Monterrey / MX. (fr) Fitch Ratings has affirmed Grupo Bimbo S.A.B. de C.V.´s (Bimbo) ratings as follows: Long-Term Issuer Default Rating (IDR) at «BBB»; Local Currency Long-Term IDR at «BBB»; National Long-Term Rating at «AA+(mex)»; USD 800 million Senior Notes due 2020 at «BBB»; USD 800 million Senior Notes due 2022 at «BBB»; Local Certificados Bursatiles Issuances at «AA+(mex)». Outlook is Stable.
Key Rating Drivers
Bimbo´s ratings continue to reflect its important size and scale within the global bakery industry, its strong brand recognition and positioning in the markets where it operates, and its extensive distribution network which provides a key competitive advantage. The ratings also consider the company´s stable operations with historically low volatility in revenues and margins, diversified revenue base and positive free cash flow (FCF) generation. Bimbo´s ratings are constrained by the recent debt-funded acquisition of a 100 percent equity stake in Canada Bread Limited Company (Canada Bread) in May 2014 for 1,83 billion CAD, which will increase the company´s leverage in the short term, pressuring credit quality. In addition, the current operating environment in Mexico, with its new taxes on high-calorie food products and weak economic conditions, also pressures the ratings.
Improved Geographic Diversification
The acquisition of Canada Bread improves the company´s business risk profile by strengthening its position as a global player in the bakery industry, as well as incorporating strong brands into its product portfolio and providing access to key large retailers and leading food services accounts. Canada Bread will also bring Bimbo geographic diversification of revenues and Ebitda. On a pro forma basis including Canada Bread, Bimbo will generate around 63 percent of its total revenues and 40 percent of its total Ebitda from its operations outside Mexico. Canada Bread operations represented around ten percent and 14 percent of Bimbo´s consolidated revenues and Ebitda in 2013, respectively, and had an Ebitda margin of around twelve percent. Fitch believes that a diversified base of revenues and Ebitda lowers business risk and cash flow volatility.
Soft Operating Environment in Mexico
Fitch expects a challenging operating performance for Bimbo in 2014 as a result of the new taxes on high-calorie products and weak economic conditions in Mexico. Despite a volume decline in Mexico for the first quarter of 2014 (Q1/2014), revenues and Ebitda were flat. Fitch anticipates an increase in Bimbo´s consolidated revenues and Ebitda in 2014 as a result of the Canada Bread acquisition, while Ebitda margins should remain relatively stable as a result of synergies from the U.S. operations, less volatile raw material costs, and internal efficiencies in its operations, which will offset the impact of integration cost in the U.S. Fitch estimates that Bimbo´s 2014 full-year Ebitda margin on a pro forma basis, including the Canadian operations, will be around nine percent to ten percent. Fitch has taken a conservative approach to the ratings, believing that Bimbo´s revenues in Mexico will remain flat in 2014, despite some indications that volumes may start to pick up in Q2/2014. During Q1/2014, Bimbo reported a volume decrease of six percent in Mexico mainly as a result of higher average prices related to the new eight percent tax on high-calorie foods products, which the company passed along to consumers. The tax affected a portion of Bimbo´s portfolio of sweet baked goods, snacks, confectionery and cookies. Fitch expects that volume demand in Mexico will continue weak in the short term as consumers fully absorb the effect of new prices, as well as remain cautious about a recovery in the economic environment for the second half of the year.
Deleverage Expected after Canada Bread Acquisition
The ratings reflect the expectation that Bimbo´s gross leverage measured as total debt-to-Ebitda will gradually decrease to levels of around 2,5x in the following 18 to 24 months after closing the acquisition of Canada Bread in May 2014. The transaction enterprise value of 1,83 billion CAD was funded with 1,5 billion USD of additional debt. Fitch anticipates Bimbo´s pro forma total debt-to-Ebitda will increase to approximately 3,1x by year-end 2014 considering twelve months of consolidation of Canada Bread. In addition, Fitch takes into account that Bimbo will maintain its commitment to debt reduction to achieve its long-term gross leverage target below 2,0x. Adjusting for operating leases related to the production, distribution and sale of its products, Bimbo´s total adjusted debt-to-Ebitda plus rents (Ebitdar) for the last twelve months as of March 31, 2014 was 3,2x, which compares favorably with 3,8x for the same period last year. Including the full-year results of Canada Bread, Fitch expects that on a pro forma basis Bimbo´s total adjusted debt-to-Ebitdar will increase to 3,7x by year-end 2014 and will gradually decrease below 3,0x in the long term as the company reaches its long-term leverage target.
Solid FCF Generation
Fitch anticipates that Bimbo will maintain solid FCF generation and will use it for debt reduction. The company´s FCF after capex and dividends was negative in 2013 as a result of higher working capital requirements related to prepaid payments and taxes, as well as an extraordinary dividend payment of around 1,7 billion MXN. However, for 2014 Fitch expects a recovery of the company´s FCF to levels around three billion MXN. In addition, Bimbo does not anticipate distributing dividends in 2014 and 2015, supporting FCF and debt reduction.
Adequate Liquidity
As of March 31, 2014 the company had a cash balance of 3,6 billion MXN and short-term debt of 5,9 billion MXN. Bimbo also has a two billion USD committed revolver credit facility that expires in 2019, of which 1,5 billion USD was used to finance the acquisition of Canada Bread. Fitch expects that Bimbo will pay down its local issuance debt maturity of five billion MXN in 2014 and will refinance a portion of the debt related to its recent acquisition. Bimbo´s next significant debt maturities are in 2016 for 5,9 billion MXN. Fitch considers Bimbo to have ample access to capital markets and bank loans, which provides financial flexibility to manage its debt amortization schedule.
Rating Sensitivities
Bimbo´s ratings are likely to be downgraded if, for a sustained period of time, a total debt-to-Ebitda ratio above 3,0x was maintained due to a decline in its operating performance or cash flow generation as a result of a weaker economic environment. Also, a significant debt-financed acquisition in the short term would result in a rating downgrade. Fitch does not anticipate positive rating actions after the acquisition of Canada Bread, but would view as positive to credit quality a combination of debt reduction, higher operating income, and cash flow generation leading to a sustained improvement in leverage.
