Fitch: Alfa's Potential Acquisition of Pacific Rubiales Manageable to Credit Quality

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings expects Alfa, S.A.B. de C.V.'s (Alfa) recent announcement to acquire Pacific Rubiales Energy Corp. (PRE) to be manageable for its credit quality. Alfa announced that it has entered together with Harbour Energy Ltd. (Harbour Energy) into a negotiation to acquire all of the issued and outstanding common shares of PRE not owned by Alfa, for a price of CAD6.5 per share. Alfa will acquire an additional 31% stake to reach 50% of the shares of PRE while Harbour Energy will acquire the remaining 50% of PRE shares. The transaction is subject to approval of PRE board members and a number of conditions which, if successful, is expected to be closed in a time frame no sooner than 60 days.

Fitch expects that Alfa will finance the transaction with cash coming from the proceeds obtained from the initial public offering (IPO) of the shares of its subsidiary Tenedora Nemak, S.A. de C.V. (Nemak), which is anticipated to be completed by the end of June 2015. If the acquisition is financed with proceeds from this IPO, Fitch estimates that consolidated net debt to EBITDA will remain relatively unchanged at approximately 2.5 times (x). However, an increase in debt at the holding level to pay for PRE transaction will increase consolidated net debt to EBITDA to approximately 2.8x, negatively pressuring the ratings. Fitch does not expect a material change in the leverage metrics of Alfa proportionally consolidating PRE for the last 12 month results and considering Nemak's minority ownership after the IPO.

Alfa's ratings reflect its diversified business portfolio, strong market position in the industries it participates, solid consolidated cash flow generation and sound financial position. The ratings also incorporate the credit quality of its main subsidiaries, debt allocation between holding and operating companies, the expected flow of dividends to the holding, as well as the liquidity position at the holding. The ratings are limited by the cyclicality of its operations in the petrochemical, automotive, and oil and gas industries, and its exposure to the volatility of its main raw materials through its business portfolio.

ALFA's RATING SENSITIVITIES

Factors that could lead to negative rating actions include:

--Sustained consolidated net debt to EBTIDA ratio above its long-term target of 2.5x;

--A change in the company's financial strategy towards additional debt at the holding level to finance investment in the energy sector in Mexico;

--A simultaneously deterioration in the operating performance of Alpek and Nemak;

--Sustained deterioration in the flow of dividends from its operating subsidiaries due to adverse market conditions or debt funded acquisitions;

--A downgrade in the ratings of its operating subsidiaries could also pressure Alfa's ratings.

Considering the structural subordination of the debt at the holding company level and existing ratings of the subsidiaries, a positive rating action is not foreseen in the medium to long term. However, factors that could lead to positive rating actions include:

--Stronger liquidity position at the holding company and higher consolidated free cash flow (FCF) generation through the business cycle;

--A significant improvement in its capital structure associated to debt reduction;

--Upgrades in the credit quality of its operating subsidiaries.

Fitch currently rates Alfa as follows:

--Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-';

--Long-term local currency IDR at 'BBB-';

--Senior notes USD500 million due 2024 at 'BBB-';

--Senior notes USD500 million due 2044 at 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Rogelio Gonzalez
Director
Fitch Mexico S.A. de C.V.,
+52 81 8399 9100
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst
Gilberto Gonzalez
Associate Director
+52 81 8399 9100
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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