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Rating Action:

Moody's affirms Orbia's rating, stable outlook

02 Dec 2019

New York, December 02, 2019 -- Moody's Investors Service (Moody's) affirmed today Orbia Advance Corporation, S.A.B. de C.V.'s (Orbia) Baa3 senior unsecured rating. The outlook is stable.

RATINGS RATIONALE

Orbia's Baa3 rating reflects its strong credit metrics and market position, ample liquidity and comfortable debt maturity profile. It also incorporates the company's adequate margin for the rating category, coupled with our expectation that its profitability will further benefit from its vertical integration into ethylene that reduced costs substantially, and the benefits from its growth -organic and through acquisitions- in high margin value-added businesses.

Conversely, the rating considers Orbia's strategy to grow through acquisitions, which increases execution risk. This risk is mitigated by the company's good track record integrating acquisitions while capturing synergies.

Orbia's leverage reached 3.9x as of March 31, 2018 following its debt financed acquisition of Netafim. Since then, the company has paid about $800 million in debt and reduced its adjusted debt/EBITDA to 3.3x as of September 30, 2019. Netafim's acquisition followed Orbia's strategy to increase its portfolio of specialty products and solutions, while diversifying and expanding its end markets toward the high-growth worldwide agricultural market. The company does not anticipate any material acquisitions in 2020-21. As a result, we expect its adjusted debt/EBITDA to stabilize around 2.5x by year-end 2020, with adjusted EBITDA/interest expense over 6.5x.

During 2019, Orbia's EBITDA was hurt by lower profitability in its vinyl and polymer businesses. The company's vinyl operation was hurt mainly by lower caustic soda prices that more than offset strong results in its datacom business because of a better mix of products, lower raw material costs and better performance of Netafim. Moreover, the illegal importation and selling of refrigerants in the European Union, breaching European regulations on F-gas, has been pressuring the company's fluor business. We expect Orbia's profitability to improve during 2020 as caustic soda prices recover. We estimate global caustic soda demand will increase, mainly driven by the growth in the textile market in the Asia Pacific region, in particular from India and China. In the medium term, a solution to the practice of dumping refrigerant gases in the European Union would also benefit the company's top line and profitability.

Orbia has adequate liquidity. The company reported short-term debt of $1,053 million as of September 30, 2019 which include $583 million related to letters of credit. As of the same date, Orbia's cash on hand of $593 million can cover 1.3x its short-term debt -- excluding the letters of credit. Orbia's liquidity is further supported by its positive free cash flow generation and a $1.5 billion committed revolving credit facility that is fully available. The company posted, on average, free cash flow of $375 million per year in 2017 and 2018. Orbia has a comfortable long-term debt maturity profile with $302 million due 2020, $37 million due 2021, $915 million due 2022, $18 million due 2023, and $2,152 million due 2024 and beyond.

The stable outlook reflects our expectation that Orbia's leverage will normalize toward historical levels over the next 12 months. The outlook also incorporates our expectation that Orbia will maintain adequate liquidity and credit metrics for the rating category.

Orbia's ratings could be upgraded if the company maintains strong liquidity and improves its profitability. Quantitatively, an upgrade would require EBITDA margins close to 20%, adjusted debt/EBITDA below 2.5x and adjusted EBITDA/interest expense above 11x.

The ratings could be downgraded due to the deterioration of the company's margins such that EBITDA margin falls below 15%, if adjusted debt/EBITDA increases, for example because of a debt-financed acquisition, above 3x on a sustained basis with no clear plan to de-lever. A deterioration in liquidity or an acquisition that is not accretive could also result in a downgrade.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Orbia Advance Corporation, S.A.B. de C.V. is one of the world´s largest producers of water conduction products and solutions for building and infrastructure, the leader in precise irrigations technology, the leader in the data conduction market in the US, the global leader in production of PVC specialty resins, one of the global Top 10 largest PVC producers, and has the biggest fluorspar reserve globally in its mine in San Luis Potosí, México. The company manufactures its products under three divisions: (1) the Vinyl division produces chlorine, caustic soda, sodium hypochlorite, phosphate, ethylene, vinyl chloride monomer, PVC general purpose and specialty resins and PVC compounds; (2) the Fluent division which produces PVC, polyethylene and polypropylene pipes and fittings, polypropylene water conduction products and solutions for building and infrastructure, geosynthetics (woven and non-woven), irrigation systems (water management), and datacom systems and infrastructure products; and (3) the Fluor division produces fluorinated products, hydrofluoric acid and refrigerant gases. The company reported revenues of $7,041 million over the twelve months ended September 30, 2019.

REGULATORY DISCLOSURES

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.

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

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
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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