OREANDA-NEWS. Fitch Ratings has affirmed Grupo KUO, S.A.B. de C.V. (KUO)'s ratings as follows:

--Long-term foreign currency Issuer Default Rating (IDR) at 'BB';
--Long-term local currency IDR at 'BB';
--Long-term national scale rating at 'A(mex)';
--USD325 million senior notes due 2022 at 'BB';
--MXN700 million Certificados Bursatiles due in 2015 at 'A(mex)';
--MXN700 million Certificados Bursatiles due in 2019 at 'A(mex)'.

The Rating Outlook is Stable.

KEY RATING DRIVERS
The ratings reflect KUO's diversified business portfolio in the chemical, consumer and automotive industries which allow the company to mitigate the volatility across the business cycle, solid market positions, and stable financial profile. The ratings also incorporate its diversified revenue stream with around 46% of its total revenues coming from exports and subsidiaries located outside of Mexico, as well as its joint ventures (JVs) with international industry leaders. The ratings consider the company's strategy oriented toward developing high value-added products with attractive returns. KUO's ratings are limited by the exposure to volatility of demand and input costs across its business lines.

For analytical purposes Fitch incorporates the financial information of KUO under the proportional consolidation of its JVs (Dynasol, Herdez del Fuerte and Insa Gpro). In addition, Fitch considers the consolidated figures reported under IFRS which account for the JVs under the equity method.

Diversified Business Portfolio
Fitch believes that KUO's diversified revenue and cash flow generation from its business portfolio mitigates the overall risks associated with the volatile industries in which it participates. KUO's relatively less cyclical consumer business (Herdez del Fuerte JV and pork meat) has contributed to counterbalancing the exposure to the volatile business cycle of its chemical (synthetic rubber and plastics) and automotive (transmissions and aftermarket) businesses. During 2014, lower cash flow generation from the chemical and automotive businesses (25% and 7% of total EBITDA, respectively) was more than compensated for by the higher operating performance of its pork meat business (41% of total EBITDA) in the consumer segment. KUO's JV with Herdez del Fuerte added the remaining 27% of the total EBITDA reported by the company.

Steady Profitability
Fitch expects KUO to face a challenging operating environment in 2015 associated with low sales prices in the chemical business and a normalized operation in its pork meat business. KUO's chemical business will continue to face pressures on revenues and cash flow generation, as lower oil prices and oversupply conditions decrease raw material costs and impact the company's average sales prices. In addition, revenues from its consumer business are expected to grow in the low single-digits range, as a result of a more balanced demand and supply in the pork industry, which had higher average sales prices during 2014. In contrast, KUO's transmissions business should benefit from higher requirements of new customers and better economic growth from the U.S. and Mexican economy. In terms of profitability, KUO's EBITDA margin should remain relatively stable, as lower EBITDA from its pork business will be mitigated by an increase in the cash flow generation of its transmissions, aftermarket and Herdez del Fuerte JV businesses.

Higher Temporal Leverage
Fitch expects that KUO's total debt-to-EBITDA and net-to-EBITDA, considering the proportional consolidation of its JVs, to be around 3.0x and 2.5x, respectively, in the following 12-18 months. These ratios are slightly above those of the last five years; however, Fitch considers them still within the current rating category. Fitch projects a modest increase in total debt for 2015 and stronger EBITDA generation in the second half of the year. As of Dec. 31, 2014, KUO's total debt-to-EBITDA was relatively stable at 2.7x, compared to year-end 2013, while net debt-to-EBITDA increased to 2.2x from 1.9x. Additionally, the company's consolidated total debt to EBITDA and net to EBITDA ratios, accounting its JVs by the equity method, were 3.8x and 3.4x, respectively. These ratios compare to 3.6x and 2.8x, at the end of 2013. KUO's total debt as of Dec. 31, 2014, was USD500 million.

Negative FCF
The ratings incorporate KUO's expected negative free cash flow (FCF) in 2015, considering the proportional consolidation of its JVs, after covering capex and dividends of approximately USD116 million and USD11 million, respectively. In 2014, the company's FCF was negative for around USD79 million as a result of capex for USD138 million and dividends payments of USD11 million. Fitch also estimated consolidated negative FCF of approximately USD103 million, accounting for the company's JVs by the equity method. Sustained negative FCF in the next 2-3 years will pressure the ratings.

Adequate Liquidity
KUO's liquidity position is adequate with a cash balance of USD90 million and a short-term debt of USD63 million as of Dec. 31, 2014, considering the proportional consolidation of its JVs. In addition, the company's consolidated cash balance, accounting for its JVs by the equity method, was around USD55 million. Fitch expects KUO to refinance its short-term debt before its maturity in November 2015. With no significant maturities from 2016 to 2018 after refinancing its credit facility of USD48 million due in 2016, Fitch considers the company's debt profile to be manageable.

The ratings incorporate KUO's financial strategy which historically has funded its indebtedness needs at the holding company and then has distributed the funds to subsidiaries through intercompany lending or equity injections. At the holding company KUO services its debt mainly from the cash inflows of its subsidiaries in the form of interest payments from intercompany loans, dividends, and management fees.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Proportional consolidation of its JVs;
--2015 top-line growth approximately flat in USD;
--2015 EBITDA margin stable at 9%;
--Total debt-to-EBITDA and net debt-to-EBITDA approximate 3x and 2.5x in the next 12-18 months. Leverage could be temporarily above these levels during 2015, since stronger results are expected in the second half of 2015.

RATING SENSITIVITIES

Positive rating actions could result from the combination of the following factors:

--Lower volatility in cash flow generation across its businesses leading to neutral to positive FCF through the cycle;
--Sustained lower leverage ratios (total debt/EBITDA and net debt-to-EBITDA around 2x and 1.5x, respectively, under the proportional consolidation of its JVs);
--Stronger liquidity position.

Negative rating actions could result from the combination of the following factors:

--Sustained deterioration in operating performance leading to total debt-to-EBITDA and net debt-to-EBITDA consistently above 3x and 2.5x, respectively (under the proportional consolidation of its JVs);
--High negative FCF over the next 2-3 years;
--Weak liquidity position relative to upcoming debt obligations.