TCL bond issue to repay debt

US-based credit rating agencies Standard & Poor’s (S&P) and Fitch Ratings on Tuesday gave low ratings to Trinidad Cement Ltd’s (TCL’s) planned bond issue announced on the T&T Stock Exchange (TTSE) Monday. TCL announced its plan to issue senior secured first lien notes (bonds) not exceeding an aggregate principal amount of US$325 million. The bonds will be issued approximately 80 per cent in a US dollar tranche, and the remainder in a TT dollar tranche, S&P said.

In its notice to the TTSE, TCL said: “Approximately US$295 million from the proceeds of the offering is expected to be utilised by TCL to repay existing debt. The remainder of the proceeds of the offering is intended to be used for working capital improvement and to pay all fees and expenses associated with the offering.” TCL said it expects to issue the bonds with a seven year tenor, maturing in 2021. The coupon rate has not yet been decided, and may be influenced by the credit rating agencies’ ratings. 

However, TCL said “interest on the notes is expected to be fixed and paid on a semi-annual basis in arrears,” commencing approximately six months after issuance. Subject to regulatory approvals, TCL expects to close the offering this month. “Weak business risk profile

Explaining why it rated the TCL bonds “B,” which is “highly speculative” and five notches below investment grade, making it what is known in the industry as “junk bonds,” S&P said: “The rating on TCL reflects our assessment of its “weak” business risk profile, “highly leveraged” financial risk profile, and “less than adequate” liquidity.” S&P said it assesses TCL’s business risk profile as “weak,” given the company’s scale relative to its global peers.

“However, we believe its regional scope and end-market diversification are favourable compared to those of its Latin American peers. We view the company’s leading position in the Caribbean as its main strength. On the other hand, we consider that TCL’s operating efficiency has been hindered by low levels of investments in its production facilities,” S&P said. 

Potential for improvements

“However, we believe that the company’s ability to strengthen its operating margins during 2013 shows the potential for further improvements, once the company addresses its capital expenditure (capex) requirements.” Additionally, exports generate about 30 per cent of the company’s total revenues, although an unusual practice in the industry as operating efficiencies are lost due to high transportation cost, S&P said.

That notwithstanding, S&P said it believes TCL’s expertise of more than 60 years, together with its geographic location and limited cement supply in the markets it serves, increases its pricing bargaining power, allowing it to easily pass on cost increases to end-customers.

“Highly leveraged”

S&P assessed TCL’s financial risk profile as “highly leveraged.” TCL’s aggressive debt-financed growth strategy, along with the global financial crisis in 2008-2009, weakened earnings before income tax, depreciation and amortization (EBITDA) and cash flow generation, leading the company to default on its debt obligations in 2011. 

S&P said: “We believe that TCL is highly exposed to currency mismatch as the vast majority of total debt will be US dollar denominated after the issue, whereas more than 70 per cent of its EBITDA is denominated in TT dollars.”

What Fitch said:

Explaining why it rated the bonds “B-” which is six notches below investment grade, or two categories deep into junk, Fitch Ratings said: “TCL Group’s ‘B-’ ratings reflect its business position in the relatively small Caribbean cement market, high leverage, weak liquidity, and volatility of its cash flow generation due to the cyclicality of the cement industry. TCL Group has relatively small operations with total capacity across its three cement operating facilities of 1.5 metric tons (MT). 

Favourable outlook

Fitch believes the company will be able to slowly deleverage, as operating cash flow should continue to improve as volumes and sales prices increase.” Further factored into the ratings is the favourable outlook for the Caribbean cement industry over the medium term driven by the region’s positive macroeconomic and business environment, Fitch said. The agency said: “TCL Group’s financial performance and cash flows stabilised in 2013 since the economic downturn during 2011-2012 with progressive momentum into 2014. 

In addition, the company has no significant or immediate capital expenditures required in the medium-term, which should allow TCL to use its cash flow to repay debt and rebuild its cash balances.”