SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Odebrecht Finance Ltd.'s (OFL) USD500 million proposed senior unsecured notes due 2029, which will be unconditionally and irrevocably guaranteed by Construtora Norberto Odebrecht S.A. (CNO). Net proceeds from this issuance will be used on a tender offer for the 2020, 2022, and 2023 notes. Fitch currently rates OFL with a foreign currency Issuer Default Rating (IDR) of 'BBB' and CNO with foreign and local currency IDRs of 'BBB'. A complete list of ratings follows at the end of this press release.
Key Rating Drivers
CNO's investment-grade rating reflects its conservative financial profile, good and consistent track record of operations, and its leading position in the engineering and construction sector in Latin America. The ratings also incorporate the company's margin resilience, as demonstrated during the last quarters, within an operating environment of increasing costs. CNO has also been successful in raising funds to lengthen its comfortable debt amortization profile. Fitch expects that CNO will continue to maintain a conservative capital structure and strong liquidity for the next few years.
Fitch's rating analysis considers CNO's business risk associated with potential volatility in backlog and some revenue concentration in its main projects. The ratings also incorporate the current financial exposure of CNO to other businesses of the Odebrecht Group (ODB Group), with projects carrying risks associated with the pre-operational phase. These risks will continue to lessen as projects develop under schedule.
Robust Backlog and Resilient Margins
The company has succeeded in renewing its firmed contracts portfolio and maintaining it at a robust level of USD33 billion by the end of March 2014, equivalent to 27 months of revenues. CNO's backlog presents moderate concentration as the 10 largest projects have accounted for 44% of its total firmed contracts in the same period.
The company's margins remain robust and above the industry's average. CNO has also demonstrated resilient performance to support pressure from cost increases, as it benefits from the geographical diversification of its contracts and management capacity to control costs. Fitch expects the company to sustain its EBITDA margin at around 9% during the next few years.
Sound Liquidity and CFFO
CNO has historically maintained a strong liquidity position and benefits from a lengthened debt maturity profile. As of March 2014, cash and equivalents were BRL6.8 billion, enough to cover CNO's short-term adjusted debt of BRL218 million by 31x. CNO's financial flexibility is enhanced by an unused USD850 million standby credit facility and proven access to debt markets.
Fitch expects CNO's to sustain its strong free cash flow (FCF) in the next few years, supported by its sound cash flow from operations (CFFO). In the last 12 months (LTM) ended March 31, 2014, CFFO of BRL5.1 billion covered capital expenditures of BRL1 billion, leading to FCF of BRL3.7 billion. The company distributed dividends of BRL387 million in the period.
Reduced Net Leverage
Fitch expects adjusted net leverage to remain conservative, at around 1.0x in the next few years. As of March 31, 2014, CNO's net leverage as measured by net adjusted debt/EBITDA, was 0.3x, while total adjusted leverage was 2.3x, in line with Fitch's expectations. These two leverage ratios were, respectively, -0.3x and 2.5x by the end of 2013.
As of March 31, 2014, the company's total adjusted debt reached BRL7.7 billion, including BRL7.2 billion of off-balance-sheet guarantees, compared with adjusted debt of BRL8 billion, including the BRL7.4 billion of off-balance-sheet guarantees, in December 2013.
Lower Risk of Exposure to Sister Companies
Fitch expects CNO to reduce its financial exposure to other businesses of the ODB Group. As some of the group's projects finish their pre-operating phase and initiate cash generation, ODB's leverage and CNO's guarantees tend to reduce. The agency understands that further equity support to affiliate companies will be provided by the holding company and not CNO.
Efficient Strategy Mitigates Backlog Risks
CNO has reported a positive track record of maintaining relevant backlog balance and a reduced level of project rescheduling/cancelation. The company benefits from its efficient management strategy, which is based on selecting strategic projects with relevant sponsors, backed with funding from multilateral development agencies. The company also mitigates backlog risk by requesting advanced payments of around 10% from clients abroad.
The ratings could be negatively affected by a substantial reduction in backlog and/or cancelation of projects, a weaker liquidity position, or higher leverage.
Future upgrades are unlikely in the short to medium-term. In the long term, ratings could be upgraded by improvements in the consolidated credit metrics of ODB Group based on performance of its more mature projects.
Fitch currently rates CNO and OFL as follows:
Construtora Norberto Odebrecht S.A. (CNO)
--Long-term foreign currency IDR at 'BBB';
--Local currency IDR at 'BBB';
--Long-term national rating at 'AAA(bra)'.
Odebrecht Financial Limited (OFL)
--Long-term foreign currency IDR at 'BBB';
--USD200 million senior guaranteed notes due April 2014 at 'BBB';
--BRL500 million senior guaranteed notes due April 2018 at 'BBB';
--USD500 million senior guaranteed notes due April 2020 at 'BBB';
--USD600 million senior guaranteed notes due June 2022 at 'BBB';
--USD800 million senior guaranteed notes due April 2023 at 'BBB';
--USD550 million senior guaranteed notes due April 2025 at 'BBB';
--USD850 million senior guaranteed notes due June 2042 at 'BBB';
--USD750 million guaranteed perpetual bonds at 'BBB'.
The Rating Outlook for CNO and OFL's corporate ratings is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug.5, 2013);
--'National Scale Ratings Criteria' (Oct. 31, 2013).