Controladora Mabe Ratings Raised To #BBB-# From #BB+# On Debt Reduction And Financial Outlook Stable

Stocks and Financial Services Press Releases Wednesday March 28, 2018 10:23
MEXICO CITY--28 Mar--S&P Global Ratings

MEXICO CITY (S&P Global Ratings) March 27, 2018--S&P Global Ratings today said it has raised its corporate credit and issue-level ratings on Controladora Mabe S.A. de C.V. (Mabe) to 'BBB-' from 'BB+'. The outlook is stable.

After more than two years in which our ratings on Mabe had a positive outlook, the company adopted a more disciplined financial strategy that not only strengthened its debt-to-EBITDA ratio, but also prompted a path for sustained leverage reduction. In 2017, Mabe was able to lower its net leverage through debt repayments, improved management of short-term factoring facilities, and an increase in its cash balance. Mabe brought its debt-to-EBITDA ratio down to 2.9x for the twelve months ended Dec. 31, 2017. This was an important milestone for Mabe, especially when considering that over the last two years we had indicated that if this leverage ratio declined below 3.0x, the company would reach investment-grade.

At this time, our assessment of Mabe's financial risk profile is still significant, because other key credit metrics, such as funds from operations (FFO) to debt and FOCF to debt are still below the thresholds for a stronger financial risk profile. Therefore, we upgraded Mabe not only because of the company's successful execution of its deleveraging plan in 2017, but more importantly because of our expectation that its financial discipline will further reduce debt within the next 12-24 months. In particular, the improving trajectory of Mabe's profitability and financial performance following the product recall in North America during 2017 supports the one-notch uplift that our comparable rating analysis captures.

Our assessment of Mabe's business risk profile hasn't changed from our previous review. However, changes in the U.S trade policy have raised concerns that a potentially less favorable trade framework may curtail Mabe's growth prospects. For example, in January of this year, the Trump administration announced new Tariff-Rate Quotas (TRQs) on imported large residential washers, including those from Mexico. The North American Free Trade Agreement (NAFTA) renegotiation is also still underway, with no clarity on the possible outcome. However, these downside risks on Mabe's business risk profile are somewhat contained and captured in our rating action. In the case of the new TRQs, we believe that the announcement doesn't have negative implications for our ratings on Mabe because the company does not export to the U.S. any washing equipment that meets the specifications now subject to the TRQs. Mabe also has the ability to absorb incremental costs without affecting its medium-term profitability, supported by highly efficient operations and pricing flexibility. Moreover, the company has a long history in the manufacturing and selling of finished home appliances under the GE brand in the U.S.

The stable outlook on Mabe reflects our expectations that over the next twelve months, the company will remain committed to deleveraging its capital structure. It will not only maintain a debt-to-EBITDA ratio below 3.0x, but will also improve its cash flow metrics so that its FOCF-to-debt ratio trends towards 15%, even when considering the seasonality of cash flow. We believe that this will be possible through a recovery of about 100 basis points in the EBITDA margin, as the company absorbs the costs associated with the 2017 product recall in North America. Although Mabe will make dividend payments this year for about $20 million, we expect the company to maintain its financial discipline and to make additional debt repayments as its cash flow permits. The stable outlook also considers that the company has ample access to external sources of funding to address its 2019 debt maturities before year-end 2018.

We could lower the ratings on Mabe within twelve months if the company deviates from its current financial plan, resulting in higher-than-expected leverage, with a debt-to-EBITDA ratio consistently exceeding 3.0x. A FOCF-to-debt ratio consistently below 10% would be another downward trigger. This could result from either a more aggressive growth strategy that requires additional indebtedness or if cash flow does not meet our expectations due to higher-than-anticipated capital investments or dividend payments.

Although unlikely in the near term, an upgrade would follow a major business transformation that drastically grows Mabe's scale and further strengthens its competitive position relative to other global players within the home appliance industry. In our view, Mabe's 'BBB-' rating already captures the transition of its financial risk profile assessment to intermediate. Therefore, a new upgrade related to an improvement in the company's financial risk profile would need to be triggered by a more conservative financial policy that brings the debt-to-EBITDA ratio below 2.0x and the FFO-to-Debt ratio above 45%.

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