Fitch Upgrades Mastellone's IDRs to 'B-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded Mastellone Hermanos Sociedad Anonima's (Mastellone) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) as well as its senior unsecured notes to 'B-' from 'CCC'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The upgrade of Mastellone's ratings reflects the company's improving credit metrics on the back of Arcor SAIC's (Arcor; 'B+'/ Outlook Stable) and Bagley Argentina S.A.'s (Bagley), Arcor's subsidiary, purchase of a 25% stake in December 2015 which has improved the company's liquidity position. The upgrade also reflects the expected continued improvement in credit metrics despite a slightly negative consumption environment as Mastellone continues to lower costs through more efficient distribution and expanded facilities. Mastellone's ratings reflect its operating environment in Argentina, which contributed over 80% to sales and 85% to EBITDA as of year-end 2015 as well as its exposure to the country's production of raw milk. Mastellone is the largest dairy company and the leading processor of dairy products in Argentina.

Improving Credit Metrics

Fitch expects net leverage to improve to 2.0x by 2018. As of the LTM ended June 30, 2016, Mastellone's net leverage ratio was 2.3x. The lower average price paid for raw milk in 2015 as well as price increases led to an increase in EBITDA to ARS722 million from ARS363 million in 2014; EBITDA was ARS1.2 billion as of LTM June 30, 2016. Liquidity has also improved; in December 2015 Arcor and Bagley paid USD50 million total for a 25% stake in the company. Mastellone used the cash to pay down short-term debt, to complete expansion projects and to update technology at its facilities.

Cash Flow Concentrated in Argentina

In 2015, cash flow generated in Argentina contributed 87% to total sales of ARS14 billion and 85% to EBITDA of ARS722 million. Its next most important market is Brazil, which comprised 5% of total sales and 15% of EBITDA. The company is exposed to double-digit inflation in Argentina and other direct and indirect sovereign-related risks, including devaluation and refinancing risks.

Exposure to Currency Risk

Mastellone's debt is USD-denominated and creates currency risk as company sales are mainly in Argentine pesos. The company has not entered into any agreements to hedge its exposure to devaluation risk.

Volatility of Raw Milk Production

Mastellone's business is divided between sales to the Argentine and Brazilian domestic markets and exports; the excess between raw milk supply and domestic sales is exported. A shortage of raw milk production could lead to the interruption of the company's export business (3% of sales) or an increase in production costs.

Strong Business Position: Mastellone is the largest dairy company and the leading processor of dairy products in Argentina. Mastellone is first in the fluid milk market in terms of physical volume with a market share of approximately 66%. The company maintains the first and second market position in most of its product lines. Its strong market shares allow it to benefit from economies of scale in the production, marketing and distribution of products. Mastellone purchases about 16%-18% of raw milk production in Argentina, which provides it with a degree of negotiating power.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Mastellone include:

-- Revenue growth slightly below inflation in 2016 and 2017, and 10% in 2018 and 5% in 2019;

-- EBITDA margin improves to close to 6% in 2016 and remains relatively stable from 2017-2019;

-- EBITDA of about USD70 million in 2016 and USD80 million in 2017;

-- Capex of around USD30 million in 2016, USD35 million in 2017 for expansion of San Luis facility;

-- Arcor pays USD35 million in early 2017 to increase its stake to 35%;

-- Expansion of Trenque Lauquen plant will be completed and facility will begin operating in first quarter 2017, for a cost savings of USD3 million per year;

-- Net leverage ratio to about 2.0x by 2018.

RATING SENSITIVITIES

Mastellone's ratings would be negatively impacted by a downgrade of Argentina's country ceiling rating. Furthermore, a sustained deterioration in cash flows or an increase in leverage for a prolonged period of time could negatively impact Mastellone's credit rating.

A sustained improvement in net leverage below 2.0x as well as further geographic diversification reducing the importance of cash flow from Argentina could result in a positive rating action. In addition, Arcor's increased ownership in the company would result in a positive rating action if there are strong legal and operational ties between the two companies.

LIQUIDITY

Mastellone reported cash and equivalents of about ARS387 million (USD28 million) as of June 30, 2016, down slightly from 2015 due to increased capex and the cancelation of short-term debt. Under Fitch's methodology, ARS174 million is readily available cash. The company's total debt of ARS2.9 billion (USD211 million) as of June 30, 2016, is mainly comprised of its USD200 million senior unsecured notes that mature on July 3, 2021. The company has not entered into any agreements to hedge its exposure to devaluation risk. Mastellone has available lines of credit, of which half are pre-export facilities with local and international banks, and are collateralized by inventories. As of June 30, 2016, no amounts were outstanding.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings:

--Long-Term Foreign Currency IDR to 'B-' from 'CCC';

--Long-Term Local Currency IDR to 'B-' from 'CCC';

--Senior unsecured notes to 'B-/RR4' from 'CCC/RR4'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016)

https://www.fitchratings.com/site/re/887669

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013445

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013445

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

View source version on businesswire.com: http://www.businesswire.com/news/home/20161020006412/en/

Fitch Ratings
Primary Analyst
Cristina Madero
Associate Director
+1-312-368-2080
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Johnny DaSilva
Director
+1-212-908-0367
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Analysts split on Apple after foldable iPhone Duo debut
• MadCharts Hits $1 Million Milestone in World-Record Trading Challenge After Starting With Just $1K
• SURF'S UP FOR THE WORLD'S PAW-SOME-EST COMPETITORS!