Controladora Mabe, S.A. de C.V. 'BBB-' Ratings Affirmed, Outlook Remains Stable

  • Mexico-based home appliance company Controladora Mabe S.A.B. de C.V. (Mabe) has been posting better-than-expected results in the past 18 months, which helped improve the company's key credit metrics and liquidity.
  • A stronger financial risk profile puts Mabe in a comfortable position to cope with the COVID-19 crisis, and we expect credit metrics to remain resilient even under a hypothetical downside scenario of a pronounced top-line contraction.
  • On March 24, 2020, S&P Global Ratings affirmed its long-term 'BBB-' global scale issuer credit rating on Mabe. At the same time, we affirmed our 'BBB-' issue-level rating on Mabe's $370 million senior unsecured notes due 2028.
  • The stable outlook on Mabe reflects our expectations that it will be able to protect its key credit from supply chain interruptions and demand risks metrics in the next 12 months. We expect Mabe to maintain debt to EBITDA at about 2.0x and funds from operations (FFO) to debt close to 45%.
MEXICO CITY (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating actions listed above.
Mabe's financial performance has exceeded our expectations.  In the past 18 months, Mabe continued to deliver strong financial results thanks to favorable demand in North America and a resilient performance in Mexico. In addition, the company maintained a disciplined financial policy that enabled a sustained leverage reduction to unprecedented levels, while also increasing liquidity. For the 12 months ended Dec. 31, 2019, Mabe lowered its debt-to-EBITDA ratio to 1.8x, an important milestone for the company, given that the ratio remained at about 3.0x for many years.
The improvement in Mabe's key credit metrics led us to revise our assessment of its financial risk profile to intermediate from significant, given that we now expect the company to maintain the leverage metric below 3.0x and FFO to debt above 30% despite risks related to the COVID-19 crisis.
An extended debt maturity profile and low capital investment requirements will protect Mabe's liquidity.  We now assess Mabe's liquidity as strong because we expect sources of cash to exceed uses by more than 1.5x during the next 12 months and by more than 1.0x in a 24-month time horizon. This is mainly due to relatively low annual debt maturities in the next couple of years. In addition, in recent years, the company implemented a substantial capital expenditures (capex) plan for capacity expansions and technological enhancements, which will reduce the investment requirements in the short run.
Our expectations for EBITDA margins close to 10%, as well as stringent working capital management will contribute to operating cash flow stability that would further enhance Mabe's cash balance.
A stronger financial risk profile will help cushion Mabe from the pandemic virus effects.  For 2020, Mabe's top-line growth may slip due to heightened recession risks across its key markets, stemming from the COVID-19 crisis and its pernicious effect on household income and demand for durable goods. Even under a hypothetical scenario where the company suffers from a double-digit decline in EBITDA, we expect Mabe to comfortably maintain credit metrics consistent with its investment-grade rating.
The company may be exposed to supply chain risks, and to some extent, to exchange-rate volatility. However, Mabe's strategy to maintain a fragmented supplier base, coupled with its inventory policy of ensuring high stocks of parts and replacements for manufacturing purposes, mitigate operating risks. In addition, Mabe recently accelerated production activities and increased inventories of finished goods, in preparation for the potential shutdown of its facilities due to coronavirus.
Mabe's foreign exchange risk is largely contained by the natural hedge given that its North American business generates more than 50% of consolidated EBITDA. In addition, Mabe generally hedges some of its foreign currency exposure to raw materials and financial commitments, to support the predictability of its cash flows.
The stable outlook on Mabe reflects our expectations that it will be able to protect its key credit metrics amid the looming disruptions in supply chain and demand risks in the next 12 months. We expect Mabe to maintain debt to EBITDA at about 2.0x and FFO to debt close to 45%, despite the seasonality of cash flows and the risks of the economic slowdown across the company's key markets.
We could lower the ratings on Mabe in the next 12 months if its leverage and cash flow targets deviate from our assumptions, with FFO to debt consistently below 30% or debt to EBITDA above 3x. Under such a scenario, cash flowd wouldn't meet our expectations due to deeper-than-expected deterioration of business conditions in key markets that would crimp revenue and profitability, or if the company adopts a more aggressive growth strategy that requires additional debt.

Although unlikely in the next year, an upgrade would follow a major business transformation that drastically expands Mabe's scale and further strengthens its competitive position relative to other global players in the home appliance industry, resulting in an improvement of the company's business risk profile. In addition, an upgrade would follow a strengthening of Mabe's financial risk profile, resulting in FFO to net debt consistently above 45% and net debt to EBITDA below 1.5x.
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