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.