Fitch Ratings has downgraded the foreign and local currency Issuer
Default Ratings (IDRs) of Andrade Gutierrez Engenharia S.A. (AGE) to
'B+' from 'BB+', as well as its long-term National Scale Rating to
'A-(bra)' from 'AA-(bra)'. These rating actions affect approximately
USD500 million of issued debt by Andrade Gutierrez International S.A.
(AGI) due April 2018, which AGE unconditionally and irrevocably
guarantees. The Rating Outlook remains Negative. A complete list of
ratings follows at the end of this press release.
KEY RATING DRIVERS
The rating downgrades reflect the high deterioration of the business
environment for AGE due to the challenging macroeconomic scenario and
scarce and costly credit lines in Brazil. The company's credit profile
is also affected by the weakness of oil prices, as an important part of
AGE's clients depend on the commodity exports to fund their
infrastructure projects. Fitch expects that backlog consumption will
continue to pressure EBITDA and cash flow generation and push leverage
up. The downgrades also factor in the difficulty the company will have
collecting receivables from Brazilian state governments, whose finances
are under pressure, and foreign governments, whose ability to develop
projects is being hindered by low oil prices. Fitch incorporates a BRL1
billion fine from the Lava-Jato investigation, according to the press to
be paid over the next several years in its base case scenario.
The ratings of AGE are supported by its scale as one of the largest
contractors in Latin America with 38% of revenues generated abroad, and
cash position of BRL2.3 billion in September 2015. The market value of
the AG groups investments in Companhia Energetica de Minas Gerais
(Cemig; 'AA-(bra)'; Outlook Negative) and CCR S.A. ('AA(bra)'; Rating
Watch Negative) are also positive considerations; estimated at around
BRL5 billion.
The Rating Outlook is Negative due to the uncertainties regarding the
performance of the Brazilian economy in 2016 and 2017, along with the
recovery of oil prices. Fitch also expects a continued more limited and
expensive access to debt markets.
Pressured and Concentrated Backlog
Fitch forecasts AGE's backlog to decline in the coming years, negatively
impacting revenues, cash flow generation and credit metrics. A key
reason has been the lack of new projects in Brazil due to the adverse
macroeconomic conditions and the political crisis in the country, which
has ground most infrastructure investments to a halt. AGE international
backlog is also under pressure due to falling oil markets.
In September 2015, AGE's backlog totaled BRL27.5 billion, equivalent to
3.8 years of operation. This unfavorably compares to BRL30 billion in
December 2014. Abroad, the backlog reached USD5.2 billion, down 25%
year-to-date. The crude oil closer to USD30 per barrel limits the
ability of some of AGE's clients that depend on oil exports to launch
new infrastructure projects, affecting future backlog.
AGE's backlog is concentrated in several ways, which pressures its
credit quality. The portfolio of contracts is exposed to a small number
of projects, to public clients, and to countries that depend on oil
exports. In September 2015, AGE's 10 largest projects represent 66% of
its backlog, which unfavorably compares to 62% in December 2014. At the
same time, public clients, which tends to have erratic payment behavior
were 84% compared to 78% in December 2014. Projects in countries known
for the oil export dependency, such as Venezuela, Angola, Guinea
Equatorial, among others were 58% of the total backlog compared to 53%
at the end of 2014.
Increasing Leverage
Fitch forecasts AGE's adjusted net leverage to range between 3.0x-3.5x
over the next three years. This is weaker than Fitch's previous
expectations of an adjusted net debt below 1.0x. As of the last 12
months (LTM) ended Sept. 30, 2015, AGE's adjusted net leverage reached
2.0x. In 2015, AGE's EBITDA was impacted by a one-time BRL150 million
charge from the cancellation of the Angra 3 project. In September 2015,
total adjusted debt reached BRL3 billion, mostly composed of AGI's bonds
of BRL2 billion and working capital lines of BRL753 million. Cash flow
from operations (CFFO) should decline gradually to BRL350 million in
2017, with a negative free cash flow of BRL50 million in the same year.
KEY ASSUMPTIONS
--Backlog falls 50% in Brazil and 28% abroad in USD terms in 2015. It
declines 25% domestically and grows 0.5% in foreign markets in 2016;
--Net revenues decline 24% in 2015 and 15% in 2016, and recovers as of
2017;
--EBITDA margins at a negative 5% in Brazil and positive at 22% abroad
in 2015. As of 2016, domestic margins recover to 2.5% and the
international margins returns to historical levels of 12%.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a
negative rating action include:
--Continued deterioration of AGE's business in Brazil;
--Difficulties to replace backlog abroad, mainly to continuing low oil
prices;
--Material problems collecting receivables, which can affect its working
capital needs.
An upgrade is unlikely in the short term. Future developments that may,
individually or collectively, lead to a positive rating action include:
--Recovery on its business profile in Brazil and abroad, benefitting its
backlog;
--Lower debt service challenges for AGE, which can occur through capital
injections.
LIQUIDITY
Fitch believes AGE's robust liquidity will be pressured over the next
three years. On Sept. 30, 2015, the company's cash and marketable
securities totaled BRL2.3 billion, equivalent to 4.6x its short-term
debt of BRL497 million. Liquidity has been pressured by higher interest
rates and AGE's refinancing capacity will be tested in April 2018 when
AGI's USD500 million notes expire.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
Andrade Gutierrez Engenharia S.A. (AGE)
--Foreign and local currency long-term IDRs to 'B+' from 'BB+';
--National long-term rating to 'A-(bra)' from 'AA-(bra)'.
Andrade Gutierrez International S.A. (AGI)
Fitch has assigned a 'RR4' to AGI's debt:
--USD500 million senior unsecured bonds due 2018 to 'B+/RR4' from 'BB+'.
Date of Relevant Rating Committee: June 30, 2015.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999176
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999176
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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