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 2019 at 'A(mex)'.

The Rating Outlook is Stable.

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, in addition the ratings consider its solid market positions and stable financial profile. The ratings also incorporate its diversified revenue stream with around 48% 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 negative free cash flow generation (FCF), mainly due to its capex growth, and 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 (Herdez del Fuerte and Dynasol). In addition, Fitch considers the consolidated figures reported under IFRS which account for the JVs under the equity method.

KEY RATING DRIVERS
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 (pork meat and Herdez del Fuerte JV) has contributed to counterbalancing the exposure to the volatile business cycle of its chemical (synthetic rubber and plastics) and automotive (transmissions and aftermarket) businesses. In 2015, expected lower cash flow generation from its pork meat business was more than compensated by the transmission businesses.

Improved Operating Results:
Fitch expects KUO's operating performance to improve in 2016 supported mainly by higher revenues and EBITDA growth from its consumer and automotive business. Higher production capacity in the pork meat business and opening of new Maxicarne's stores are expected to deliver in 2016 revenue growth above 20% in this segment, while a stronger consumer demand in Mexico should impulse the revenues of its Herdez del Fuerte JV. Additionally, KUO's transmissions revenues are projected to grow in the mid-teens range from higher customer requirements. These improvements should contribute to offset negative pressures on revenues and cash flow generation from its synthetic rubber business as lower oil prices and oversupply conditions decrease raw material costs and impact the company's average sales prices. Considering the proportional consolidation of its JVs, Fitch forecast a revenue growth for KUO in the high single digits range in 2016.

Fitch projects for 2016 that KUO will have an EBITDA growth in the low double digits range with an EBITDA margin of approximately 10.5%, considering the proportional consolidation of its JVs. Higher EBITDA and profitability should be mainly driven by higher revenues in the transmission, pork meat and Herdez del Fuerte JV businesses, combined with a better sales mix, internal operating efficiencies and low raw material prices. During 2015 KUO's EBITDA, considering the proportional consolidation of its JVs, increased 21% to USD222 million compared to 2014, as it included an extraordinary gain of USD40 million coming from the combination with Repsol of its emulsion rubber business. Excluding this effect the EBITDA had a slight decline of 1% to USD182 million.

Stable Leverage
Fitch forecasts that KUO's leverage will remain relatively stable during the next 12 months. Considering the proportional consolidation of its JVs Fitch projects that the company's total debt-to-EBITDA and net debt-to-EBITDA will be around 2.6x and 2.4x, respectively, in 2016. As of Dec. 31, 2015, KUO's total debt-to-EBITDA, excluding the extraordinary income in EBITDA from the sale to Repsol, increased slightly to 3.0x, compared to 2.7x at year-end 2014, while net debt-to-EBITDA had a minor improvement to 2.1x from 2.2x. On a consolidated basis, accounting its JVs by the equity method, these ratios were 3.5x and 3.1x, respectively, at year end 2015.

Negative FCF
The ratings incorporate KUO's expected negative FCF in 2016, considering the proportional consolidation of its JVs, after covering capex and dividends of approximately USD146 million and USD11 million, respectively. In 2015, the company's negative FCF of around USD36 million was supported by USD70 million cash inflow received in October 2015 after closing the transaction with Repsol. Fitch also estimated a consolidated negative FCF of approximately USD35 million, accounting the company's JVs by the equity method. Sustained high negative FCF in the coming years could pressure the ratings.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case include:
--Proportional consolidation of its JVs;
--2016 revenue growth in high single digits;
--2016 EBITDA growth in low double digits and EBITDA margin at around 10.5%;
--Total debt-to-EBITDA and net debt-to-EBITDA approximate 2.6x and 2.4x in the next 12 months.

RATING SENSITIVITIES
Positive rating actions could result from the combination of the following factors:
--Lower volatility in cash flow generation across the company's businesses leading to neutral to positive FCF through the cycle;
--Sustained lower leverage ratios (total debt-to-EBITDA and net debt-to-EBITDA around 2x and 1.5x, respectively, under the proportional consolidation of its JVs);
--Maintain a strong liquidity position.

Negative rating actions could result from the combination of the following factors:
--Sustained deterioration in operating performance across the company's businesses 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 than expected negative FCF over the next 2-3 years;
--Weak liquidity position.

LIQUIDITY
Low Liquidity Risk
KUO's liquidity position is adequate and debt profile is manageable. Considering the proportional consolidation of its JVs, the company's cash balance as of Dec. 31, 2015 was USD156 million, while on a consolidated basis, accounting its JVs by the equity method was USD127 million. KUO's debt profile including the revolving credit facility with Repsol is manageable with maturities of USD28 million in 2016, USD32 million in 2017, USD12 million in 2018, USD52 million in 2019, USD73 million in 2020, USD16 million in 2021 and USD327 million in 2022. In 2015, the company's liquidity position was further strengthened after the debt refinancing of USD45 million related to local issuances maturing in November 2015 with a credit facility of USD65 million due in 2020.

The ratings incorporate KUO's financial strategy, which historically has funded its indebtedness requirements at the holding company level and then has distributed the funds to its subsidiaries through intercompany loans 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.