Fitch Affirms Construtora Andrade Gutierrez's IDR at 'BBB-/AA(bra)'; Outlook
SAO PAULO -- April 15, 2014
Fitch Ratings has affirmed the ratings of Construtora Andrade Gutierrez S.A.
(CAG) and related issuances as follows:
--Foreign Currency Issued Default Rating (IDR) at 'BBB-';
--Local Currency IDR at 'BBB-';
--National Scale Rating at 'AA(bra)'.
Andrade Gutierrez International (AGI)
--USD500 million senior unsecured notes guaranteed by CAG due in 2018 at
The Outlook for the corporate ratings 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 satisfactory margins in the engineering and construction industry. The
company benefits from a long sustainable increase of operations and favorable
business position as the second largest construction company in Brazil. Fitch
expects CAG to maintain reduced net leverage ratios, manageable debt
amortization profile, and positive free cash flow.
The ratings also incorporate CAG's sizable backlog of projects which supports
around four years of operations. The company is exposed to concentration
risks, as 82% of its backlog is linked to the public sector and 62% comes from
its 10 largest projects. Fitch also takes into account the inherent volatility
of the heavy construction segment, and its moderate exposure to non-investment
The ratings are constrained by CAG's high off-balance-sheet debt guarantees of
BRL2 billion offered to affiliated companies of Andrade Gutierrez Group (AGG).
Potential pressure in terms of cash disbursements related to the entire amount
of those guarantees is mitigated by the mature stage and quality of the assets
the group invests. These assets are in industries with predictable results and
characterized by a track record of strong dividend distribution, which are
expected to cover 70% of the guaranteed obligations by CAG and mitigate
pressures over its liquidity and cash flow. CAG is the main operating company
of AGG, one of the main conglomerates in Brazil, with operations in heavy
construction and stakes in assets within telecommunications, power, water and
sewage and toll road.
Historical Robust Liquidity
CAG has a conservative liquidity strategy. In December 2013, the company's
cash and marketable securities totaled BRL2.2 billion, slightly higher than
the BRL1.9 billion of 2012 and equivalent to a sound coverage of 260% of its
short-term debt of BRL852 million. The company has total debt maturities of
BRL1 billion in 2014 and 2015, which is only 46% its cash balance at the end
of 2013. This liquidity is highly 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 keep a relevant cash balance
to support growth of its activities going forward.
Adequate Capital Structure
CAG has been successful in maintaining its adequate leverage level. In
December 2013, the company's total and net adjusted leverage were 5.7x and
2.0x, respectively and according to Fitch's methodology, which are broadly in
line with the 5.4x and 2.1x attained in 2012.
CAG's net debt is manageable, despite the BRL2 billion of guarantees offered
by the company. Fitch expects that the resources to support 70% of 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. The remaining portion of 30%
(or BRL634 million) comes from an intercompany loan from AGI that CAG must
repay. AGI issued USD500 million in April 2013 that has been fully guaranteed
By the end of December 2013, CAG's total adjusted debt, on a pro forma basis,
was BRL3.4 billion, including the off-balance-sheet. In December 2012, the
company's total debt was BRL3 billion, of which BRL1.4 billion was
off-balance. The slightly higher debt in 2013 basically reflected the increase
of guarantees given by CAG to AGI's issuance made in April 2013 partially
offset by the lower corporate debt.
FCF to Remain Positive
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 period. The company has also reported a consistent increase in
revenues with a compound average growth rate (CAGR) of 23% since 2007. In
December 2013, the company's net revenue totaled BRL8.4 billion, compared with
BRL7.5 billion reported in 2012.
During 2013, EBITDA margins have returned to their historical levels, reaching
7%. Between 2009 and 2012, the company's average EBITDA margin of 12.5%
benefited from contracts with Petrobras. Fitch expects the company to maintain
margins between 6% and 8% going forward.
Fitch expects CAG's FCF to remain positive in the next few years, benefited by
growing operational cash flow. The company improved its cash flow from
operations (CFFO) to BRL721 million in 2013, compared with BRL40 million in
2012, aided by a funds from operations (FFO) of BRL555 million (compared to
BRL56 million in 2012). The evolution was explained mainly by a positive
working capital given the rise in accounts payable in 2013. FCF was BRL255
million, recovering from a negative BRL261 million in 2012.
By the end of 2013, CAG's backlog was relevant, totaling BRL32.4 billion. This
is equivalent to four years of operations and represents an annual growth of
6.5%. Over the past five years, the company's backlog has shown an annual
average growth rate of 13%. 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 in the foreseeable future. This
growth reflects the bottlenecks in infrastructure, transportation, and
projects related to the electric power sector in the regions the company
operates, such as Brazil, Latin America and Africa.
CAG's project portfolio is exposed to Venezuela. In December 2013, the
company's two largest projects, amounting to BRL8.2 billion (or 25% of CAG's
backlog) came from that country. In 2013, CAG cancelled the BRL3.7 billion
contract of the Cumana project in Venezuela. This project cancellation has
been influenced by the current social and political instability and additional
write-offs may occur in the short and medium term. The company is also likely
to reduce execution speed of projects in Venezuela.
CAG's backlog is also concentrated in government clients, as well as in
relevant projects. In December 2013, 82% of its customers were in the
government sector and the 10 largest projects represented 62% of its total
backlog, excluding Cumana project. A mild portion of the backlog is exposed to
investment grade countries (31% of the total portfolio), with 37% of the total
backlog being funded by multilateral financing agents. In the same period, 87%
of the company's backlog was located in Latin America, being 48% in Brazil and
39% in rest of the region.
AGG's Mature Assets Ownership
AGG has economic interests in a diversified portfolio of companies with strong
financial profile. Indeed CAG is the most important cash generator of the
group, but AGG, through AG Telecom S.A., is part of the controlling
shareholders of the telecom incumbent Oi S.A. (FC/LC IDR 'BBB-' and
'AA+(bra)', Watch Negative) with 2.2% indirect interest and the call center
Contax S.A ('AA(bra)') with 7.8% stake. AGG also participates, through AG
Participacoes S.A. (AGPar), in concessions, through its 17% ownership in the
toll road company CCR ('AA+(bra)', Outlook Stable); in the power utility
sector, with 14.4% in Cemig ('AA(bra)', Outlook Negative) and 8.3% in the
water/wastewater utility Sanepar.
Factors that could lead to consideration of a Negative Outlook or Downgrade
include a FFO adjusted net leverage ratio above 3.0x on a consistent basis, a
weakening of the company's sound cash position, and lower dividends flowing
from affiliated units to CAG's parent company Andrade Gutierrez S.A. A
substantial growth in guarantees provided to affiliates and a net adjusted
debt-to-EBITDA ratio above 3x can also pressure the ratings.
Fitch does not anticipate any upgrades in CAG's ratings in the short term. In
the medium term a better financial profile coupled with improvements in CAG's
backlog diversification could benefit the ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Scale Ratings Criteria' (Oct. 31, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
National Scale Ratings Criteria
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Alexandre Garcia, +55-11-4504-2616
Fitch Ratings Brasil Ltda
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