Fitch: DESC's Real Estate Divestiture Mildly Positive to Credit Quality
Fitch Ratings views Desc, S.A. de C.V.'s (DESC) divestiture of its real estate business as mildly positive to credit quality and likely neutral to the company's ratings. DESC's ratings are as follows:
--Foreign currency and local currency Issuer Default Ratings (IDRs) 'B+';
--Foreign currency and local currency secured debt and IFC B Loan Participations 'BB-/RR3';
--National scale senior unsecured debt and UDI-denominated bonds due 2006 and 2007 'BBB(mex)';
--National scale Certificados Bursatiles due 2010 at 'AA (mex)'.
The Rating Outlook for all ratings is Stable.
DESC recently announced that it initiated the process of spinning-off the real estate business (Dine). As part of the transaction, all assets related to the real estate business as well as net debt of approximately US$100 million will be assigned to a separate company. On a proforma basis, the Dine spin-off should moderately decrease consolidated leverage and somewhat reduce earnings volatility. Trailing 12 months EBITDA was approximately US$170 million on a consolidated basis and US$158 million excluding Dine. Net debt-to-EBITDA is expected to decrease to 2.8 times (x) from 3.2x after the effects of the transaction, which is solid for the rating category. The transaction is subject to approval by the Board of Directors.
DESC continues to face a challenging operating environment, particularly in the chemical business, as evidenced by lower third-quarter results. While the remaining business units, chemicals (36% of proforma LTM EBITDA), food (35%), and automotive (29%), continue to provide a level of diversification, overall financial performance will continue to be exposed to cyclicality. The ratings incorporate management's strategy of refocusing the business and paying down debt. The ratings also consider consolidated operating performance, which continues to remain under modest pressure over the last several quarters on a proforma basis. Further expected improvements in operating performance and continued debt repayment remain the keys to supporting and further improving credit quality.
DESC is one of Mexico's largest industrial conglomerates, with operations in the automotive parts, chemicals, food and real state businesses. In 2005, DESC had total revenues of US$2,216 million, EBITDA of US$199 million, and exports of US$1,026 million.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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