Fitch Rates Kimberly-Clark de Mexico's USD250MM Notes due 2025 'A(EXP)'

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has assigned an expected rating of 'A(EXP)' to Kimberly-Clark de Mexico, S.A.B. de C.V.'s (KCM) proposed USD250 million notes, due 2025.

The notes will rank at least pari passu in right of payment with all unsecured and unsubordinated debt. Proceeds from the proposed issuance are expected to be used for general corporate purposes and debt repayment, including the MXN1.5 billion and MXN800 million unsecured Certificados Bursatiles due in November 2015 and March 2016, respectively.

KEY RATING DRIVERS

STRONG BUSINESS PROFILE

KCM's solid business profile is supported by its brand portfolio, low cost structure, extensive distribution network, and access to Kimberly-Clark Corp.'s (KMB) technology and research and development capabilities. The ratings reflect KCM's ability to withstand competitive pressures and soft consumer demand, manage pricing and offset input cost volatility, all of which is based on its leading business position in Mexico's consumer product market. The company is the market leader in most of the product categories in which it participates, with market share positions that are usually three to six times higher than those of the nearest competitor.

KCM's ratings reflect the company's strong credit profile and partial ownership by KMB, which maintains an equity stake of 47.9% in KCM. The company is a strategic investment for KMB, as its largest affiliate worldwide. KMB has four seats on KCM's 12-person board of directors. Because of this, KCM has access to KMB's recognized global brands, common processes and product technology, consistent financial reporting and controls, and worldwide purchasing and sourcing.

EBITDA MARGIN TO IMPROVE IN 2015

For the full year ended Dec. 31, 2014, KCM's EBITDA margin narrowed about 368 basis points compared to 2013 to 25.7%, below Fitch's expectation of 26%-27%. This was the result of a more intense competitive environment, coupled with low Mexican consumer confidence throughout 2014, and an increase in USD-denominated raw materials in 4Q'14, due to the Mexican peso's devaluation versus the U.S. dollar. Revenue was down -1.9% for 4Q'14 on an LTM basis, but up 5.2% on a quarterly basis. The latter was a result of a 3% improvement in volume and 2% improvement in price and mix.

Both revenue growth and margins are expected to improve in 2015 towards historical levels. Additionally, the ratings are supported by KCM's historical good track record of successfully managing through Mexico's business cycle while maintaining healthy operating margins and a conservative financial profile. The company's EBITDA margin has been, on average, about 29.8% during the last 10 years and Fitch expects EBITDA margins in the high 20%s over the next few years.

STRONG CASH FLOW GENERATION

KCM has a long record of sizeable levels of EBITDA and operating cash flow generation, as well as positive pre-dividend free cash flow (FCF). Fitch expects cash flow from operations (CFO), main source supporting the company's liquidity, and leverage to remain ample over the medium term. During full year 2014 CFO was MXN5.5 billion, resulting in a CFO margin of 18.8% which is slightly lower than the 10-year average of 20.5%. The ratings incorporate the company's medium-term ability to internally fund its Capex and dividend payouts. For 2014, KCM's FCF was negative MXN-558 million. FCF is expected to be neutral-to-positive in the medium term and pre-dividend FCF should approximate to MXN4 billion, consistent with historical levels.

MID-TERM LOW LEVERAGE

Fitch expects in the medium term that KCM's total debt to EBITDA should be around 1.5 times(x) and net debt to EBITDA should be close to 1.3x. In 2014 total debt to EBITDA was 1.9x, while net debt to EBITDA was 1.3x. This was the result of MXN14.6 billion in debt and a cash position of about MXN5 billion. Although debt has increased due to the Mexican peso's devaluation versus the U.S. dollar, hedging is in place that keeps debt and interest payments constant in peso terms.

The proposed debt issuance will temporarily increase gross leverage to 2.4x on a pro forma basis, to levels that are high for the rating category, however net debt should remain in levels consistent with the existing rating category. Gross leverage is expected to gradually be reduced as debt maturities in November 2015 and March 2016 are paid off and EBITDA improves given the expectation of a more favorable business environment.

SOLID LIQUIDITY

Fitch views the company's liquidity position as solid. KCM's longstanding ability to steadily generate significant amounts of operating cash flow underpins its considerable liquidity and significant access to capital markets. For Dec. 31, 2014, KCM's CFO and cash position combined (approximately MXN10.5 billion) cover about 70% of the company's MXN14.6 billion debt, which maturities are spread out between 2015 and 2025. KCM maintains ample access to capital markets, both domestic and international, and the ratings incorporate expectations that KCM's debt maturity schedule will remain manageable.

RATING SENSITIVITIES

With a highly stable business, considerable cash flow, low leverage, and strong liquidity, changes in KCM's ratings are likely to be dependent on management's actions. Since KCM is not expected to change its financial policies in the near future, Fitch does not foresee any positive action at this time.

Conversely, any change in the company's financial policies that results in sustained higher leverage above 2.0x debt to EBITDA in conjunction with significantly lower cash balances from historical levels, sustained lower profitability and negative FCF generation, could derive in negative rating actions. Also, any significant deterioration in KMB's brands, financial profile, or operational support to its Mexican affiliate could also pressure KCM's ratings. In addition, a downgrade in Mexico's sovereign rating and country ceiling could also stress KCM's ratings.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980812

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Fitch Ratings
Primary Analyst
Miguel Guzman-Betancourt
Associate Director
+52 81 8399-9100
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes No. 2612, 8th fl.
Monterrey, Mexico 64920
or
Secondary Analyst
Johnny Da Silva
Director
+1-212-908-0367
or
Committee Chairperson
Alberto Moreno
Senior Director
+52 81 8399-9100
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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