Rose­marie Sant

Fitch Rat­ings has up­grad­ed Trinidad Ce­ment Lim­it­ed's (TCL) lo­cal and for­eign cur­ren­cy Is­suer De­fault Rat­ings (IDRs) to B+ from B-. The rat­ings up­grade re­flects Ce­mex's in­creased own­er­ship of TCL to at least 70 per cent.

Fitch said al­though there are no le­gal guar­an­tees or cross-de­fault pro­vi­sions on the com­pa­ny's debt oblig­a­tions, it is of the view that a tighter re­la­tion­ship with Ce­mex should im­prove TCL's mar­ket po­si­tion and fi­nanc­ing op­tions.

The rat­ings, which are one notch be­low Ce­mex's, re­flect, ac­cord­ing to Fitch, the volatil­i­ty of TCL's cash flow due to its lim­it­ed ge­o­graph­ic pres­ence. It ex­plained that TCL has rel­a­tive­ly small op­er­a­tions with to­tal ca­pac­i­ty across its three ce­ment op­er­at­ing fa­cil­i­ties of 2.4 mil­lion tonnes.

Fitch said it al­so fac­tored in­to the rat­ings the low gross lever­age of about 2.0x due to the com­pa­ny's strong fi­nan­cial per­for­mance dur­ing 2015 and 2016, which has al­lowed it to meet its debt oblig­a­tions and re­duce its debt.

Key rat­ings dri­vers

Ce­mex re­cent­ly an­nounced that its takeover bid to all share­hold­ers of TCL to ac­quire up to 132.6 mil­lion or­di­nary shares in TCL had been de­clared un­con­di­tion­al.

This brings Ce­mex's own­er­ship stake in TCL to at least 70 per cent. Fitch said this could in­crease mar­gin­al­ly as Ce­mex of­fer to pur­chase TCL shares will re­main open un­til Feb­ru­ary 7, 2017.

Ce­mex had in­creased its own­er­ship in TCL from 20 per cent to 39.5 per cent through a rights of­fer­ing dur­ing 2015. Fitch said the pro­ceeds from these of­fer­ings strength­ened TCL's fi­nan­cial po­si­tion.

Both com­pa­nies al­so signed a tech­ni­cal and man­age­r­i­al ser­vices agree­ment which pro­vid­ed TCL with man­age­ment, tech­ni­cal as­sis­tance along with ad­di­tion­al dis­tri­b­u­tion and lo­gis­ti­cal sup­port.

Fitch ex­plained that a key dri­ver in the rat­ing was the fact that TCL had de­fault­ed on its loans twice in the last five years.

It ex­plained that the com­pa­ny took nu­mer­ous steps fol­low­ing the 2014 de­fault, in­clud­ing hir­ing a new man­age­ment team, ne­go­ti­at­ing an eq­ui­ty rights of­fer­ing with trade unions and re­fi­nanc­ing its debt.

Fitch is pro­ject­ing that TCL should be able to man­age its cap­i­tal struc­ture go­ing for­ward and sig­nif­i­cant­ly im­prove its cred­it pro­file, giv­en sched­uled amor­ti­za­tions as well as in­creased prof­itabil­i­ty re­sult­ing from cost re­duc­tion ini­tia­tives.

TCL's debt as of Sep­tem­ber 30 2016 was US$160 mil­lion.

TCL is a ma­jor pro­duc­er of ce­ment in the Caribbean with eight op­er­at­ing com­pa­nies in Trinidad, Bar­ba­dos, Guyana, Ja­maica and An­guil­la.

The com­pa­ny has a dom­i­nant mar­ket po­si­tion in the Caribbean Com­mu­ni­ty (CARI­COM) re­gion par­tic­u­lar­ly in key mar­kets such as Trinidad and To­ba­go and Ja­maica.

A ma­jor­i­ty of the de­mand for ship­ments of ce­ment to small Caribbean is­lands is for small­er quan­ti­ties, which makes it a less at­trac­tive mar­ket to many of the larg­er ce­ment play­ers not al­ready es­tab­lished in the Caribbean.

TCL's ce­ment plants in the re­gion trans­late in­to cost ad­van­tages that are dif­fi­cult for small­er com­peti­tors to repli­cate.

AS­SUMP­TIONS

Fitch's as­sump­tions for 2017-2018 are:

�2 Low sin­gle-dig­it to­tal ce­ment vol­umes sales growth;

�2 Earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­za­tion EBIT­DA mar­gins re­main above 21%;

�2 Div­i­dends of around USD3 mil­lion per year;

�2 Pos­i­tive Free Cash Flow (FCF) gen­er­a­tion is used to ser­vice debt