MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Arendal, S. de R.L. de C.V. (Arendal):
--Foreign currency long-term Issuer Default Rating (IDR) at 'B';
--Local currency long-term IDR at 'B';
The Rating Outlook is Stable.
KEY RATING DRIVERS:
The ratings are supported by Arendal's track record and technical experience in the Mexican heavy construction industry as a recognized player in the construction of fluid transportation systems and plants, its participation in both public and private sector projects across Mexico, and its positive operating performance despite a challenging economic environment. Conversely, the ratings are limited by the characteristics of the industry which is highly linked to economic cycles, project concentration of revenues and cash flow, as well as the current process of institutionalization and adoption of adequate corporate governance practices.
During 2011, 2012 and the beginning of 2013, Arendal was engaged in the construction of a Federal Penitentiary in the state of Chiapas, which diversified the company's revenue source, as well as allowed it to increase operative margins compared to past years. Nevertheless, Fitch expects that margins will decline in 2013 and 2014 due to the nature of future projects.
Arendal, along with its partner, made an agreement to sell its interest participation in the Chiapas Penitentiary to Grupo Financiero Inbursa S.A.B de C.V. (Inbursa) and Impulsora del Desarrollo y el Empleo en America Latina S.A.B de C.V. (Ideal). At this time, the prison is in the pre-operative stage and the company is expecting to receive approximately MXN1,200 million for its stake in this project during the following months. The company informed Fitch that the funds are already deposited in a fiduciary account. Management plans to use a portion of these funds to pay down liabilities and debt, strengthening the company's balance sheet position.
The company has a relevant business position in the construction of pipelines in terms of kilometers built during the last years. Arendal engages in project contracts that include full or partial engineering, procurement and construction of pipelines and plants. Also, the company has the capacity to execute projects across all the Mexican territory and to manage efficiently its technical and workforce resources. Arendal's competitive advantage among industry peers includes an historical completion rate of more than 90% of its project before or on settled dates. Customers and commercial partners in either public or private sectors recognize the company's commitment to quality and security requirements. Fitch considers that these elements will contribute to maintain its business position in the long term.
Fitch believes that the company participates in an industry exposed to economic cycles which is reflected in volatility in sales and operative margins throughout the years. Arendal's long-term main challenge is the ongoing need to add new projects. Additionally, the ratings incorporate the high competition between domestic and foreign companies in the heavy construction industry. Going forward, the company could enter into joint ventures (JVs) or consortiums to serve different projects that are expected to come in line in the near term, which in turn will strengthen its business profile.
During the past six years, the company has maintained its organic growth despite the decrease in the level of economic activity in 2008 and 2009, as well as the weak recovery in 2010. Last 12 months (LTM) revenues ended at June 30, 2013 were MXN3,277 million while operating income reached MXN546 million. Revenues reported by the company in 2012 amounted MXN3,607 million, while operating income totaled MXN690 million. Compounded annual growth rate (CAGR) of revenues and operating income for the last four and a half years ended June 30, 2013 was 39.5% and 77.8%, respectively. These factors, in Fitch's opinion, reflect management's commitment and ability to adjust its operative and business strategies depending on economic environment.
Fitch considers that revenue diversification expected by the company's strategies will contribute to a reduction of business risks and cash flow volatility. Arendal had a mix of revenues significantly oriented towards the public sector, with the Federal Government (Secretaria de Seguridad Publica) being its main customer in the last 30 months and PEMEX in 2010 and 2009. While this allows the company to maintain a relevant business position for future projects, it also concentrates the business' operating generation.
The company's financial position and flexibility is less limited than in the past, as a result of its business strategy to diversify to other segments, such as concessions. The total debt as of June 30, 2013 amounted MXN1,301 million, and around 57% was guaranteed by the cash flows from projects compared to 92% in the previous year. As of LTM June 30, 2013, the EBITDA to interest and total debt to EBITDA ratios were 5.7 times (x) and 2.3x, respectively, compared to 7.2x and 1.0x at the end of 2012 and 5.6x and 1.9x in 2011.
Arendal's financing strategy is to mainly obtain new indebtedness with the cash flows coming from a new project allowing the company to match the payment of a credit with a specific project. Given that most of the projects have periods of completion that ranges between 12-18 months, financing associated to the projects have a short-term tenor, resulting in high concentration of short-term debt. The liquidity position of the company is limited to timely collect accounts receivables and availability of credit lines to support working capital needs.
In Fitch's opinion, Arendal's recent experience in the construction of the Federal Prison will allow it to gradually participate in larger infrastructure projects as well as in the construction of energy projects and plants; furthermore, Arendal is also expanding its presence for the oil and gas services which present attractive growth prospects. These projects will require larger investments in working capital and Capex. Fitch expects that most of these requirements will be funded with debt; and that the company's mid-term leverage measured as total debt/EBITDA will be in the range of 4.5 times (x) to 5.0x.
The ratings could be negatively pressured by a combination of the following factors, among others: deterioration of Arendal's credit metrics as a result of a downturn in the heavy construction industry or a decline in its operative performance. Large scale projects with higher complexity and unfamiliar to Arendal's current areas of expertise, that could demand additional resources from the company than originally anticipated. A rating downgrade could also be driven by limited access to financing sources affecting the company's liquidity position.
Factors which could lead to a positive rating action include a combination of stronger credit metrics, improved liquidity position, and full implementation of corporate governance practices.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013;
--'Evaluating Corporate Governance', Dec. 12, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Evaluating Corporate Governance