A. de C.V. (Vitro) and subsidiaries as follows: Vitro S.A. de C.V. -- Senior unsecured local and foreign currency ratings to 'CCC' from 'B'; -- US$225 million 11 3/4% notes due 2013 to 'CCC' from 'B-'; -- National short-term to 'F3 (mex)' from 'F2 (mex)'; -- National long-term to 'BB (mex)' from 'BBB (mex)'.SOFIVSA (VICAP)
-- US$250 million (US$18 million outstanding) 11 3/8% notes due 2007 to 'CCC' from 'B-'.
Vitro Envases Norteamerica, S.A. de C.V. (Vena)
-- US$250 million 10 3/4% due 2011 senior guaranteed notes to 'B-' from 'B+'.
The Rating Outlook for the Vena bonds is Stable.
The rating actions reflect the company's lack of ability to strengthen credit protection measures, which have continued to deteriorate as a result of profitability pressures and high leverage. Operating margins remain pressured by increased levels of competition in the domestic market and higher than expected energy and packaging costs, which the company has not been able to pass on to its customers. The EBITDA margin for the first six months of 2005 declined to 14.6% from 16.4% during 2004. The operating environment is expected to remain extremely challenging due to persistently high energy costs and recently announced capacity increases in Mexico from competitors.
Higher refinancing risk and the excessive concentration of debt at the holding company level have increased probability of default particularly at the holding level. The new rating of 'CCC' for the senior unsecured obligations of Vitro S.A. de C.V. reflect that the capacity for meeting financial commitments is solely reliant on sustained, favorable business and financial conditions, including the reduction of debt.
The company has made, and continues to make, efforts to divest assets and non-core operations to ensure timely payment of its debt commitments. Notwithstanding, leverage has remained high following these asset sales. In addition, Vitro has increasingly relied on secured debt borrowing at the operating company level, particularly at the glass containers business, which further reduces financial flexibility and adds to structural subordination at the holding company level. Free cash flow generation over the next several months will continue to be pressured by upcoming debt maturities totaling approximately US$395 million for the next 12 months and $700 million over the next 24 months. For the 12 months ended June 30, 2005, the ratio of total debt to EBITDA reached 4.1 times (x) and the ratio of EBITDA to interest expense was 1.7x.
On July 27, 2005, Vitro announced that it began negotiations with its partner Libby Inc. for the sale of the company's 51% stake in Vitrocrisa, the glassware business. Fitch believes that the completion of this transaction will secure liquidity to meet the company's short-term debt obligations, but that its effect on Vitro's financial structure and debt leverage will be limited. Vitro has publicly announced that its primary goal is the reduction of debt at a consolidated level and, importantly, at the holding company level. It recently engaged Credit Suisse First Boston to complete a strategic review of refinancing alternatives, which it expects to present to the market within a period of three to six months.