SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on Galvao Participacoes S.A. and its full subsidiary Galvao Engenharia S.A.:
Galvao Participacoes S.A. (GALPAR)
--Foreign and local currency Issuer Default Ratings (IDRs) downgraded to 'B' from 'B+';
--Long-term national rating downgraded to 'BBB(bra)' from 'A-(bra)'.
Galvao Engenharia S.A. (GESA)
--Long-term national rating downgraded to 'BBB(bra)' from 'A-(bra)'.
The Rating Outlook for the corporate ratings is Stable.
The downgrade of the ratings reflects the weakening of operating results and liquidity position of the Galvao Group on consolidated basis. The relevant deterioration of the group's credit metrics in the last 12 months (LTM) ended June 2011 indicates a weaker credit profile due to strong leverage and higher refinancing risks. The group's operational and financial performance is well below the initial expectations incorporated in previous ratings, and presents a marked deviation compared to robust results and conservative financial profile presented over last years.
The ratings incorporate the challenges of the Galvao group to strengthen its liquidity, reduce and lengthen debt and recover operating margins. The Galvao Group needs to operate in more solid basis of operational cash generation and, mainly, of liquidity in order to limit important risk factors currently observed. A stronger liquidity position is crucial in the heavy construction industry to sustain the strong working capital need, risks of delay, suspension or cancellation of projects and to provide adequate support to the group's strong growth in its contractor operations, as well as the ongoing diversification into infrastructure businesses, so as to return to more conservative metrics by 2012 and 2013.
The ratings of both companies are at the same category due to the strong financial link and integration of GALPAR with GESA as its full subsidiary, main operating company of the Galvao group and, historically, the group's cash generator. In LTM ended June 2011, GESA accounted for 96% of the group's consolidated revenues and 111% of the EBITDA, and provided upstream guarantees for 35% of GALPAR's consolidated debt.
The Stable Outlook reflects Fitch's views of a gradual and constant improvement in cash generation and credit metrics by 2012, however, without a return to the conservative parameters observed up to 2010. It also considers Fitch's expectation of a more conservative management of the group's financial profile. In addition, it incorporates Fitch's favorable outlook on the growth potential of the domestic contractor industry in view of the strong demand for infrastructure works in the domestic market where the Galvao group concentrates its operation and in satisfactory funding conditions which have been offered for these works.
Consolidated EBITDA Materially Affected By Higher Costs And Working Capital Of GESA:
GESA's operational cash generation was strongly affected in the first half of 2011 by increased costs and higher working capital needs associated with the suspension of certain works by the company, without the corresponding revenues, which depend on ongoing negotiations. Such factor resulted in losses of BRL117 million in company's cash generation in the LTM ended June 2011. For the second half of the year new losses are not expected.
GESA recorded a BRL73.9 million operating EBITDA in the LTM ended June 2011, a weak performance compared to the BRL164.7 million EBITDA obtained in 2010. The EBITDA margins also deteriorated to 3.4% from 9%, respectively. The negative impacts on GESA's cash generation negatively affected GALPAR's consolidated position. Over the same period, GALPAR's consolidated operating EBITDA reduced to BRL66.7 million from BRL223.5 million due to GESA's higher costs, which contributed for the narrowing of the consolidated EBITDA margin to 3% from 9%, respectively.
Liquidity Deterioration, High Leverage and Short-Term Debt Concentration:
At the end of June 2011, GESA presented total cash and marketable securities of BRL70.3 million, a very weak position compared to the BRL164.7 million at the end of 2010. The short-term debt strongly increased to BRL223.3 million from BRL23.3 million, over the same period, which increased the company's refinancing risk. On a consolidated basis, GALPAR held a total liquidity of BRL98.4 million, compared with BRL251.5 million at the end of 2010. The liquidity cover for the short-term debt was very weak at around 25% of the debt maturing in the short term, compared with a comfortable 363% at end 2010.
Fitch expects a partial recovery of the consolidated liquidity in the course of 2012, however, at levels below those of 2010. The group's financial strategy is based on the benefits of an expected liquidity from a growing cash generation from the projects in its backlog. Still over the first half of 2011, GALPAR's total consolidated debt increased to BRL1,017 million from BRL757 million in 2010 and BRL435 million in 2009. The consolidated debt increase was pressured by the debt taken by GESA in support of the expansion of its operations. The debt maturity profile became highly concentrated, with 43% maturing until end 2012.
The higher debt volume and the EBITDA narrowing led to a substantial increase in net leverage measured by net debt/EBITDA, to 13.8 times (x) at the end of June 2011, from 2.3x at the end of 2010. Fitch expects that on a consolidated basis, GAPAR can substantially reduce its leverage in 2012 to more adequate parameters for the rating category.
Waiver Approved, Substitution of Debt Covenant by Guarantee:
The increased leverage of GALPAR and GESA in the LTM ended June 2011 led to the non compliance of covenants, waiver and substitution of a debt covenant for guarantee related to the BRL300.2 million debentures issued by GALPAR in May 2010, with final maturity in May 2016. On Sept. 28, 2011, the debenture holders meeting authorized the waiver for the non compliance by GESA, as guarantor, of the reported net debt/EBITDA ratio of 3.4x, above the maximum 2.5x debt covenant at the end of June 2011. The debenture holders meeting also authorized the extinction of the covenant maximum net debt/EBITDA of 4.0x for GALPAR, and its substitution for additional guarantee of fiduciary assignment of a work contract amounting to BRL498 million.
Backlog Concentration, Backlog Expansion Ensures Growth:
Galvao Engenharia ranked seventh in revenues among Brazil's largest contractors in 2010. The total backlog has grown substantially to BRL6.3 billion in June 2011, from BRL2.3 billion in December 2009, and covers around 2.5 years of operations. The total backlog carries a concentration with 43% of the total represented by work contracts related to the oil & gas sector, 23% energy and 34% related to various sectors. Fitch expects the Galvao group to achieve a greater diversification in future backlog growth so as to reduce the concentration risk.
Potential Rating or Outlook Drivers:
The ratings can be negatively affected by maintenance or further deterioration of the weak consolidated operating results, low liquidity and debt concentration in the short term; suspension or cancellation of works, reducing revenues and cash generation; high backlog concentration by client and work; high dividend outflows reducing consolidated liquidity and higher guarantees given by GESA increasing its total adjusted debt.
The ratings can be positively affected by a consistent and sustainable recovery of the Galvao group's cash generation, combined with a significant improvement of its liquidity position and debt profile, as well as return of leverage to ratios nearer the historical levels.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 12, 2011;
--'Parent and Subsidiary Rating Linkage', dated Aug. 12, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
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