Fitch Revises Aldesa's Outlook to Negative; Affirms at 'B'
The Negative Outlook reflects Aldesa's recent weak financial results, which over the past 24 months have been below our expectations, leading to a material increase in Fitch-adjusted funds from operations (FFO) net leverage. Consequently, we believe that there is a risk that expected improvements in revenue and profitability could not restore a financial profile that is commensurate with a 'B' rating.
A downgrade is possible over the next 12 to 18 months once Fitch has assessed the recourse group's sales and margin evolution, working capital development and cash deployment. Fitch will focus on Aldesa's ability to generate sustainable FFO, allowing for material deleveraging towards an FFO adjusted net leverage of 4.5x.
Aldesa's IDR remains underpinned by an operating and liquidity profile in line with a 'B' rating. The company benefits from a growing and geographically diversified order book covering more than two years of revenue, satisfactory end-markets diversification, robust risk management and from the absence of material maturities over the next two years. We also view positively that adjusted net debt has been decreasing since 2011.
Fitch focuses its analysis on cash flow generated at the recourse group (Fitch's rating perimeter), primarily the engineering and construction (E&C) segment. Fitch adjusts leverage calculations for Aldesa to reflect the non-recourse nature of concessions by excluding related FFO and non-recourse debt, but including sustainable dividends.
Our net debt calculation is substantially higher than that reported by Aldesa. We take into account off-balance sheet obligations related to working capital management facilities (EUR66m at end-2014 of factoring and confirming) and operating leases (EUR12m at end-2014). We also assume that an additional EUR78m of cash is not readily available for debt repayment, including EUR70m to withstand seasonal working capital swings and EUR8m based on geographical location.
KEY RATING DRIVERS
Deterioration of Operating Performance
Financial performance of the recourse business weakened further over 2014 with contracting profits and revenues, albeit at a slower rate for the latter. The deterioration of EBITDA generation and margin has translated into weaker cash generation, despite lower cash tax, with FFO margin down at 2.4% in 2014, from 3.3% and 4.3% in 2013 and 2012, respectively. We acknowledge that the deterioration would have been less severe if not for delays on two constructions projects, and start-up costs related to projects with a new customer in Mexico. However, these events are not unusual and are inherent risks of constructions activities.
Deterioration of Credit Metrics
Fitch-adjusted FFO net leverage increased to 6.7x at end-2014, confirming the negative trend observed since end-2012. The main driver of the net leverage increase was deterioration in FFO generation, which more than offset a reduction in Fitch-adjusted net debt to EUR199m at end-2014 from EUR255m at end-2011.
Despite weaker cash generation on a FFO basis, Aldesa has been able to generate positive free cash flow (FCF), notably due to working capital inflows on the back of a growing backlog (advance payments) and a normalisation of payment delays from clients in Spain. The improvement of Aldesa's net working capital position also led to a material reduction in the use of factoring.
Uncertainty over Deleveraging Pace
We are confident that FFO generation and margins should recover over the medium term, due to solid organic growth prospects on the back of a growing backlog, improving profitability in new markets (e.g. Peru) and Aldesa's track record in winning and executing profitable projects. However, it is not certain if revenue and profitability could sustainably grow to return the company's financial profile to one that is consistent with a 'B' rating.
The mild recovery of the Spanish construction market will only gradually ease pressure on the profitability of new projects. In Mexico, there is a risk that the potential weaker demand from public bodies, in the context of lower oil prices, may not be fully offset by new contracts from the private sector. Furthermore, a shift in project mix to installations and non-residential building construction could weigh on expected margin improvements, as these contracts are less profitable than civil works. Poland is likely to remain a bright spot with strong macro-economic fundamentals, where the construction sector also likely to benefit from a new EU funding cycle.
Robust Backlog
Total backlog increased 9% in 2014 to EUR1.49bn, of which EUR1.1bn related to constructions projects. As such, the backlog-to-revenue coverage ratio reached 2.4x (2.0x in 2013) for the recourse group and 2.9x (2.6x in 2013) for the construction division. This level of revenue visibility is higher than a typical B-category E&C company. Fitch also positively views the company's more diversified order book across Spain, Mexico and Poland. Project concentration risk remains high, but this is mitigated by management's prudent approach to assess and manage contract risks.
Solid Track Record
Aldesa has robust risk management policies in place with no large loss-making contracts, a track record of sound execution and no evidence of large disputes. Despite being a second tier construction player in the Spanish market, management has taken a number of strategic steps that helped the company avoid the restructuring or even bankruptcy that has affected its competitors. Aldesa was one of few second tier players to diversify outside of Spain by concentrating on niche sub-segments such as railways and tunnelling. Using these sub-segments capabilities, it has managed to attain a top-10 market position in Mexico.
KEY ASSUMPTIONS
-Annual recourse EBITDA around EUR45m-EUR55m in 2015-2018
-FFO margin trending towards 3%-3.25%
-Strong turnover recovery in 2015, with gradual stabilisation of activity in Spain and mid-single digit growth in Mexico and Poland in 2016-2018
-Gradual reversal of the current net working capital position (payables greater than receivables)
-No dividends from non-recourse subsidiaries
RATING SENSITIVITIES
Negative: Future developments that could, individually or collectively, lead to a downgrade include:
-Fitch-FFO adjusted net leverage failing to decline towards 4.5x by end-2017 (2014: 6.7x) and FFO fixed charge cover failing to improve towards 2.0x (2014: 1.3x) by-end 2017.
-Deterioration of the liquidity profile with liquidity score below 1.0x (December 2014: 2.2x) and an increased dependency on factoring and short term lines.
-Negative FCF on a sustained basis.
-Evidence of supporting weakening non-recourse activities or a material increase in new concessions leading to equity contributions from the recourse business.
Positive: Future developments that could, individually or collectively, lead to positive rating action include:
-Fitch-FFO adjusted net leverage below 4.5x and FFO fixed charge cover above 2.0x on a sustained basis.
-Significant improvement in the operating risk profile driven by increased scale and internationalisation, reduced concentration risk and funding diversification.
-A material increase in steady income up-streamed from the concession business without a re-leveraging of assets.
LIQUIDITY
Aldesa's recourse liquidity at end-December 2014 was EUR249m. In addition to EUR145m of cash considered available by Fitch, Aldesa has access to undrawn committed banking facilities of around EUR104m, including a EUR100m revolving credit facility maturing in 2018. It provides sufficient headroom to cover debt maturities for the next 12-18 months and a sudden loss in factoring and confirming facilities. Overall, the maturity profile is not an immediate risk, with no major debt maturity over the next two years.
Seasonal working capital swings of EUR55m to EUR70m are covered by the additional EUR70m of cash viewed by Fitch as not readily available for debt repayment.
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