Various Rating Actions On 15 Mexican Corporations Following Downgrade Of The Sovereign

  • On March 26, 2020, we lowered our long-term foreign currency and local currency ratings on Mexico to 'BBB' from 'BBB+' and 'BBB+' from 'A-', respectively.
  • The downgrade occurred because we expect a pronounced hit to the Mexican economy following the combined shocks of COVID-19 in Mexico and the U.S., its main trading partner and lower global oil prices. These shocks, while temporary, will worsen Mexico's already weak trend GDP growth dynamics for 2020-2022 that reflect, in part, low private-sector confidence and poor investment dynamics.
  • The outlook on the sovereign is negative, indicating the risks of a downgrade in the coming 12-24 months. This a result of uneven or ineffective policy execution, potential weakening in public finances, reflecting a difficult trade-off between sustaining GDP growth given Mexico's low non-oil tax base and spending rigidities, and rising pressure on Pemex, a potential contingent liability for the sovereign.
  • As a result of these actions on the sovereign ratings, S&P Global Ratings lowered the global scale on four Mexican companies with a negative outlook. On two companies, we affirmed the global scale ratings and revised the outlook to negative. Finally, we affirmed the ratings and maintained the stable outlook on nine companies, including four on national scale only. The ratings on most of these corporations are directly influenced by the ratings on Mexico, because either the former ratings are capped at the same level, or they are up to a maximum number of notches relative to the sovereign ratings.
MEXICO CITY (S&P Global Ratings) March 27, 2020--S&P Global Ratings took multiple rating actions on Mexican corporations following the downgrade of the sovereign to BBB/Negative/A-2 on global scale. The ratings on most of these corporations are directly influenced by the ratings on Mexico, because either the former ratings are capped at the same level, or they are up to a maximum number of notches relative to the sovereign ratings.
We lowered the global scale ratings by one notch keeping the negative outlook and affirmed our 'mxAAA' national scale ratings and outlook on the following entities:
  • América Móvil, S.A.B. de C.V. and subsidiaries (BBB+/Negative/--; mxAAA/Stable/mxA-1+);
  • Coca-Cola Femsa, S.A.B. de C.V. (KOF; BBB+/Negative/--; mxAAA/Stable/--);
  • Kimberly-Clark de Mexico S.A.B. de C.V. (KCM; BBB+/Negative/--; mxAAA/Stable/mxA-1+); and
  • El Puerto de Liverpool, S.A.B. de C.V. (Liverpool; BBB/Negative/--; mxAAA/Stable/mxA-1+).
Some of these entities have a relevant exposure to the Mexican economy, although their finances are sound, stemming from their business positions, manageable leverage, robust cash positions, and geographic diversification. The ratings on AMX, KOF, and KCM are currently limited at one notch above the sovereign foreign currency rating, while those on Liverpool are capped at the sovereign level.
Our downgrades of AMX and KOF follow the downgrade of Mexico's sovereign rating because we consider that ratings on both entities can only be one notch above the foreign currency sovereign rating due to the exposure these companies have to Mexico's country risk, as well as to lower-rated countries. The 'a-' stand-alone credit profile (SACP) of AMX and KOF remains unchanged because, in our view, both companies will be able to absorb the negative shocks from the coronavirus crisis. In particular, low leverage and healthy liquidity will provide them sufficient flexibility to withstand a contraction in top-line growth and pressure on profitability amid the economic downturn in their key markets. The one-notch differential above the foreign currency rating on Mexico reflects our consideration that telecommunications and beverage companies are moderately sensitive to country risk, their intrinsic credit factors, and their liquidity cushion under a stress test of Mexico. The negative outlook on these two entities reflects a potential one-notch downgrade if we were to lower our sovereign rating on Mexico.
KCM's downgrade reflects our view we can rate the company one notch above the sovereign foreign currency rating. In our view, KCM is moderately sensitive to country risk because its products are somewhat resilient to economic downturns and its current structure provides a high degree of flexibility to adjust capital expenditures (capex) and dividend payments if needed, also supporting our belief that its 'a-' SACP remains unchanged at this point of time. The negative outlook on the company reflects a potential one-notch downgrade if we were to lower our sovereign rating on Mexico, given KCM's high exposure to the country.
Liverpool's downgrade reflects our belief that the company wouldn't overcome a hypothetical stress test scenario in Mexico. The company generates the majority of its revenue in Mexico, and given that its products are somewhat discretionary in nature, its business dynamics are very sensitive to economic downturns. As a result, we cap the company's credit quality at that of the sovereign, but Liverpool's SACP remains unchanged at 'bbb+', given its solid business position and low leverage, coupled with strong cash reserves, which provides certain leeway for the company to absorb short-term impacts. We will continue monitoring if potentially more drastic and prolonged measures to contain the coronavirus spread could impair the company's revenue, EBITDA, cash generation, and credit metrics.
We affirmed the global scale rating, revised the outlook to negative from stable, and affirmed our 'mxAAA' national scale ratings on the following companies:
  • Grupo Televisa S.A.B. (BBB+/Negative/--; mxAAA/Stable/--); and
  • Fomento Economico Mexicano S. A. B. de C. V. (FEMSA: A-/Negative/--; mxAAA/Stable/mxA-1+).
We can rate Televisa up to one notch above the foreign currency rating on Mexico, given the company's high concentration of operations in the country, mitigated by its exceptional liquidity and the dollar-denominated royalties it receives from Univision.
We can rate FEMSA up to two notches above our foreign currency rating on Mexico. In our view, the company will be able to generate strong cash flows even during an economic downturn because of its solid financial performance thanks to resilient operations, manageable debt levels, and ample liquidity. FEMSA benefits from the euro-denominated dividends it receives from Heineken and its solid cash levels. As a result, we believe that we could rate it up to two notches above our foreign currency rating on Mexico.
We affirmed the ratings on the companies below. This is because we believe that they will be able to generate strong cash flows even during an economic downturn because of their solid financial performance due to their resilient operations to a sovereign distress scenario, given that some either export or have presence in higher rated countries, have manageable debt levels, and ample liquidity.
  • Becle S. A. B. de C. V (BBB/Stable/--);
  • GRUMA S.A.B. de C.V. (BBB/Stable/--; mxAA+/Stable/mxA-1+);
  • Grupo Mexico S.A.B. de C.V. and subsidiaries (BBB+/Stable/--);
  • Industrias Penoles S.A.B. de C.V. (BBB/Stable/--; mxAAA/Stable/--); and
  • Fresnillo plc (BBB/Stable/--).
Becle and Gruma benefit from geographical footprint in higher rated countries such as the U.S., which is their main market, they have solid liquidity positions with dollar-denominated cash reserves. Moreover, Gruma's products are resilient to economic downturns.
In the case of Grupo Mexico, Industrias Peñoles, and Fresnillo, their export nature and dollarized structure (more than 80% of revenues in that currency) make them less vulnerable to Mexico's economy. These factors, along with solid liquidity position and credit metrics, leads us to believe that we could rate them up to two notches above our foreign currency rating on Mexico.
Finally, we affirmed the national scale ratings on the following companies:
  • ARCA Continental S.A.B. de C.V. (mxAAA/Stable/--);
  • AC Bebidas, S. de R.L. de C.V. (mxAAA/Stable/--);
  • GMexico Transportes, S.A. de C.V. (mxAAA/Stable/--); and
  • Ferrocarril Mexicano, S.A. de C.V. (mxAAA/Stable/mxA-1+).
The affirmation of the long-term national scale ratings with a stable outlook on the 13 companies with national scale above considers that these entities have a stronger credit profile when compared to other corporations in the country and also reflects that of the sovereign on national scale.
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A:Friday, March 27, 2020
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A:AI rating scale, which ranges from a maximum Aaa to a minimum C, consists of 21 notches and two categories: Investment category for the financially sound companies and Speculative category for the companies with a higher risk of defaulting.
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