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Global Credit Research - 08 Jun 2010
Approximately MXN10 billion in debt securities affected
Mexico City, June 08, 2010 -- Moody's Investors Service changed the rating outlook for Grupo Bimbo,
S.A.B. de C.V.'s (Bimbo) Baa2 global
scale senior unsecured debt and issuer ratings to positive from stable.
At the same time, Moody's upgraded Bimbo's Mexican national
scale rating (NSR) to Aa1.mx from Aa2.mx and affirmed Bimbo's
existing senior unsecured Baa2 global scale ratings. The outlook
for the national scale rating is stable.
"The outlook change and NSR upgrade primarily reflect Bimbo's
ongoing progress in de-leveraging its balance sheet following last
year's acquisition of Weston Foods, Inc. (WFI's)
fresh bakery business despite challenging market conditions in its key
Mexican and U.S. baked goods markets," said
Sebastian Hofmeister, a senior analyst at Moody's in Mexico
These rating actions also reflect the expectation that efficiency measures,
synergies from the WFI deal and moderate capex levels should continue
to support near term earnings and free cash flow trends, helping
the company to further reduce debt for several more quarters before reaching
its target capital structure, Hofmeister said.
The improvement of credit metrics was largely driven by debt reduction
from free cash flow and the added earnings from WFI (now called BBU East).
Credit metrics are now relatively well aligned with the Baa2 rating category.
For the 12 months ended March 31, 2010, lease and pension
adjusted Debt/EBITDA, EBIT/Interest and Retained Cash Flow/Net Debt
were 2.5 times, 4.0 times and 25%, respectively,
well ahead of the 3.5 times, 3.7 times and 17%
Moody's had estimated on a pro forma basis at the time of the acquisition.
Moody's expects metrics to improve somewhat further over the coming
quarters but to potentially level out on a gross debt basis in line with
Bimbo's stated target for reported Debt/EBITDA of around 2.0
times, which would translate into 2.3 times when adjusted
for certain lease and labor obligations. Metrics may continue to
improve further on a net debt basis if cash reserves accumulate with positive
free cash flow, although this will ultimately depend on the company's
acquisition and investment plans and its returns to shareholders.
While Bimbo's organic revenue growth in local currencies has recently
remained anemic because of weak economic conditions in its key markets
and pronounced promotional activity in the U.S., the
company's top line grew materially over the past 12 months because
of the addition of BBU East. For the LTM 1Q10 period, Bimbo
reported net revenues of MXN116 billion (USD8.9 billion),
up 27% year-over-year. Margins also improved,
with the reported LTM EBITDA margin of 14.1% reflecting
a 210bp increase vs. the comparable period, largely driven
by BBU East's higher margins and cost efficiencies, which
could more than offset the negative effects of soft volumes and pricing.
Moody's expects Bimbo to exhibit resilient margins and cash generation
given the defensive nature of the branded packaged food sector.
In addition, earnings in the U.S. should continue
to benefit from modest synergies from the WFI integration over the next
few years, driven by increased sales and administrative efficiencies
as well as benefits from distribution network optimization and better
purchasing terms. Bimbo estimates around USD100 million in annual
EBITDA benefit by 2014.
On an LTM basis, free cash flow was around MXN6.8 billion
(USD517 million), driven by earnings growth and low capex (MXN3.0
billion or USD231 million), as well as inflows from working capital.
Moody's expects Bimbo to remain free cash flow positive in 2010
despite a likely return to higher capital spending (in its 4Q09 earnings
call Bimbo indicated it will spend around USD330 million this year,
which would be slightly above depreciation and amortization).
Bimbo's liquidity is currently solid, reflecting the continued
debt reduction over the past year which helped lower debt maturities for
the remainder of 2010 to a modest MXN2.8 billion (USD221 million).
In addition, debt maturities in 2011 are minimal (MXN714 million
or USD58 million). Bimbo should be able to easily cover these commitments
with existing cash reserves and free cash flow (as of March 31,
2010, cash was at MXN4.9 billion).
Liquidity is somewhat tempered by more sizeable debt maturities in subsequent
years, including MXN13.5 billion (USD1.1 billion)
in 2012, MXN5.4 billion (USD437 million) in 2013 and MXN7.7
billion (USD624 million) in 2014. However, Moody's
expects Bimbo to refinance these on a timely basis in the debt capital
markets or through bank financing and, to a lesser extent,
with free cash flow. Bimbo also maintains a USD750 million committed
revolving credit facility with a bank syndicate which is currently undrawn
and provides alternate liquidity.
Besides the aforementioned factors, Bimbo's Baa2 and Aa1.mx
ratings are underpinned by the free cash flow generation of its high margin
baked-goods franchise in Mexico, its improved U.S.
business position and geographic diversification, and prudent financial
policies. These credit positives are partly offset by the competitive
nature of the markets the company operates in (in particular in the U.S.),
the volatility of results in its South and Central American markets and
the traditionally modest (although recently improved) profitability in
its western U.S. markets.
Global scale ratings could be upgraded when Moody's expects credit
metrics to improve such that adjusted Debt/EBITDA falls close to or below
2.0 times and Retained Cash Flow/Net Debt will solidly exceed 30%
on a sustainable basis. An upgrade would also require several further
quarters of favorable performance in the U.S., limited
risk that debt financed acquisitions materially affect performance or
credit metrics (in particular related to the ongoing consolidation in
the U.S. baked-goods industry), and a cleaner
medium term debt maturity profile.
The outlook for the global scale rating could be stabilized if credit
metrics weaken substantially, for example because of higher than
expected investment spending, debt-financed acquisitions
that are not sufficiently free cash flow accretive or unexpected aggressive
payouts to shareholders, with Debt/EBITDA rising towards 3.0
times for a prolonged period without a clear path to subsequent de-leveraging.
The last rating action on Bimbo was on December 10, 2009,
when Moody's changed Bimbo's outlook to stable from negative
and affirmed Bimbo's senior unsecured ratings at Baa2 and Aa2.mx.
The principal methodology used in rating Bimbo is Moody's Global Consumer
Packaged Goods Rating Methodology, which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Based in Mexico City, Mexico, Grupo Bimbo, S.A.B.
de C.V is the largest producer of packaged bread and sweet baked
goods in Mexico and the U.S. and one of leading players
in Mexico's salty snack and confectionary categories. For the 12
months ended March 30, 2010, the company reported MXN116 billion
(USD8.9 billion) in revenues, which included a full year
of Weston Foods, Inc.'s fresh bakery business acquired
in January 2009.
Sebastian Hofmeister, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Corporate Finance Group
Moody's Investors Service
Moody's changes outlook for Bimbo's Baa2 ratings to positive; upgrades national scale rating
No Related Data.
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