New York, October 18, 2017 -- Moody's Investors Service (Moody's) today upgraded the Corporate
Family Rating on Administracion Nacional de Combustibles, Alcohol
y Portland (ANCAP) to Ba2 from B1. Moody's also raised the company's
Baseline Credit Assessment (BCA) to b3 from caa1. The rating action
reflects ANCAP's lower debt burden, higher interest coverage,
improved cash generation and high level of government support.
The outlook on the ratings is stable.
RATINGS RATIONALE
The raising of ANCAP's BCA (a measure of the issuer's intrinsic risk regardless
of its controlling entity) to b3 from caa1 reflects the company's
lower debt burden after the USD622 million debt capitalization in 2016
coupled with better operating margin and interest coverage in the last
18 months. As of June 2017, ANCAP's consolidated debt leverage
reached 2.6 times adjusted debt/EBITDA, down from close to
12 times in December 2015. In turn, consolidated adjusted
EBITDA reached 16.9% in June 2017 from 7% in 2015.
The company's operating performance improved on the back of increasing
efficiencies and expense reductions and the government's permission
for ANCAP to adjust fuel prices to assure a minimum level of profitability.
For instance, the company increased fuel prices by 8% in
2016 and reduced gasoil prices by 8% so far in 2017.
Because Uruguay does not have production of crude oil, the company
depends 100% on oil imports. In the past, the government
of Uruguay had prevented ANCAP from fully passing on cost increases,
including higher crude prices and local currency devaluation, to
final prices, which caused operating losses and rising debt.
However, more recently, the government has publicly stated
its intention to support a better financial profile for ANCAP.
Nevertheless, because the government does not follow a clear,
specific formula for fuel price adjustments, it remains unclear
if ANCAP will be able to reduce earnings uncertainty. In addition,
further cost cuts may be difficult to achieve by a company with limited
cash to invest in equipment or technology upgrades and a powerful workforce.
ANCAP's b3 BCA is supported by its monopoly position in refining and dominant
position in wholesale marketing in Uruguay. However, the
BCA also considers the company's small size, particularly in the
context of its exposure to volatile and cyclical commodity prices,
dependence on crude oil imports, as well as its reliance on a single
refinery. In addition, ANCAP's small crude distillation capacity
of 50,000 bpd at a single complex (La Teja) and its average 75%
utilization rate raise concentration and operating risk issues.
Since ANCAP is 100% owned by the Uruguayan government, it
is considered a government related issuer (GRI) under Moody's methodology
for such entities. ANCAP's Ba2 Corporate Family Rating is based
on its BCA of b3, moderate dependence, reflecting the moderate
degree of correlation between factors that could lead to financial stress
on ANCAP and the government at the same time, and a high probability
of extraordinary support from the government. The government's
willingness to support the company is based on its 100% ownership
of ANCAP's, the company's monopoly status for refining activities
in Uruguay, and its strategic importance to Uruguay's economy and
national security. In addition, the government's ability
to provide support to ANCAP is measured by its Baa2 local currency rating
with a stable outlook. The high support assumption embedded in
ANCAP's Ba2 ratings has been evidenced since 2013, when the government
granted a USD 500 million equivalent loan to the company, which
at the time replaced half of ANCAP's total outstanding debt to third parties.
In addition and most importantly, in early 2016 the government capitalized
the equivalent of USD622 million in debt to ANCAP's equity,
reducing its debt by 43% from 2015 levels.
ANCAP's liquidity is adequate. Cash balance as of June 2017 of
UYU 5,620 million plus expected cash flow from operations in the
next 12 months of about UYU 6,500 million should be more than enough
to cover the company's basic needs including capital investments
and debt repayment of a total of UYU 5,921 million in the next 18
months. But ANCAP remains subject to the volatility of commodities'
prices. In addition, the company does not have committed
credit facilities, although as a government owned entity it has
ample access to local and international bank financing in Uruguay.
Foreign exchange risk is high for ANCAP since imports are 100%
U.S. dollar-denominated and 95% of its debt
is in U.S. dollars. However, foreign currency
devaluation risk is limited now for Uruguay given lower inflation rate
in the 6-7% range and the potential 3% GDP growth
in 2017-18.
The stable rating outlook reflects the Moody's expectation that ANCAP
will be able to sustain current operating and credit metrics over the
short to medium term given the government's stated commitment to
allow the company to pass through cost increases, a more disciplined
operating and financial management, and lower inflation rates in
Uruguay, which will somewhat offset volatile crude prices and management's
limited ability to set fuel prices at its will.
ANCAP's ratings could be upgraded if the company not only maintains debt
leverage at current levels but also strengthens its liquidity position
further to the point to protect its credit quality from earnings volatility.
An upgrade of Uruguay's ratings could also add upward rating pressure
on ANCAP's Corporate Family Rating. Conversely, if the company's
EBITDA loses traction and debt leverage increases with limited prospects
of a quick reversal, its ratings could be downgraded.
The methodologies used in these ratings were Refining and Marketing Industry
published in November 2016, and Government-Related Issuer
published in August 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of these methodologies.
ANCAP, fully owned by the government of Uruguay, has a monopoly
position in refining and fuel wholesale marketing within the country.
ANCAP owns Uruguay's only refinery (La Teja), with a Nelson complexity
rating of 8 and a crude distillation capacity of 50,000 barrels
per day. ANCAP is the largest company in Uruguay, with revenues
and total assets of USD1.99 billion and USD1.97 billion,
respectively, in June 2017. The company also has a cement
company, among other smaller businesses, which in aggregate
represented 14.8% and 19.4% of consolidated
adjusted revenues in EBITDA in 2016, respectively.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Nymia C. Almeida
VP - Senior Credit Officer
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: 800 891 2518
Client Service: 1 212 553 1653
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