OREANDA-NEWS. Fitch Ratings has downgraded the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Andrade Gutierrez Engenharia S. A. (AGE) to 'B-' from 'B+', as well as its long-term National Scale rating to 'BB-(bra)' from 'A-(bra)'. These actions affect approximately USD500 million of issued debt by Andrade Gutierrez International S. A. (AGI) due April 2018, which AGE unconditionally and irrevocably guarantees. The Rating Outlook remains Negative. A complete list of ratings follows at the end of this press release.

KEY RATING DRIVERS

The rating downgrades reflect AGE's liquidity deterioration due to difficulties the company has faced in monetizing its receivables, combined with a continued challenging business environment. In Brazil, the adverse macroeconomic scenario, lack of new projects, and more scarce and costly credit lines continue to affect AGE's operations and credit profile. Abroad, the backlog renewal is impaired by moderate oil prices, as a large part of the company's clients are countries that depend on the commodity exports to support their infrastructure agenda. In order to protect its liquidity, AGE has reduced activities on projects that are facing delays in payments or not progressing as expected due to clients' financial issues.

AGE's ratings are supported by its scale as one of the largest contractors in Latin America with 34% of revenues generated abroad. The market value of the AG group investments in Companhia Energetica de Minas Gerais (Cemig; 'A(bra)'/Outlook Negative) and CCR S. A. ('AA(bra)'/Outlook Stable) are also positive considerations, and are estimated at around BRL6.4 billion. The signing of the lenience agreement related to the Lava-Jato scandal, determination of the BRL1 billion fine and the extended time to pay it of 12 years were considered as positive, as they remove uncertainties linked to this process, and potentially allow the company to participate in more bids for new works.

The Negative Outlook is due to the uncertainties regarding AGE's capacity to manage its working capital needs that have been consuming its liquidity cash rapidly. It also considers the challenging performance of the Brazilian economy in 2016 and 2017, along with the recovery of oil prices that may continue to limit backlog renewal. Fitch also expects the more limited and expensive access to debt markets to continue.

Pressured and Concentrated Backlog

Fitch projects that AGE's total backlog will decline 21% in 2016 and grow 4% in 2017 in BRL terms. The anemic operating environment has resulted in backlog consumption and poses uncertainties as to backlog replacement capacity. AGE's backlog decreased to BRL22.1 billion in March 2016 from BRL25.2 billion in December 2015 and BRL30 billion in December 2014. The adverse macroeconomic conditions and the political crisis have blocked the infrastructure agenda in Brazil. International backlog renewal remains affected by the moderate oil prices, as a large part of AGE's international backlog derives from countries that depend on oil exports, such as Venezuela. As for 2017, the scenario may improve with the Federal Government agenda for new concessions in Brazil.

AGE's backlog is concentrated in several ways, which pressures its credit quality. The contract portfolio is exposed to a small number of projects, to public clients, and to countries that depend on oil exports. In March 2016, AGE's 10 largest projects represent 73% of its backlog. At the same time, public clients, which tend to have erratic payment behavior, were 89%. Projects in countries known for their oil export dependency, such as Venezuela, Angola, Guinea Equatorial, among others surpasses 60%. Venezuela, which is going through an economic crisis, represents 42% of AGE's backlog.

Lenience Agreement Signed

Fitch believes signing the lenience agreement was an important step for the group. The deal came at the expense of a BRL1 billion fine to be paid over the next 12 years as well as the application of very restricted compliance measures going forward. The company has been entitled to participate in public bids and applying to access public funding. The agency also expects AGE to resume its condition to provide services to Petrobras in the short term, which could add projects to its backlog. The lenience agreement partially mitigates concerns about the company's refinancing capacity.

Cash Flow Still Pressured

Fitch forecasts that AGE's cash flow from operations (CFFO) will decline to BRL87 million in 2016, due to negative working capital of BRL161 million, with negative free cash flow (FCF) of BRL97 million in the same year. In the last 12 months (LTM) ended March 31, 2016, CFFO of BRL42 million was heavily reduced by BRL667 million of working capital needs, while FCF was negative at BRL362 million.

We also expect AGE to have adjusted net leverage of 3.3x in 2016 and 1.5x in 2017, the result of BRL290 million and BRL346 million EBITDA generation, respectively, in the same period. As of the LTM ended March 31, 2016, AGE's adjusted net leverage reached 5.3x. AGE's EBITDA continues to be affected by the weak operating environment. In March 2016, total adjusted debt reached BRL2.5 billion, mostly composed of AGI's BRL1.6 billion in outstanding bonds and working capital lines of BRL685 million.

KEY ASSUMPTIONS

--Backlog falls 20% in Brazil and 6% abroad in USD terms in 2016. It declines 5% domestically and stays flat in foreign markets in 2017 in USD;

--Net revenues decline 15% in 2016 and 12% in 2017 due to the lack of new contracts;

--EBITDA margins of 1.5% in Brazil and 10% abroad in 2016, leading to a consolidated margin of 5.7%. As of 2017, domestic margins increase to 2.5% and the international margins returns to historical levels of 12%.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--Continued deterioration of the company's liquidity and CFFO generation capacity;

--Difficulties in replacing backlog domestically and abroad;

--Material problems collecting receivables, which can affect working capital needs.

An upgrade is unlikely in the short term. However, future developments that may, individually or collectively, lead to a positive rating action include:

--Recovery in its business profile on a sustainable basis with strengthened backlog replacement capacity;

--Lower debt service challenges for AGE, which can occur through capital injections, debt refinancing, or asset sale.

LIQUIDITY

Fitch believes AGE's liquidity is under pressure. The company has not been able to monetize receivables as expected due to the financial deterioration of its clients and prolonged delays to receive invoices from banks and multilateral agencies. AGE is considering selling part of its concessions in order to reinforce its liquidity which has not been considered on Fitch's base case. Access to funding has been restricted by higher cost and shorter tenors than before. The main repayment is AGI's USD500 million bond maturing in April 2018 that has been serviced by AGE.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

Andrade Gutierrez Engenharia S. A. (AGE)

-- Long-Term Foreign and Local Currency IDRs to 'B-' from 'B+';

--National long-term rating to 'BB-(bra)' from 'A-(bra)'.

Andrade Gutierrez International S. A. (AGI)

--USD500 million senior unsecured bonds due April 2018 to 'B-/RR4' from 'B+/RR4'.