OREANDA-NEWS. Fitch Ratings has affirmed Mastellone Hermanos Sociedad Anonima's (Mastellone) Issuer Default Ratings (IDRs) and its senior unsecured notes. All the ratings have been removed from Negative Watch. A full list of rating actions follows at the end of this press release.

Fitch's rating action follows Arcor's purchase of 25% of Mastellone's shares for about USD50 million with options to purchase an additional 10% for USD35 million in 2017 and up to 100% by 2025. For Mastellone this transaction is beneficial in that it helps the company overcome its current liquidity issues so that it can better manage its working capital needs, expand its business and reduce costs. Mastellone will use the USD50 million to complete projects which had previously been placed on hold mainly due to its liquidity position: a milk drying plant at its Trenque facility, expanding into the San Luis province to produce and distribute fluid milk in the center of the country.

Fitch had previously placed all ratings on Negative Watch due to concern over the company's ability to generate sufficient cash to cover interest payments on its USD200 million notes. Mastellone reported USD35 million in cash as of Sept. 30, 2015, an improvement over USD22 million reported as of March 31, 2015.

KEY RATING DRIVERS

Mastellone's 'CCC' ratings reflect the company's operating environment in Argentina and its contribution to over 80% of EBITDA as well as its exposure to raw milk production, currency mismatch, and solid position as the leading processor of dairy products in Argentina.

Cash Flow Concentrated in Argentina

Mastellone's domestic market contributed 87% to total sales and 82% to EBITDA. Its next most important market is Brazil, which contributed 7% of total sales and 18% 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.

Solid Business Position

Mastellone is the largest dairy company and the leading processor of dairy products in Argentina. Mastellone maintains the largest market share of the fluid milk market in terms of physical volume with a market share of approximately 67%. The company maintains the first and second positions in most of its product lines. Its strong market share allows it to benefit from economies of scale in the production, marketing and distribution of products, and strengthens its bargaining position. Mastellone purchases about 16% - 18% of raw milk production in Argentina, which provides it with a good degree of negotiation power.

Exposure to Raw Milk Production

Argentine milk production declined for a second straight year in 2014 by about 2%. Mastellone's business is divided between sales to the Argentine and Brazilian domestic markets and exports. A shortage of raw milk production could lead to the interruption of the company's export business (7% of sales) or an increase in production costs. Both of these occurred in 2014 as Mastellone decided not to enter into any new export contracts during the fourth quarter given the low price of powdered milk and as the costs related to the purchase of raw milk increased. Mastellone resumed exporting in the first quarter of 2015.

Currency Mismatch

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

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Mastellone include:
--The majority of the USD50 million received from Arcor's 25% purchase will be used towards completion of expansion plans;
--Revenue growth in line with inflation;
--EBITDA margin remains close to 2.5% on average;
--Maintenance level capex of about ARS200 million per year.

RATING SENSITIVITIES
Mastellone's ratings could be negatively affected by further economic deterioration in Argentina and the company's inability to convert and transfer foreign exchange. In addition, a deterioration in cash flow that further weakens its credit metrics could negatively impact Mastellone's credit rating.

A positive rating action is unlikely in the short- to medium term, but could occur if Arcor continues to increase its ownership stake in the company and the strategic and operational linkage between the two companies is strong.

LIQUIDITY

Mastellone reported cash and marketable securities of about USD35 million as of Sept. 30, 2015. Short-term debt was USD41 million. Almost 80% of Mastellone's debt is USD-denominated, which creates significant currency risk, as the company's sales are over 90% denominated in Argentine Pesos. The company has not entered into any agreements to hedge its exposure to devaluation risk. The company has pre-export facilities with local and international banks; each facility is collateralized by a separate trust containing either sales collections to the domestic retail market, inventories (of parent company and Mastellone San Luis), or Leitesol's purchase order assignments.

Fitch has affirmed the following ratings and removed them from Negative Rating Watch:

Mastellone Hermanos Sociedad Anonima
--Foreign currency IDR at 'CCC';
--Local currency long-term IDR at 'CCC';
--Senior unsecured notes at 'CCC-/RR4'.