OREANDA-NEWS. June 30, 2015. Fitch Ratings has affirmed San Miguel Industrias PET S.A.'s (SMI) Issuer Default Rating (IDR) and senior unsecured notes at 'BB'.

The Rating Outlook is Stable

KEY RATING DRIVERS

Leading Position in Peru:
SMI is the leading manufacturer and distributor of polyethylene terephthalate (PET) preforms and bottles in Peru, with a market share of about 70%. The group's performance benefits from the growing middle class and soft drink consumption in Peru. Production costs and scale advantages are high barriers to entry for competitors. The company generates about 54% of sales from within Peru. The ratings also reflect SMI's increasing geographical diversification. The company operates in Ecuador, Panama, El Salvador and Colombia.

Concentration Risks and Long-Term Supply Agreement:
The group has longstanding contracts with international bottlers such as Lindley and SABMiller. The top four customers accounted for around 65% of the group's 2014 sales in 2014. This exposes SMI to concentration risks if these bottlers do not renew their contracts or if they begin to further integrate their own operations vertically (i.e. injection and blowing). About 85% of SMI's sales are based on contracted agreements in 2014. SMI has demonstrated its capacity to renew its long-term contracts over the years with its main customers.

Deleveraging Expected:
Fitch expects SMI's net leverage to trend below 4x in 2016 from 4.4x in FYE14. Free cash flow will improve as capex tapers off in 2016 following the large investment made in 2014 in a new injection plant, machines and storage space in Colombia and investments in Ecuador in 2014 and 2015. Fitch understands that the group's medium-term financial policy is to operate under a leverage ratio below the incurrence-debt covenant at 3.5x in order to pay dividends.

Stable Profitability:
SMI's steady EBITDA margin of about 21% is due to an operating model that benefits from long-term contracts that retain enough flexibility to pass through volatility in costs. Raw material (mainly resin) represents about 80% of total costs, and SMI's resin purchases are concentrated in four main providers. SMI has been able to maintain steady EBITDA margin because of its operating model based on highly contracted revenues, its pass-through model that gives margin protection against price volatility of the resin and the natural hedges against currency fluctuation (equipment and client contracts are in USD).

KEY ASSUMPTIONS

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

--Steady EBITDA margin at about 21-22% over the next two years;
--Capex of about USD20million in 2015;
--Positive FCF in fiscal year end 2015;
--Net debt to EBIDA of 4x in FYE15 and between 3.5x-4x in FYE16.

RATING SENSITIVITIES

A positive rating action could result from some combination of the following factors: a sustained strengthening of the company's net leverage to below 2.5x on a sustained basis, and strong free cash flow, improved geographical and client diversification while sustaining an EBITDA margin above 20%.

A negative rating action could be triggered by some combination of one or more of the following: net debt leverage above 4.0x or the non-renewal of a large supply contract.

LIQUIDITY AND DEBT STRUCTURE

SMI will not face material debt maturities in the short term. Its debt is mainly comprised of its USD 200 million senior unsecured notes due in 2020. The company bought back USD16 million of its own bonds in 2014. SMI is a private company fully owned by Nexus Group SA. Positive support from the shareholder factors into its Issuer Default Rating (IDR).

FULL LIST OF RATING ACTIONS

Fitch has affirmed the ratings for San Miguel Industias PET SA as follows:

--IDR at 'BB';
--Senior unsecured debt at 'BB'