at Industrias Unidas and the guarantors declines to below US$20 million. A downgrade of the corporate family rating would be likely if the company is unable to renew the revolver credit facilities available to its U.S. subsidiaries and/or if cash and cash equivalents drop below 1.7 times short term debt. An upgrade is unlikely in the near term, but would require adjusted debt/EBITDA of below 3.0 times and an EBIT margin of above 5% on a sustainable basis, leading to an EBIT interest coverage ratio of above 1.5 times. Industrias Unidas is one of Mexico's largest diversified industrial groups, manufacturing a wide range of copper-based and electrical products for the housing and electrical power sectors mainly in Mexico and the U.S. The company processes over 220,000 of metric tons of copper per year. As of September 2007, last twelve month revenues were in excess of US$2.4 billion. |
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