Fitch Downgrades Andino Investment Holding S.A.A. to 'B+'; Outlook Remains Negative
The downgrade reflects AIH's weaker than expected results, higher leverage and tight liquidity. Since 2014, AIH's operations have been affected by the economic slowdown in Peru, which has increased competition in its trade services business which is highly concentrated in the Port of Callao. AIH's gross adjusted leverage reached 5.9x at LTM June 2015 in PEN terms, above Fitch's expectation of 4.5x.
KEY RATING DRIVERS
Sluggish Performance Continues:
AIH's consolidated revenues for 2015 and 2016 are expected to be at the same level or lower than 2014 while higher margins should preserve EBITDA. During the LTM ended June 30, 2015, revenues were USD214 million, lower than 2014 (USD220 million) and 2013 (USD227 million), while EBITDA remained at around USD26 million as the company improved its EBITDA margin at 12.3% from 11.9% in 2014. The company is making efforts to improve operational margins by reducing costs in its logistics services business, provided by Neptunia, and by focusing on higher-profit contracts. These are long-term contracts for maritime services provided by Cosmos to oil companies in the north of Peru. Cosmos' improvements have partially off-set lower results in the logistics services provided by Neptunia. Cosmos and Neptunia are the primary wholly-owned AIH's subsidiaries which explained more than 80% of the group's EBITDA as of LTM June 2015.
High Leverage to Remain:
Fitch does not expect the company to delever as previously anticipated. Fitch's Base Case projections result in a gross adjusted leverage ratio of between 5.5x-6.0x in 2015 and 2016. The company's gross adjusted debt/EBITDA and net debt/EBITDA ratios were 5.9x and 5.5x in PEN terms, respectively, for the LTM ended June 30, 2015. AIH's total debt was USD146 million at the end of June 2015 mainly composed of its international issuance of USD115 million notes during November 2013.
The company's USD115 million bond indenture considers a limitation on additional indebtedness of a consolidated net debt to consolidated EBITDA ratio no greater than 4.0x from issuance until June 30, 2015 and 3.5x thereafter. The indenture also includes carve-outs that allow for additional new debt of up to USD35 million despite being above the maximum financial leverage covenant. As of June 2015, the company's financial leverage ratio was above the covenant maximum limit and the additional new debt incurred was USD18 million short-term commercial papers issued early this year which is below the maximum allowed for additional indebtedness (USD35 million).
Negative FCF:
FCF is projected to be negative in 2015 and should remain negative in the next coming years depending on capital expenditures. Following the economic slowdown and the company's limitations on indebtedness, Fitch expects lower capex levels in 2016-2018 at about 4% of revenues compared to more than 10% in 2014 and 2015. Over the last few years, capex was mainly allocated in equity injections to joint-venture projects and dividends to AIH are not expected for the next five years due to their project-finance distribution restrictions.
Increasing Competition:
Peru's economic slowdown and lower international commodity prices have reduced international trade in key ports such as Callao where logistics service operators such as Neptunia are facing higher competition. AIH's business position in the port of Callao has weakened since 2014; Callo is the main port in Peru and accounts for 80% of international trade activities. During the LTM as of June 2015, AIH's temporary storage of import & export containers at the Callao port fell by 12.9% while its market share reduced to 9.0% versus 10.4% in June 2014. Despite the decrease in market share, AIH still maintains a well-diversified customer base with long-term business relationships and has storage facilities strategically located next to the Callao port and airports. On the maritime services side, Cosmos' business position shows a positive trend for fleet and off-shore barge operations for oil companies.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for AIH include:
--Revenues growth at 0% in 2015 & 2016 and 3% in 2017 & 2018;
--EBITDA margin recovers to 12.5% in 2015, 13.0% in 2016 and 13.5% in 2017 and onwards;
--Capex of USD20 million for 2015;
--Capex/revenues at 4% for 2016 and onwards;
--No major acquisitions or capital injections in joint-ventures in 2016-2018;
--No dividend paid by AIH or received from joint-ventures.
RATING SENSITIVITIES
Factors that could result in a negative rating action include further deterioration in the company's credit metrics leading to gross adjusted leverage above 6.0x in a sustained basis due to increasing competition or important macroeconomic downturn. Delays and/or higher capital needs for infrastructure projects sponsored by AIH as well as new acquisitions could pressure the consolidated leverage and negatively affect the rating.
A positive rating action is not likely in the near term. An Outlook revision to Stable includes improvement on liquidity position and cash flow generation while maintaining leverage levels below 6.0x (gross adjusted leverage). More geographic diversification and successful development and/or consolidation in infrastructure projects that lead to relevant and stable cash flow generation would also be considered as a positive factor.
LIQUIDITY
AIH's liquidity reduced to USD10.8 million as of June 30, 2015 from USD35.5 million in 2013 while its short-term debt increased to USD25.3 million. Earlier this year, AIH issued USD18 million in short-term commercial paper in the local market to fund working capital and capex, which the company aims to refinance into longer term maturities when they come due between January and April 2016. There are no major debt amortizations until its USD115 million senior unsecured notes due in 2020. AIH maintains about USD300 million of unencumbered fixed assets, which could be borrowed against in case liquidity further deteriorates.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
Andino Investment Holding S.A.A.
--Foreign currency IDR downgraded to 'B+' from 'BB-';
--Local currency IDR downgraded to 'B+' from 'BB-';
--Senior unsecured notes downgraded to 'B+' from 'BB-' and assigned a Recovery Rating of 'RR4'.
The Rating Outlook is Negative.
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