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TEXT-S&P raises Gruma rating to 'BB'
March 14, 2012 / 9:43 PM / 6 years ago

TEXT-S&P raises Gruma rating to 'BB'

March 14 - Overview	
     -- Mexico-based tortilla and corn flour producer Gruma continued to 	
demonstrate a more prudent financial strategy and risk management practices, 	
as evidenced by deleveraging and active use of derivatives to offset raw 	
materials price volatility.	
     -- We are raising our ratings on Gruma, including raising the corporate 	
credit rating to 'BB' from 'BB-'.	
     -- The stable outlook reflects our expectation that Gruma will maintain 	
its current risk management, continue to strengthen its corporate governance, 	
and keep deleveraging in the near future despite its expansion strategy and 	
working capital requirements.	
	
	
Rating Action	
On March 14, 2012, Standard & Poor's Ratings Services raised its ratings on 	
Gruma S.A.B. de C.V., including raising the corporate credit rating
to 'BB' from 'BB-'. The recovery rating on Gruma's $300 million fixed-rate
perpetual notes, indicating our expectation of a meaningful (50% to 70%)
recovery in the event of a payment default, remains unchanged at '3'. The
outlook is stable.	
	
Rationale	
The upgrade followed Gruma's ongoing commitment to a more prudent financial 	
strategy, which has resulted in total debt to EBITDA of less than 3x and 	
operating results in line with our expectations, despite higher raw material 	
costs in 2011. Gruma has been able to mitigate high corn price volatility 	
through anticipated purchases, corn-hedging strategies, and price increases 	
across most of its subsidiaries. Additionally, the company was able to fund 	
its acquisitive expansion strategy and significant working capital 	
requirements mainly with internal cash flow generation.	
	
Our ratings on Gruma reflect the company's "significant" financial profile (as 	
our criteria define the term) due to its still leveraged position and its 	
exposure to volatile raw materials prices. The company's "satisfactory" 	
business profile reflects its leading position as a corn flour and tortilla 	
producer, strong brand recognition, and geographically diverse cash flow, 	
which mitigates financial risks. A continued track record of more moderate 	
financial policies is a key factor supporting our ratings.	
	
In 2011, Gruma's sales volume rose 5% compared with the 2010 level, while net 	
sales grew by 23%, mainly due to price increases and the Mexican peso 	
depreciation's effect on the company's foreign subsidiaries. Also, the 	
company's adjusted EBITDA margin remained stable at 9.5% in 2011, compared 	
with 9.4% in 2010. Total debt to EBITDA, funds from operations to total debt, 	
and EBITDA interest coverage (adjusted for operating leases and postretirement 	
pension liabilities) were 2.8x, 29.0%, and 4.7x, respectively, compared with 	
4.7x, 11.3%, and 3.0x in 2010. These measures reflect Gruma's repayment of 	
about 50% of its debt with proceeds from the sale of its 8.8% stake in Grupo 	
Financiero Banorte S.A.B. de C.V., short-term credit lines, and cash on hand 	
at the beginning of 2011.	
	
We expect moderate volume and price increases in 2012, and volatile corn 	
prices in the following quarters, which could somewhat hurt its profitability 	
measures, leading to an EBITDA margin of about 8.5% in 2012.	
	
With $4.1 billion and $389 million in sales and EBITDA, respectively, in 2011, 	
Gruma is one of the world's leading producers of tortillas and corn flour, 	
with operations in the U.S., Mexico, Venezuela, Central America, Europe, Asia, 	
and Australia. With lower debt and elimination of some restrictive covenants, 	
we expect Gruma to raise investments in its operations and increase 	
acquisitions, but still report positive free operating cash flow (FOCF) and 	
continue to gradually reduce debt. As a result, total debt to EBITDA should 	
head to 2x in a few years, even if we excluded the operations of Gruma 	
Venezuela. The cash flow contribution from this subsidiary remains uncertain 	
given the government's expropriating measures since 2010. As of today, the 	
Venezuelan government has not yet taken operational or managerial control of 	
this subsidiary, and it continues to operate in the ordinary course of 	
business.	
	
Liquidity	
We now view Gruma's liquidity as "adequate." In our view, cash flow generation 	
and liquidity, in the form of cash on hand and committed credit facilities, 	
comfortably cover debt service, expected capital expenditures and 	
acquisitions, and dividends in the next two years. Sources of cash include 	
cash on hand of $94.6 million as of Dec. 31, 2011, expected positive FOCF of 	
about $40 million in 2012, and a five-year committed credit facility of $250 	
million. Gruma has $117 million of short-term debt, which we expect it to roll 	
over using its revolving credit lines. Next significant maturity is in 2016, 	
when $371 million comes due. In accordance with our liquidity criteria, 	
several expectations support our liquidity assessment:	
	
     -- The company's liquidity sources during the next 12 to 18 months 	
exceeding its uses by more than 1.2x, the minimum for an adequate designation 	
and representing no significant expected shortfall in liquidity during the 	
next two years;	
     -- Net sources and covenant cushions being positive even with a 15% drop 	
in EBITDA;	
     -- A sound relationship with banks, as evidenced by the June 2011 	
refinancing of several long-term credit facilities;	
     -- Committed credit lines of $250 million (as of Dec. 31, 2011, the 	
available amount was $67 million); and	
     -- The likelihood that the company could absorb high-impact, 	
low-probability shocks due to positive cash flow from operations and available 	
liquidity.	
	
Recovery analysis	
See our recovery report on Gruma, published on May 25, 2011.	
	
Outlook	
The stable outlook reflects our assumption that Gruma's corporate governance 	
and risk management will remain prudent and that the company's expansion 	
strategy through acquisitions, working capital needs, and dividend payments 	
will not require additional debt in the coming years. A negative rating action 	
is possible if the current volatility in raw material prices leads to a 	
higher-than-expected deterioration in the company's profitability and 	
leverage, leading to an EBITDA margin of less than 7.5% or an adjusted total 	
debt-to-EBITDA ratio closer to 4x. A consistent positive FOCF generation that 	
allows Gruma to maintain an adjusted total debt to EBITDA of about 2.0x on a 	
sustained basis could lead to an upgrade.	
	
	
Related Criteria And Research	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
	
Ratings List	
 	
Upgraded	
                                    To              From	
GRUMA S.A.B. de C.V.	
 Corporate Credit Rating            BB/Stable/--    BB-/Positive/--	
 Senior Secured	
  Foreign Currency                  BB              BB-	
   Recovery Rating                  3               3	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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