OREANDA-NEWS. Fitch Ratings has affirmed Alpek, S. A.B. de C. V.'s (Alpek) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) and senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. A complete list of related rating actions is provided at the end of this release.

Alpek's ratings reflect its strong business profile in the petrochemical segment in Mexico and the Americas, supported by leading positions in its different product lines, especially in the polyester chain in North America and in Expandable Polystyrene (EPS) across the Americas. The ratings also reflect its solid customer base, and the end-markets' resilience to economic downturns. The ratings consider the company's solid financial profile characterized by low leverage and stable funds from operations (FFO). Fitch expects Alpek's ratio of net debt/consolidated EBITDA over the long term to be around 1.5x. Also incorporated in the ratings are the cyclical nature of the industry, strong competitive environment, Alpek's historical acquisition track record and Fitch's expectation of negative free cash flow (FCF) for the next two years.

KEY RATING DRIVERS

Strong Market Positions in Key Products

The company holds leading market positions in North America for both Purified Terephthalic Acid (PTA) and Polyethylene Terephthalate (PET). Alpek is also the largest producer of EPS in the Americas and holds strong market positions in Mexico in Polypropylene (PP) and Caprolactam (CPL). Alpek is the sole producer of CPL in Mexico, most of which is exported to China. It is also the sole producer of PP through Indelpro, S. A. de C. V., its joint venture with LyondellBasell Industries Holdings, B. V.

Alpek's polyester segment (PTA, PET and Polyester Fibers) comprises about 72% and 52% of Alpek's consolidated revenue and EBITDA, respectively. All other products make up Alpek's Plastics & Chemicals segment and account for the remaining 28% and 48% of total consolidated revenues and EBITDA, respectively.

Expected Negative FCF

Fitch expects the company to continue investing in efficiency projects, capacity growth and vertical integration, with a combination of greenfield investments and potential acquisitions. The company's capex guidance for 2016 is USD320 million. Announced investments include USD64 million under its PET supply agreement with Gruppo Mossi & Ghisolfi as well as a total investment of USD350 million in a new 350MW cogeneration plant in Altamira, Tamaulipas. This plant should begin operations in the first half of 2018. Fitch is projecting that FCF will turn negative for a two-year period as the construction of the Altamira cogeneration plant continues and the company executes its capex plan.

The company announced yesterday that it has entered into a 60- day exclusive period of negotiations with Petroleo Brasileiro for the potential acquisition of PTA, PET and PET fiber assets in Pernambuco, Brazil. The exclusivity period may be extended by an additional 30 days. The assets have an installed capacity to produce 0.7 and 0.45 million tons per year of PTA and PET, respectively, as well as 90,000 tons per year of texturized polyester filament. The certainty of the transaction taking place as well as the size of the transaction is unknown.

Fitch has factored the acquisitive nature of the company into its expectations and believes that a potential transaction would likely be leveraging. The ratings incorporate that, from time to time, net consolidated leverage could approach 2.0x before returning to the 1.5x considered commensurate with long-term expectations for the rating level. Significant deviation from Fitch's expectations following an affirmative purchase transaction could pressure the company's credit quality. Fitch will continue to monitor this event and evaluate its effect on the ratings as more information becomes available.

Solid Financial Profile

The ratings consider the company's strong cash flow generation reflecting high capacity utilization rates, long-term contracts and relationships with clients, and cost-plus pricing formula in the North American PTA segment. Also factored in is the company's growth strategy, which has been financed with a combination of debt, internally generated funds and equity. Since the company's IPO in 2012, total debt has remained stable at USD1.1 billion.

Alpek's consolidated total and net leverage ratios for the last 12 months ended June 30, 2016 were 1.7x and 1.4x, respectively. These are below the 2.3x and 1.6x registered in the same period a year ago. Fitch expects these credit metrics will remain relatively stable in the medium term at around 2x and 1.5x, respectively.

KEY ASSUMPTIONS

--Annual segment volumes for 2016-2017 remain above 3 million tons for polyester and above 0.95 million tons for plastics and chemicals.

--Revenue declines of mid-single digits reflecting the lower pricing environment in 2016. Revenue growth resumes in 2017 mainly reflecting higher petrochemical prices and higher polyester volumes.

--FFO above USD350 million for 2016 and growing in the following years.

--Consolidated EBITDA generation above USD670 million in 2016 and USD700 million in 2017 and growing in the following years.

RATING SENSITIVITIES

A negative rating action could arise from a combination of sharp and prolonged reductions in volume, profitability and cash flow generation resulting in lower fixed-cost absorption and weaker credit metrics. A larger than expected debt-financed acquisition or capital investment that moves the company's capital structure away from net debt/consolidated EBITDA of 1.5x in the long term would also pressure the ratings. Material deterioration in spreads that results in consolidated EBITDA significantly below Fitch's base case not offset with similar reductions in discretionary capex and dividends or equity increases could also result in negative rating action.

Positive rating actions could be supported by consistent positive FCF generation through economic cycles and investment periods, product diversification and vertical integration across production chains, combined with the expectation of lower leverage levels in the mid - to long-term. Larger scale that allows the company to generate EBITDA greater than USD1 billion combined with conservative leverage levels in the lower range of management's target of net debt/consolidated EBITDA between 1.5x-2.5x could also have positive rating implications.

LIQUIDITY

Alpek's liquidity profile is sound as a result of its cash and marketable securities balance of USD204 million. This compares to short-term debt maturities of USD56 million and total debt of USD1.1 billion. The company's liquidity is further supported by undrawn committed credit lines for USD367 million, with the vast majority maturing during 2017-2020. The company intends to continue to renew these credit facilities as they approach expiration.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

--Long-Term Local Currency IDR at 'BBB-';

--Long-Term Foreign Currency IDR at 'BBB-';

--USD650 million senior notes due 2022 at 'BBB-'

--USD300 million senior notes due 2023 at 'BBB-'.