Fitch Affirms GCC's IDRs at 'B+'; Revises Outlook to Positive

Fitch Ratings has affirmed Grupo Cementos de Chihuahua, S.A.B. de C.V.'s (GCC) local and foreign currency Issuer Default Ratings (IDRs) at 'B+' and senior secured 2020 notes at 'BB-/RR3'.

The Rating Outlook is revised to Positive from Stable.

The expected recovery ratings of 'RR3' reflect good recovery prospects given default. 'RR3' rated securities have characteristics consistent with securities historically recovering 51% - 70% of current principal and related interest.

The revision of the Outlook to Positive reflects Fitch's view that GCC's operations could gain momentum resulting from U.S. construction spending expanding in 2014 driven by continued strength in residential construction, and to a lesser extent in modest recovery in commercial and public construction spending. The Outlook also incorporates an expectation of higher public spending in Mexico in 2014. In Fitch's view, materialization of such expectations, in conjunction with scheduled debt amortizations, would likely result in a strengthening of the company's leverage metrics, which in turn could result in a positive rating action.

GCC's ratings reflect the company's solid business position in the cement, ready mix and aggregates segments in the regions where it has a presence; diversified operations in Mexico and the U.S. in the non-residential and residential sectors; as well as positive free cash flow generation through the cycle. The ratings are limited by the company's high leverage and pressure on profitability given market and competitive conditions.

At the beginning of 2013, GCC refinanced the full amount of its existing debt by issuing USD260 million of 2020 Senior Secured Notes and obtaining a USD 250 million syndicated loan with final maturity in 2017. As a result, the company improved its maturity profile and increased its financial flexibility.

KEY RATING DRIVERS

Construction Activity Driving Profitability

A better pricing environment in the fourth quarter of 2013 and in 2014 fueled by higher construction spending in the U.S. as a result of strengthening in the residential construction market and increased public spending in Mexico, will likely improve GCC's operating results and outweigh cost pressures in Mexico in the coming years. In 2013, low public infrastructure spending in both Mexico and the U.S., slow residential construction in Chihuahua, high fuel prices in Mexico and continued competitive pressures in the U.S. resulted in a weak operating environment for GCC. In addition, a volatile Mexican peso which strengthened during the first half of the year and a longer-than-average winter also contributed to lower results from the Company's U.S. operations. During the last twelve months to September, 2013, the company's cement volumes declined 0.5% from the same period a year ago.

Business Position Supported by Leading Market Shares

GCC is leader in the state of Chihuahua in all product segments and has strong cement market positions in North and South Dakota, Wyoming, Colorado, New Mexico, and the region of El Paso, Texas. The majority of these markets was less affected during the U.S. housing crisis, and has shown above average volume recovery in 2012 and 2013, largely as a result of their exposure to oil & gas and agriculture sectors. GCC's contiguous North American footprint allows for economies of scale, ease of distribution and international trading capabilities. According to the Portland Cement Association (PCA), a majority of the states where GCC has presence have a better-than-average outlook for the medium term.

Leverage High but Likely to Improve

Fitch expects GCC's total debt-to-EBITDA ratio to be at or below 4.0x by the end of 2014, with significant improvement in 2015 as the company resumes revenue and EBITDA growth and scheduled debt amortizations take place. In addition, Fitch recognizes that operating leverage in the sector is high and margins could improve more than expected as a result of higher volumes or an improved pricing environment. GCC's total debt-to-EBITDA ratio was 4.4x for the LTM ended Sept. 30, 2013, similar to that registered in the same period of 2012.

Positive FCF Generation Through the Cycle

Fitch expects GCC to generate USD20 million of Free Cash Flow (FCF) in 2013, but to be FCF neutral in 2014, as recovery in its main markets continues and the company invests in deferred maintenance and to a lesser extent in growth initiatives. The company's positive FCF generation history, which in conjunction with asset sales has been used to reduce debt levels, is factored into the ratings. Also factored into the ratings is an expectation that the company will continue to pay dividends conservatively.

Liquidity Supported by Cash Generation

The company strengthened its liquidity position as a result of its refinancing strategy, and aligned debt maturities to projected cash flows and extended its debt average life. At Sept. 30, 2013, GCC's total debt was USD506 million, cash and marketable securities were USD67 million, and short-term debt was USD14 million. Scheduled maturities are USD20 million in 2014, USD52.5 million in 2015, USD82.5 million in 2016, USD91.3 million in 2017, and USD260 million in 2020. GCC generated USD117 million of EBITDA and USD73 million of Cash Flow from Operations (CFO) during the LTM ended Sept. 30, 2013.

RATINGS SENSITIVITY

Future developments that may, individually or collectively, lead to a positive rating action include:

--A rating upgrade could derive from improved operating performance that leads to higher operating margins and EBITDA generation, which in conjunction with scheduled debt amortizations, translates into lower leverage. A total debt-to-EBITDA ratio remaining below 4.0x, while maintaining adequate liquidity and a manageable debt maturity profile, could have positive implications.

Future developments that may, individually or collectively, lead to a negative rating action include:

--A negative rating action could be triggered by a deterioration of the company's credit metrics and cash position due to weak operational results, reflecting increased price competition or higher costs; deterioration in FCF generation driven by increasing working capital needs and capex; and declining EBITDA margins. A debt-to-EBITDA ratio consistently at or above 5.0x will also likely result in a downgrade.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 20, 2013).

Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816338
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Fitch Ratings
Primary Analyst:
Gilberto Gonzalez, CFA, [phone]
Associate Director
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst:
Alberto de los Santos, [phone]
Associate Director
or
Committee Chairperson:
Sergio Rodriguez, CFA, [phone]
Sergio Director
or
Media Relations:
Elizabeth Fogerty, [phone]
[e-mail]