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Rating Action:

Moody's affirms Alpek's Baa3 rating; stable outlook

30 Jul 2020

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.

RATINGS RATIONALE

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 around $55/bbl.

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 deleveraging.

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.

REGULATORY DISCLOSURES

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alonso Sanchez
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
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Releasing Office:
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JOURNALISTS: 1 212 553 0376
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No Related Data.
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