MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned the following initial ratings for Arendal, S. de R.L. de C.V. (Arendal):
--Foreign Currency Long-term Issuer Default Rating (IDR) at 'B-';
--Local Currency Long-term IDR at 'B-';
The Rating Outlook is Stable.
The ratings reflect Arendal's historically track record and technical experience in the Mexican heavy construction industry as a recognized player in the construction of fluid transportation systems and plants, its participation in both public and private sector projects across the Mexican territory, and its positive operating performance despite a challenging economic environment. The ratings also reflect the company's limited financial flexibility and weaker credit protection measures when compared to historical levels. In addition, the ratings incorporate the characteristics of the industry which is highly linked to economic cycles, as well as the current under developed corporate governance structure.
The company's has a relevant business position in the construction of pipelines in terms of kilometers built during the last years. Arendal engages in project contracts that include full or partial engineering, procurement and construction of pipelines and plants. Also, the company has the capacity to execute projects across all the Mexican territory and to manage efficiently its technical and personnel resources. Arendal's competitive advantage among industry peers includes an historical completion rate of around 98% of its project before or on settled dates. Customers and commercial partners in either public or private sectors recognize the company's commitment to satisfy quality and security requirements. Fitch considers that these elements will contribute to maintain its business position in the long term.
Fitch believes that the company participates in an industry exposed to economic cycles which is reflected in volatility in sales and operative margins throughout the years. Additionally, the ratings incorporate the high competition between domestic and foreign companies in the heavy construction industry.
During the last five years the company has maintained its organic growth despite the decrease in the level of economic activity in 2008 and 2009, as well as the weak recovery in 2010. Revenues reported by the company in 2010 amounted MXN752 million, while operating income reached MXN64 million. Compounded annual growth rate (CAGR) of revenues and operating income for the last five years was 3% and 17%, respectively. These factors, in Fitch's opinion, reflect management's commitment and ability to adjust its operative and business strategies under the presence of an unfavorable economic environment.
Fitch considers that revenue diversification expected by the company's strategies will contribute to a reduction of business risks and cash flow volatility. Arendal had a mix of revenues significantly oriented towards the public sector, with PEMEX being its main customer in 2010 and 2009. While this allows the company to maintain a relevant business position for future projects, it also concentrates the business' operative generation.
The company's financial position and flexibility is limited, as a result of its business strategy and adverse economic situation. As of Dec. 31, 2010 the EBITDA to interest and total debt to EBITDA ratios were 1.6 times (x) and 4.9x, respectively, which compare favorably with the 1.3x and 8.2x at the end of 2009. However, current ratios are above historical parameters reported by the company. The total debt as of Dec. 31, 2011 amounted MXN398 million, and around 72% was guaranteed by the cash flow from the projects. In Fitch's view, a gradual and consistent strengthening of the company's credit metrics combined with higher operative generation and adequate debt management, could lead to positive rating actions.
Fitch considers that the high concentration of short-term debt limits the liquidity position of the company, as it depends on the management's ability to obtain new projects and financing, as well as to handle efficiently its receivables days, allowing the company to finance working capital requirements and improve its debt maturity profile. Arendal's financing strategy is to secure the amount of debt with the cash flow coming from the projects allowing the company to obtain additional financing and continue growing.
The ratings are constrained by the current underdeveloped corporate governance of the company, which include, among other issues, the participation of key executives in the business operation, lack of independent members in the Board of Directors as well as alternative overseeing committees, and related party transactions.
Key rating drivers:
The ratings could be negatively pressured by the deterioration of Arendal's credit metrics as a result of a downturn in the heavy construction industry or a decline in its operative performance. A rating downgrade could also be driven by limited access to financing sources affecting the company's liquidity position.
As mentioned before, factors which could lead to a positive rating action include a combination of stronger credit metrics, improved liquidity position, and full implementation of corporate governance practices.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 12, 2011;
--'Evaluating Corporate Governance', Dec. 16, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405
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