Fitch Affirms CLISA's Foreign and Local Currency IDRs at 'CCC' and 'B-'
The 'RR4' Recovery Rating for the company's senior unsecured notes outstanding reflects an average expected recovery given default and is in line with the RR soft cap established for Argentina.
The Rating Outlook for the company's local currency IDR is Negative.
KEY RATING DRIVERS
CLISA's 'CCC' foreign currency ratings are constrained by the sovereign rating of Argentina, which has an 'RD' foreign/local currency IDR. Fitch has assigned a country ceiling of 'CCC' to the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates, including CLISA to 'CCC'.
Country ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates, which may prevent them from converting local currency (LC) to any foreign currency (FC) under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Key concerns of corporates domiciled in Argentina include high inflation, government meddling, economic uncertainty, and limited access to debt markets, especially after the country's recent default.
STRONG MARKET POSITION: CLISA has a strong market position as one of Argentina's largest privately owned industrial conglomerates. The company has experienced a slowdown in the construction segment as Argentine economic growth has stalled since 2013.
CLISA operates in four main businesses: construction and toll road concessions (through Benito Roggio e Hijos [BRH]), water treatment, waste management (CLIBA), and transportation. Over the last five years, CLISA's cash flow generation has held up relatively well despite political and economic instability and following positive trends for construction, which is primarily driven by public works.
DEVALUATION IMPACTS RESULTS: During the last 12 months (LTM) ended March 31, 2015, the company reported revenues and EBITDA of USD879 million and USD131 million, respectively. This compares negatively with 2013 results, on a dollar basis, as revenues and EBITDA declined by 20% and 25% versus full-year 2013 results. The large decline can be attributed to a 42% currency depreciation of the Argentinian Peso versus the U.S. Dollar between year-end 2012 and year-end 2014. On a peso basis, the company's revenues and EBITDA grew by 14% and 10% respectively during the same period.
POSITIVE DEBT EXCHANGE: In September 2014, the company proposed an exchange offering for its 9.5% USD120 million ON Clase 3 notes due in 2016. The notes had three equal amortizations scheduled for 2014-2016, and the initial offer was to exchange the notes for 11.5% ON Clase 4 notes due in 2017. The exchange was then amended to push back the maturity date until 2019. In October, CLISA announced that holders of USD87.1 million in ON Clase 3 notes agreed to the exchange, which represented a positive development for the company.
On a dollar basis, the company's total debt as of March 2015 totaled USD327 million which is slightly above the USD320 million reported as of year-end 2013. Half the debt is short-term. Argentine corporates typically carry significant short-term debt loads given the general lack of availability of long-term financing in the domestic market. The debt exchange has significantly improved the company's debt profile, as the current 50:50 ratio between short-term debt and long-term debt improved from 63:37 as of year-end 2013.
CYCLICAL BUSINESS: The company's cash flow is exposed to the cycles of the construction industry and public works in Argentina. While infrastructure needs remain high, the construction segment decelerated during the last two years due to the macroeconomic slowdown in Argentina and as the execution of government infrastructure projects has slowed down this year heading to the Presidential elections scheduled for October 2015 (if there is a run-off, the second round would take place in November). This year has seen the government's focus shift towards stimulating the housing market rather than large infrastructure projects. The company is also exposed to collection risk derived from having the government as its main counterparty.
Post-elections, CLISA is in a solid position for a reacceleration of construction growth as its construction backlog continued to be strong at US$731 million in March 2015 (AR$6.45 billion) allowing the company to maintain an important cash generation source for approximately three years. The company's construction backlog has grown by 51% since December 2012.
REGULATORY RISK: CLISA's main activities depend on contractual agreements and government regulations at the national, provincial and municipal levels. Exposure to regulatory risk derives from the delay in the renegotiations of public service contracts. In particular, in its mass transportation subsidiary Metrovias there has been past political risk when the National Government attempted to transfer the subway concession to Buenos Aires City. Most of Metrovias income is generated from subsidies from the National Government. However, in April 2013, Metrovias and SBASE signed an agreement in which SBASE granted exclusively to Metrovias the operation and maintenance of the subway, excluding the exploitation of collateral services and the execution of works and investments. The term of the contract is two years, extendable for two more years plus an option for one addition year by SBASE.
The company has faced more recent pressure in the commuter railroad services business. In February 2015, the Argentine government notified CLISA that, it was immediately rescinding the company's right to operate the San Martin and Mitre commuter railroad services. Via this motion, the government asserted control over these railroad services.
RATING SENSITIVITIES
CLISA's ratings could be negatively affected by a combination of the following: further economic deterioration and the Republic of Argentina's inability to convert and transfer foreign exchange for CLISA; a significant deterioration of credit metrics; and/or the adoption of adverse public policies that can affect the company's business performance in any of its business segments.
A positive rating action in the short to medium term is considered unlikely given Argentina's current sovereign restricted default rating.
LIQUIDITY AND DEBT STRUCTURE
IMPROVED LIQUIDITY: Post 2014's debt exchange, the company has an improved liquidity profile. In March 2015, the company reported USD74 million in cash and equivalents, which represents 0.5x short-term debt of USD163 million. Given Argentine corporates have a significantly higher level of short-term debt versus regional peers, this is a relatively solid level of cash and equivalents to short-term debt ratios for Argentine corporates.
Leverage, defined as Total Debt:EBITDA was a relatively solid 2.5x in the last 12 month (LTM) March 2015 period. This was higher than the 1.8x level reported in 2013, as revenues and EBITDA growth have lagged inflationary growth. Fitch is forecasting leverage levels in the 3x level in the short-to-medium term.
KEY ASSUMPTIONS
--Starting with 2015, financial forecast reflects loss of Mitre/San Martin train commuting services;
--2015 financial results reflect slight decline in Construction revenues as sector is expected to remain slow leading up to elections;
--Long-term, expect revenues to correlate with inflationary trends;
--Company is expected to continue rolling over short-term debt on an annual basis;
--Leverage expected to remain in the 3x level, on a dollar basis, over next five years.
Fitch has affirmed the following ratings:
Compania Latinoamericana de Infraestructura y Servicios S.A.
--Foreign currency IDR at 'CCC';
--Local currency IDR at 'B-';
--International senior unsecured bond ratings at 'CCC/RR4'.
The Rating Outlook for the local currency IDR is Negative.
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