CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded Andino Investment Holding S.A.A.'s (AIH) Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) to 'B-' from 'B+'. Fitch has also downgraded AIH's senior unsecured notes to 'B-' and assigned the bonds a Recovery Rating of 'RR4'. The Rating Outlook remains Negative. A complete list of rating actions follows at the end of this press release.
The downgrade and Negative Outlook reflects AIH's weakening ability to service its debt due to declining operating cash flow, as a result of the macroeconomic slowdown in Peru and increasing competition in its market sectors.
KEY RATING DRIVERS
Weak Operating Results
AIH's consolidated EBITDA was PEN58 million as of the LTM ended June 2016, 18% lower than 2015's EBITDA (PEN71 million). During this period EBITDA margin declined to 8.7% as of the LTM to June 2016 from 10.6% in 2015. The first half of 2016 was particularly hard for the company as investors postponed decisions during the presidential elections. The company is attempting to improve operational margins by reducing costs in its logistics services business, Neptunia, and by focusing on higher-profit, long-term contracts at its maritime services subsidiary, Cosmos. In order to centralize operations and get more savings through synergies Cosmos and Neptunia are being merged. Together they account for about 80% of the group's EBITDA.
Increasing Competition
Neptunia's results have been hit by the economic slowdown in Peru, which has increased competition in the Port of Callao. This port accounts for 80% of Peru's international trade activities. AIH's business position in the port of Callao has weakened since 2014, but AIH still maintains a well-diversified customer base with long-term business relationships and has storage facilities strategically located next to the Callao port and airports. On the maritime services side, Cosmos' business position shows a positive trend for fleet and off-shore barge operations for oil companies in Peru and new potential operations in Guayaquil-Ecuador.
High Leverage
AIH's gross adjusted leverage reached 8.0x at LTM ended June 2016 in PEN terms. This was above Fitch's expectation of between 5.5x-6.0x due to lower cash flow generation. Fitch's revised base case projections result in a gross adjusted leverage ratio of around 7.5x by YE2016 and 6.5x by YE2017 depending on recovery of operating results as well as debt reduction through non-core fixed asset sales. AIH's total debt was PEN460 million at the end of June 2016. The company's USD115 million bond indenture includes a limitation on additional indebtedness when consolidated net debt to consolidated EBITDA ratio is greater than 3.5x. The indenture also includes carve-outs that allow for additional new debt of up to USD35 million. As of June 2016, the company's financial leverage ratio was above the covenant maximum limit and USD26 million of the carve-out had been used.
Neutral to Positive FCF Expected
Fitch expects capex in 2016-2017 to drop to about 2.5% of revenues, as maintenance capex has been reduced to USD2 million and expansion capex was restricted to complete the logistic centre at Lima hub project (about USD5 million is the remaining capex for this project). This compares with capex at more than 10% of revenues in 2014 and 2015. Capex was mainly allocated for equity injections to joint-venture infrastructure projects. AIH also invested USD10 million during 2015 for the logistic centre at Lima-hub project. Lower capex should lead to positive FCF for the next two years. FCF was positive at PEN19 million and capex was PEN44 million as of LTM ended June 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for AIH include:
--Revenues growth at 3% per year in 2016-2018;
--EBITDA margin of 9% in 2016 improving to historical 11% in 2018;
--Capex/revenues at 2.5% for 2016-2018 (includes maintenance capex of USD2 million);
--Non-core fixed assets sales of USD10.7 million in 2016 (already achieved);
--New USD12 million eight-year credit loan by YE2016;
--No acquisitions or capital injections in joint-ventures in 2016-2018;
--No dividend paid by AIH or received from joint-ventures.
RATING SENSITIVITIES
Factors that could result in a negative rating action include further deterioration in the company's credit metrics leading to gross adjusted leverage above 7.0x for the next 12-18 months while liquidity and refinancing risks persist. Delays and/or higher capital needs for infrastructure projects sponsored by AIH and/or new acquisitions (not expected at this time) could pressure the consolidated leverage and negatively affect the rating.
A positive rating action is not likely in the near term. An Outlook revision to Stable includes improvement on liquidity position and refinancing risk through recovery on cash flow generation, medium-term loan refinancing and/or non-core asset sales, while maintaining gross adjusted leverage below 7.0x.
LIQUIDITY
AIH's cash position reduced to PEN12 million as of June 2016 from PEN34 million in 2015 while its short-term debt was PEN67 million as of June 2016. AIH issued USD18 million in short-term commercial papers in the local market during 2015 to fund working capital and capex of USD10 million for its Lima-hub project. The outstanding commercial papers were USD9 million as of June 2016 which were paid in August with funds from the sale of non-core fixed assets. AIH sold two pieces of land for close to USD11 million and is in the process to sell two more for additional USD26.5 million. In addition, AIH should obtain a USD12 million 8-year syndicated bank loan for short-term debt refinancing. There are no major debt amortizations until its USD115 million senior unsecured notes due in 2020. AIH maintains about USD300 million of unencumbered fixed assets, which could be borrowed against to support liquidity.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
Andino Investment Holding S.A.A.
--Foreign currency IDR downgraded to 'B-' from 'B+';
--Local currency IDR downgraded to 'B-' from 'B+';
--Senior unsecured notes downgraded to 'B-' from 'B+' and assigned a Recovery Rating of 'RR4'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Country-Specific Treatment of Recovery Ratings (pub. 28 Apr 2016)
https://www.fitchratings.com/site/re/880875
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)
https://www.fitchratings.com/site/re/886557
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
https://www.fitchratings.com/site/re/879564
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013160
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013160
Endorsement Policy
https://www.fitchratings.com/regulatory
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