New York, July 30, 2020 -- Moody's Investors Service (Moody's) today affirmed Alpek,
S.A.B. de C.V.'s Baa3 senior
unsecured ratings. The outlook is stable.
Alpek's Baa3 ratings are supported by its relevant positioning within
the polyester industry, where it has a significant share of North
America's production capacity of purified terephthalic acid (PTA) and
polyethylene terephthalate (PET), and its efficient cost structure.
The rating also considers the negative impact of lower oil prices in Alpek's
revenues, incorporates a certain level of execution risk in integrating
acquisitions, which is partially offset by its management team's
track record in mergers and acquisitions, as well as its exposure
to the cyclicality of the industries in which it operates.
Tight supplies of polyester have led to margin increases that benefit
Alpek, which generates about three-quarters of its consolidated
revenue from polyester sales. Before the Covid-19 pandemic
began, Alpek had anticipated polyester reference margins of $255/ton
for 2020. But in the first quarter of 2020, the Covid-19
pandemic forced polyester producers in Asia to shut down their factories,
reducing worldwide supply, while demand for polyester end products
increased slightly. As a result, average Asian polyester
reference margins increased in the first quarter to around $275/ton
and to $310/ton in the second quarter. As polyester producers
in Asia gradually reopen in the second half of 2020 and throughout 2021
we expect supply to catch up with the strong demand resulting in an adjustment
in reference margins to around $280/ton in the rest of 2020.
Still, we believe Alpek will continue to benefit from the better
than expected margins in the second half of 2020.
Low feedstock prices will continue to benefit Alpek's profit for
the rest of 2020 and into 2021 as low oil prices persist. Alpek's
feedstock costs have declined in tandem with oil prices leading to a 33%
decline in US reference prices for paraxylene (Px), a key feedstock
for producing PTA, during the second quarter 2020. We estimate
that WTI prices will average just $30/bbl in 2020 before rising
to $40/bbl in 2021. Market rebalancing and demand recovery
will take time, but we estimate prices will rise into the $45-$65/
bbl medium-term range and an equilibrium price that we estimate
Alpek credit metrics over the twelve months ended June 30, 2020
were affected by lower EBITDA, mainly driven by the drop in oil
prices that led to a temporary non-cash decline in raw material
and inventory valuation, and higher debt. As a result,
Alpek's debt/EBITDA, as adjusted by Moody's, increased
to 4.4x as of June 30, 2020, up from 2.7x as
of 31 December 2019. Still, we estimate that Alpek's
leverage ratio will decline below 3.5x by year-end 2021
and below 3x by year-end 2020. Similarly, we expect
Alpek's Moody's adjusted EBITDA/Interest expense to increase
to around 6x in 2021 and close to 7x in 2022.
Alpek has strong liquidity. As of June 30, 2020, Alpek
reported cash on hand of $610 million, covering 2.4x
its short-term debt. In addition, the company has
committed facilities of $740million ($590 million available)
and revolving lines of credit for around $1 billion ($830
million available) to cover seasonal cash requirements. As with
many other companies in Latin America and globally, Alpek withdrew
$240 million from its committed and other bank credit facilities
during the coronavirus outbreak to enhance its liquidity. The company
will pay down the borrowed money as volatility winds down. The
company has posted negative free cash flow (defined as cash from operations
minus dividends minus capital spending) of $25 million in the twelve
months ended June 30,2020. We estimate that Alpek will post
negative free cash flow of close to $95 million in 2021 considering
dividend payout of around $160 million and capital expenditures
of $130 million. Still, the company has the ability
to adjust its dividend payout to support its free cash flow generation.
The stable outlook reflects our expectation that Alpek's operating and
credit metrics will improve over the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade could be triggered in the medium term if credit metrics were
to improve, such that the company's: adjusted debt/EBITDA
falls close to or below 2.5x and free cash flow/debt solidly exceeds
13% on a sustained basis while maintaining an EBITDA margin above
12%. The rating could also be upgraded if the company maintains
strong liquidity and a comfortable debt maturity profile.
A downgrade could be triggered if the company's credit metrics or margins
weaken substantially, for example, because of an acquisition
that hurts the company's operations or credit metrics, higher-than-expected
investment spending, debt-financed acquisitions that are
not sufficiently free cash flow accretive or unexpected aggressive payouts
to shareholders, with the company's Moody's-adjusted debt/EBITDA
increasing above 3x for a prolonged period without a clear path to subsequent
The principal methodology used in these ratings was Chemical Industry
published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Alpek is a Mexican petrochemical company that produces PTA, PET,
rPET and fibers in its polyester business, which accounts for 76%
of its sales. The balance is generated in its plastics & chemical
business where it produces and sells polypropylene, expandable polystyrene,
caprolactam, and specialty chemicals & fertilizers. The
company has a total installed capacity of 7,746 thousand tons per
year out of which 37% is for PTA, 36% for PET,
and 1% for rPET. Alpek reported revenues of $5.5
billion over the twelve months ended June 30, 2020.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Vice President - Senior Analyst
Corporate Finance Group
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MD - Corporate Finance
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