OREANDA-NEWS. March 16, 2016. Fitch Ratings has affirmed the following ratings of Alfa, S.A.B. de C.V. (Alfa):

--Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-';
--Long-term local currency IDR at 'BBB-';
--Senior notes USD500 million due 2024 at 'BBB-';
--Senior notes USD500 million due 2044 at 'BBB-'.

The Rating Outlook is Stable.

Alfa's ratings reflect its diversified business portfolio, strong market position in the industries it participates, solid consolidated cash flow generation and sound financial position. The ratings also incorporate the credit quality of its main subsidiaries, debt allocation between holding and operating companies, the expected flow of dividends to the holding, as well as the liquidity position at the holding. Alfa's credit quality are limited by the cyclicality of its operations in the petrochemical, automotive, and oil and gas industries, and its exposure to the volatility of its main raw materials through its business portfolio.

KEY RATING DRIVERS

Solid Business Profile:
Alfa's credit quality benefit from the solid business profiles of its subsidiaries as well as from being one of the largest conglomerate groups in Mexico. Its main companies Alpek, S.A.B. de C.V. (Alpek; 'BBB-'/Outlook Stable), Nemak, S.A.B. de C.V. (Nemak; 'BB+'/Outlook Stable), Sigma Alimentos, S.A. de C.V. (Sigma; 'BBB'/Outlook Stable), and its recent merger between Alestra, S. de R.L. de C.V. (Alestra) and Axtel, S.A.B. de C.V. (Axtel; 'BB-'/Outlook Stable), have leading or important positions in the industries where they participate and stable capital structures, which support the credit profile of the holding company in the long term.

Diversified Business Portfolio:
Fitch considers that Alfa's diversified portfolio across different industries mitigates its business risks and cash flows generation. The company's business exposure to more volatile petrochemical, automotive, and oil and gas industries are mitigated by the relatively more stable business profiles related to processed foods, and IT and telecom. Also, petrochemical and automotive business cycles have historically counterbalanced each other through the cycles, stabilizing Alfa's consolidated cash flow. Fitch views as well that additional flexibility comes from its geographical and currency diversification with operations in 26 countries and around 66% of consolidated revenues from subsidiaries outside Mexico.

Acquisition Strategy:
Fitch anticipates that Alfa will continue evaluating investments or acquisitions to strengthen its business portfolio. While investment in the energy sector are expected to be delayed due to the current industry conditions, Fitch contemplates in its ratings that any significant transactions related to this sector at the holding level would be supported mainly with the potential proceeds of an IPO's from its subsidiary Sigma, as current net leverage is in the upper range of its long-term target. The merger of Alestra and Axtel that was concluded in February 2016 is not expected to have a material impact in the credit quality of Alfa.

Stable Net Leverage:
Fitch's forecast for 2016-2017 Alfa's total debt to EBITDA on a consolidated basis to be around 2.8x and the net debt to EBITDA to be 2.3x. These leverage metrics include the effect of the merger between Axtel and Alestra. The company's ratings reflect the company's growth strategy and its financial policy to maintain a consolidated net debt to EBITDA between 1.5x to 2.5x. As of Dec. 31, 2015, Alfa's total debt to EBITDA and net debt to EBITDA calculated by Fitch were approximately 3.1x and 2.4x, respectively. The company's total debt was MXN106.9 billion (USD6.2 billion) at year ended 2015.

Steady Dividend Inflow:
Fitch incorporates into the ratings that Alfa at the holding level will be receiving approximately USD330 million of annual dividends from its operating subsidiaries in 2016. These levels of dividends combined with its cash position should be sufficient to cover its debt service, corporate expenses, taxes and dividend payments to Alfa's shareholders. In 2015, the holding received around USD245 million of dividends from its subsidiaries and USD569 million from Nemak's IPO.

Structural Subordination:
Fitch views that Alfa's subordination of debt at the holding level is mitigated by its liquidity position, flow of dividends relative to its debt service, and the credit profiles of its main subsidiaries. While the recent IPO of Nemak and the merger between Alestra and Axtel have decreased its equity ownership in these subsidiaries, Fitch continues to view the company has sufficient control in defining their business strategies and financial policies.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case include:
--Revenue increase in high single digits in MXN terms in 2016-2017;
--EBITDA margin to remain at around 13%-14% in 2016-2017;
--Consolidated total debt to EBITDA at 2.8x and the net debt to EBITDA at 2.3x in 2016-2017;
--Annual flow of dividends to the holding higher than USD300 million in 2016-2017.

RATING SENSITIVITIES
Factors that could lead to negative rating actions include:

--A change in the company's financial strategy towards additional debt at the holding level to finance investment in the energy sector in Mexico;
--A simultaneous deterioration in the operating performance of Alpek and Nemak;
--Sustained deterioration in the flow of dividends from its operating subsidiaries due to adverse market conditions or debt funded acquisitions;
--Sustained net debt to EBTIDA higher than its long-term target of 2.5x;
--A downgrade in the ratings of its operating subsidiaries could also pressure Alfa's ratings.

Considering the structural subordination of the debt at the holding company level and existing ratings of the subsidiaries, a positive rating action is not foreseen in the medium term. However, factors that could lead to positive rating actions include:

--Stronger liquidity position at the holding company and higher consolidated free cash flow (FCF) generation through the business cycle;
--A significant improvement in its capital structure associated to debt reduction;
--Upgrades in the credit quality of its operating subsidiaries.

LIQUIDITY
Strong Liquidity:
Fitch considers that Alfa's liquidity position is strong in relation to its short-term debt maturities. As of Dec. 31, 2015, the company's consolidated cash balance was MXN24.8 billion (USD1.4 billion) with short-term debt maturities of MXN4.5 billion (USD262 million). At the holding level Alfa had cash balances of USD301 million, available committed and non-committed credit facilities of USD175 million and USD350 million, respectively, and no material short-term debt. Fitch views that the company's good access to capital markets and credit facilities provide additional financial flexibility.