CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the ratings for Arendal, S. de R.L. de C.V. (Arendal) to 'C' from 'CCC'. A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
Restricted Default Appears Imminent
The downgrade reflects the absence of successful refinancing of Arendal's short-term debt and the increased likelihood that timely payment on its notes due May 23 will not be met. Over the next three months more than 70% of Arendal's total debt is due. Such concentrated debt maturities relative to an insufficient liquidity position and the working capital needed to fund its project backlog made it imperative that Arendal refinanced its debt maturities. The ratings reflect Fitch's view that the company will use its available cash to support existing operations and execute its project backlog while it continues to seek funding alternatives.
Customer and Project Concentration
Arendal has gained progressively larger projects which have increased its project concentration risks. A single large project has at times represented 40% of revenues or more. During 2015, the company also generated about 80% of its revenues from contracts with Pemex as the ultimate client. Considering the available backlog, revenues from Pemex will likely continue to represent a large portion of the company's revenue source and its project concentration risk is unlikely to diminish in the medium term.
Cash Flow Pressure
During 2015, Arendal's cash flow from operations (CFFO) was negative MXN893 million, representing about 23% of sales, largely due to higher working capital requirements. The company's working capital cycle grew by close to 100 days despite having only minimal revenue growth. Free cash flow (FCF) was negative MXN1.1 billion. Fitch expects CFFO and free cash flow to be negative in 2016 as the company continues to execute its project backlog. Fitch believes the capital injection to Pemex promised by the Mexican government to support its supplier payments will only minimally impact Arendal's cash flow in the near term as most of its working capital investments represent costs incurred but not yet billed.
A selective payment default or the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel would result in the IDRs being downgraded to Restricted Default 'RD'.
Successful debt refinancing or completion of a debt restructuring coupled with funding of operations through a combination of internal and external sources could result in positive rating actions.
Arendal's liquidity position is insufficient relative to near term debt maturities and projected negative cash flow generation. The company's cash balance at year-end 2015 was MXN889 million, compared to MXN3.9 billion of short-term debt maturities. This debt amount includes USD100 million of notes maturing May 23, 2016.
FULL LIST OF RATING ACTIONS
Fitch has downgraded Arendal's ratings as follows:
--Long-term Foreign Currency Issuer Default Rating (IDR) to 'C' from 'CCC';
--Long-term Local Currency IDR to 'C' from 'CCC';
--Unsecured notes due 2016 to 'C/RR4' from 'CCC/RR4'.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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