MONTERREY, MEXICO — Credit ratings of Grupo Bimbo S.A.B. de C.V. have been affirmed by Fitch Ratings, including its BBB long-term issuer default rating.
An update on Bimbo’s credit rating was issued by Fitch days after the baking company closed on its acquisition of Canada Bread Limited Co. for $1.7 billion. While Fitch said Bimbo’s leverage will rise over the short term, to about 3.1 times EBITDA as of the end of 2014, the agency said it expects the multiple to fall to 2.5 times either by the end of 2015 or by mid-2016. Over the long term, Bimbo is committed to a gross leverage target beneath 2 times, Fitch added.
A constraint keeping Bimbo from bringing down leverage more quickly may be hiccups the company is experiencing in Mexico, its most profitable market, Fitch said. On the other hand, improvements in U.S. baking results are expected.
“Fitch expects a challenging operating performance for Bimbo in 2014 as a result of the new taxes on high-calorie products and weak economic conditions in Mexico,” the agency said. “Despite a volume decline in Mexico for the first quarter of 2014, revenues and EBITDA were flat. Fitch anticipates an increase in Bimbo’s consolidated revenues and EBITDA in 2014 as a result of the Canada Bread acquisition, while EBITDA margins should remain relatively stable as a result of synergies from the U.S. operations, less volatile raw material costs, and internal efficiencies in its operations, which will offset the impact of integration cost in the U.S. Fitch estimates that Bimbo’s 2014 full-year EBITDA margin on a pro forma basis, including the Canadian operations, will be around 9% to 10%.”
Elaborating on the Mexico situation, Fitch referenced the new 8% tax on high calorie food products, which Bimbo has passed along to customers. Bimbo volume in Mexico in the first quarter fell by 6%.
“The tax affected a portion of Bimbo's portfolio of sweet baked goods, snacks, confectionery and cookies,” the ratings agency said. “Fitch expects that volume demand in Mexico will continue weak in the short term as consumers fully absorb the effect of new prices, as well as remain cautious about a recovery in the economic environment for the second half of the year.”
Still, Fitch believes Bimbo will maintain “solid free cash flow generation and will use it for debt reduction.”
At a higher level, Bimbo’s strong marketplace position helps the company sustain its credit rating, Fitch said.“Bimbo’s ratings continue to reflect its important size and scale within the global bakery industry, its strong brand recognition and positioning in the markets where it operates, and its extensive distribution network which provides a key competitive advantage,” the agency said. “The ratings also consider the company’s stable operations with historically low volatility in revenues and margins, diversified revenue base and positive free cash flow generation.”