Fitch Rates Construtora Andrade Gutierrez's IDR 'BBB-'; Outlook Stable
SAO PAULO -- April 15, 2013
Fitch Ratings has assigned the following ratings to Construtora Andrade
--Foreign Currency Issued Default Rating (IDR) 'BBB-';
--Local Currency IDR 'BBB-';
--National Scale Rating 'AA(bra)'.
The Rating Outlook is Stable.
Key Rating Drivers
CAG's investment grade ratings reflect its conservative financial profile
supported by its track record of strong liquidity, adequate capital structure
and above-average margins for its operating industry, engineering and
construction. The company benefits from its long and successful track record
of operations, sustainable growth and favorable business position as the
second largest construction company in Brazil. Fitch expects CAG to maintain
its conservative capital structure, with a manageable debt amortization
profile combined with growth in operations during the next years.
The ratings also incorporate the company's sizable backlog of projects which
supports around four years of operations. CAG is exposed, however, to
concentration risks, as 80% of its backlog is linked with public clients and
concentrated on a small amount of relevant projects, from the volatility
inherent to the heavy construction segment, in addition to the moderate direct
exposure to non-investment grade countries.
The ratings are also restricted by CAG's financial exposure due to
off-balance-sheet debt guarantees offered to non-operating affiliated
companies of Andrade Gutierrez Group (AGG). Such exposure risk is mitigated by
the quality of assets in which the group has ownership and whose dividends
should support the guaranteed debt. These assets have presented matured
operations in industries with highly predictable results and characterized by
the track record of strong dividends distribution that should cover the
guaranteed obligations by CAG and mitigate pressures over its liquidity and
CAG is the main operating company of AGG, one of the main conglomerates in
Brazil, with operations in heavy construction and ownership of assets within
telecommunications and infrastructure concessions.
CAG has a conservative liquidity policy. By the end of December 2012, the
company's cash and marketable securities totaled BRL1.9 billion, stable
compared with the balance in December 2011 and equivalent to 265% of its
short-term debt of BRL711 million. The company has total debt maturities of
BRL972 million in 2014. The high liquidity is positive, given the volatility
of the heavy construction sector. Fitch expects CAG to be successful in its
strategy of preserving an extended debt maturity profile and continue to
maintain a relevant cash balance to support growth of its activities going
Adequate Capital Structure
By the end of December 2012, CAG's adjusted total debt was BRL3.2 billion, of
which BRL1.4 billion was off-balance-sheet debt. These numbers compare with
the BRL1.8 billion in total adjusted debt reported by the end of December
2011, of which only BRL140 million was off-balance-sheet debt. This growth
basically reflected the increased guarantees given by CAG to the non-operating
subsidiaries of AGG. The company's adjusted leverage and adjusted net leverage
were 5.9x and 2.4x, respectively, by December 2012. Excluding the
off-balance-sheet debt, these ratios would be significantly reduced to 3.3x
CAG's net debt is manageable, despite the guarantees offered by the company,
since the resources to support the guaranteed debt should come from the
group's participation in assets with mature operations in sectors with
reasonable results predictability and a strong track record for dividend
distributions. Fitch estimates that CAG's liquidity should not be pressured by
its off-balance-sheet obligations. The coverage ratio for the guaranteed debt
by the estimated projected dividend flow going forward is satisfactory.
High Operating Margins
CAG has reported a consistent increase in operations, with average growth of
17% during the past four years. During 2012, the company's net revenue totaled
BRL7.7 billion, compared with BRL6.7 billion reported in 2011. CAG has
efficiently managed its activities and reported margins that are adequate for
its business sector, despite cost pressures and increase of labor cost in the
Between 2009 and 2012, the company's average EBITDA margin was 11%. During
2012, the EBITDA margin declined to 7% due to additional unplanned costs, a
reduction in projects contracted by Petrobras, and delays due to the political
instability in Mali. The company's EBITDA decreased to BRL544 million from the
BRL846 million reported in 2011. Fitch's expectation is that the company's
margins will recover to around 9% from 2013 onwards.
CAG's operational cash flow from operations (CFFO) is expected to improve in
2013. During 2012 its CFFO was only BRL8 million, compared with BRL705 million
in 2011. Free cash flow (FCF) was negative at BRL294 million, attributable to
investments of BRL300 million and dividends of BRL1.6 million.
By the end of 2012, the company's backlog was relevant and totaled BRL30
billion, equivalent to four years of operations. In the past four years, the
company's backlog has shown an annual average increase of 14% and rose 19% in
2012. The company's expertise in project execution and the buoyant demand in
the heavy construction sector are expected to continue to support the growth
in CAG's operations during the next three years. This growth reflects the
bottlenecks in Brazil's infrastructure and projects related to the power
sector, as well as those linked to sporting events (the 2014 World Soccer Cup
and the 2016 Olympics).
CAG's project portfolio is, however, concentrated, with 80% of its customers
in the government sector and with nine large projects representing 65% of its
total backlog as per December 2012. A relevant portion of the backlog has
exposures in countries that are not classified as investment grade (58% of the
total portfolio, with 29% of the total backlog having guarantees of
multilateral financing agents). In the same period, 84% of the company's
backlog was located in Latin America (36% in Brazil and 22% in Venezuela), 14%
in Africa and 2% in Europe.
AGG's Mature Assets Ownership
CAG is an important cash generator for AGG, whose diversified ownership in
Brazil is in assets with a strong financial profile. The group has indirect
shares (as well as belongs to the controlling block) of 12.6% and 7.8%,
respectively, in Oi S.A. (FC/LC IDR 'BBB' and 'AAA(bra)' ) and Contax S.A
('AA(bra)'). These two companies are the main players in their business
sectors. AGG also has participations in concession sectors, through its 16.7%
ownership in the toll road company CCR ('AA-(bra)'); in the power utility
sector, with 14.1% in Cemig ('AA(bra)') and the water/wastewater utility
sector, with a 9.4% share in Sanepar. By the end of December 2012, AGG's
financial profile was strong, with a total debt/EBITDA leverage ratio of 3.4x;
2.1x on a net basis.
The factors that could trigger consideration of a Negative Outlook or
downgrade of the ratings include an increase in the guarantees granted by CAG
or pressures for its dividends to support other AGG companies. Operational
performance below the agency's expectations or change in its conservative
financial strategy to preserve strong liquidity could also result on a rating
CAG's ratings could be affected positively by lower exposure of its backlog to
customers in the government sector and to countries that are not investment
grade, as well as a strengthening of its credit metrics, including a reduction
in its total net leverage, including guarantees.
Additional information is available at 'www.fitchratings.com and
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2012);
--Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research
Corporate Rating Methodology
National Ratings Criteria
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