Fitch Downgrades Camargo Correa to 'BB-'; Outlook Revised to Stable

CHICAGO--()--Fitch Ratings has downgraded the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Camargo Correa S.A. (Camargo) to 'BB-' from 'BB' and the Long-Term National Rating to 'A+(bra)' from 'AA-(bra)'. The Outlook has been revised to Stable from Negative. A full list of rating actions follows at the end of this release.

Camargo's downgrade reflects the deterioration of the credit profile of its key operating asset - InterCement Participacoes S.A. (InterCement; 'BB-'/Outlook Stable), and the growing refinancing pressure at Camargo's holding company (HoldCo) level in 2017 and beyond. The harsh business environment for the Engineering & Construction, Textile, and Homebuilding industries (Camargo's others main operations) adds further volatility to the group's business profile. The Stable Outlook reflects Camargo's current adequate liquidity position, supported by BRL2.7 billion from the sale of Alpargatas S.A. late in 2015, and by an unused stand-by facility of BRL2 billion.

Camargo's inability to find options to refinance the short-term debt allocated at the holding level and for its fully-controlled subsidiaries successfully in the next six months could pressure the ratings.

KEY RATING DRIVERS

Deterioration in Cement Business; Adequate Liquidity is Key

InterCement, the cement division, accounted for 60% of Camargo's consolidated revenues and 69% of its EBITDA during 2015. Net leverage within this business unit was 4.5x, as per Fitch's methodology. InterCement's credit metrics have suffered materially over the last 12 months as a result of the difficult operating environments in its key markets, mainly in Brazil, which has led to significantly lower EBITDA generation.

Fitch views InterCement's ability to generate positive FCF through the business cycle as a credit positive, but it has not been enough to improve the company's capital structure. InterCement's debt amortization schedule is manageable and its cash position is adequate to support operating cash flow volatility in the short term. Liquidity is sufficient to cover debt coming due until 2018.

Lava-Jato Investigation; Backlog Rebound is a Challenge

Camargo's subsidiary Construcoes e Comercio Camargo Correa S.A. (CCCC) was one of 23 companies involved in the Lava-Jato investigation. Camargo announced leniency deals reached with public authorities and fines of BRL104 million and BRL700 million, respectively. We believe that any new developments about Camargo and the investigation could bring additional uncertainties and would pressure Camargo's ratings. As a whole, CCCC contributed approximately 15% to Camargo's consolidated EBITDA during 2015. The company will be challenged to replace its backlog which extends only through 2018.

High Leverage

Camargo experienced deterioration in its consolidated credit metrics due to the difficult operating environment in Brazil. Consolidated net leverage increased to 5.9x at Dec. 31, 2015 from 4.3x at Dec. 31, 2014. Fitch projects Camargo's net leverage will remain around 6.0x on average in 2016 and 2017 due to lower cash flow generation across its businesses, and will be partially offset by reductions in capex.

On a stand-alone basis, Camargo's net leverage in terms of received dividends to parent company net debt was 3.7x (holding company debt of BRL4.4 billion, cash of BRL928 million and dividends received of BRL948 million). We estimate a lower dividend inflow during 2016 and 2017 of around BRL400 million, as only the transportation and energy segments of Camargo will be able to maintain dividends distribution within this period.

Diversified Asset Base

Camargo's ratings also incorporate its broad business diversification. The ratings consider the diversification and credit quality of Camargo's dividend flow, with approximately 50% of the company's dividend receipts expected to come from its toll road concession and energy concession businesses. In the toll road concession segment, Camargo holds 17% participation in CCR S.A., which Fitch rates locally at 'AA-(Bra)'/Watch Negative, and in the energy segment, Camargo holds 23.6% in CPFL Energia S.A., rated locally at 'AA-(Bra)'/Outlook Negative.

KEY ASSUMPTIONS:

--13% decline in Brazilian Cement volumes in 2016;

--The tough operating scenario for the Engineering & Construction and Textile segments continues;

--No dividends inflow from InterCement during 2016, and dividends around BRL380 million from CCR and CPFL;

--Maintenance of robust liquidity profile.

RATING SENSITIVITIES

Negative Rating Action: Fitch would view a combination of the following as negative to credit quality:

--Inability to successfully refinance its 2016 and 2017 maturities;

--Material decline in the group's consolidated liquidity position;

--Sustained net leverage metrics above 6.0x, on a sustainable basis;

--New developments in Lava Jato investigation and material fines and restrictions on participating in local public contracts.

Positive Rating Action: Factors that could lead to a positive rating action:

--Additional proactive steps by the company to materially bolster its capital structure in the absence of high operating cash flow, such as a material asset sale.

--Faster than expected deleveraging to below 4.5x on a sustained basis, and consistent free cash flow generation to pay down gross debt levels.

LIQUIDITY AND DEBT STRUCTURE

On a stand-alone basis, Camargo faces increasing refinancing risks beginning in 2017. The weaker operating cash flow generation of its controlled business and lower dividends inflow will pressure HoldCo liquidity in 2017. The HoldCo faces BRL578 million of debt maturities in 2016 and BRL1 billion in 2017, but its controlled subsidiaries, excluding InterCement, have additional maturities of BRL1.6 billion in 2016 and BRL400 million in 2017. Including other subsidiaries' cash resources, pro forma cash at the HoldCo is approximately BRL2.7 billion, which included the resources from Alpargatas sales. Positively, Camargo has a BRL2 billion stand-by facility available until May 2017.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following:

Camargo Correa S.A.

--Long-Term Local Currency IDR to 'BB-' from 'BB';

--Long-Term Foreign Currency IDR to 'BB-' from 'BB';

--Long-Term National Rating to 'A+(bra)' from 'AA-(bra)';

Fitch has also affirmed the following:

--Short-Term National Rating at 'F1(bra)'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: [June 29, 2016.]

Additional information is available at 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

Parent and Subsidiary Rating Linkage (pub. 10 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869363

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008290

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008290

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
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Debora Jalles
Director
+1-312-606-2338
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55-21-4503-2227
or
Media Relations
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+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Debora Jalles
Director
+1-312-606-2338
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55-21-4503-2227
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com