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ICA Seen Paring Debt as CGL Prison Deal Reaps $116 Million

Empresas ICA SAB’s $116 million deal with CGL to create a partnership to service and develop prisons will help Mexico’s largest construction company cut debt, according to Citigroup Inc. and Corporativo GBM SAB.

ICA will hold 30 percent of the venture and will contribute two existing 22-year contracts for non-correctional services at two penitentiaries, Mexico City-based ICA said in a statement yesterday. CGL, a unit of El Paso, Texas-based Hunt Cos. that designs and develops buildings, will own 70 percent.

The agreement follows asset sales last year in which ICA raised more than $600 million after credit-rating downgrades by Moody’s Investors Service and Standard & Poor’s. After the deal is completed, ICA will no longer consolidate the prison business or related project debt in its financial results.

“Proceeds will likely be applied towards debt reduction at the holding company, which we view as a top priority and significant concern weighing on the shares,” Dan McGoey, an analyst with Citigroup, said in a research report today.

ICA fell 0.5 percent to 26.05 pesos at the close in Mexico City as the benchmark IPC index of 35 Mexican stocks dropped 1.3 percent. The builder’s shares have tumbled 29 percent during the last 12 months.

The CGL deal will help ICA cut debt while lightening its investment obligations in future penitentiary projects, said McGoey, who has a buy recommendation on the shares.

Mature Assets

The transaction, which requires approval from bondholders and the Mexican government, will probably close by the end of the first quarter, according to the statement. The companies said they’ll seek additional prison-related work in Mexico.

While the CGL deal is “a step forward towards deleveraging,” there is “still a long way to go” in ICA’s effort to cut debt, Javier Gayol, a GBM analyst with the equivalent of a sell rating on the shares, said in a report today.

The contracts it’s providing to the CGL venture “are clearly mature assets that ICA can monetize,” Chief Executive Officer Alonso Quintana said in the statement. “The resources received will also assist ICA in continuing our mission of developing infrastructure assets in a variety of sectors.”

Last year, ICA generated about 2.85 billion pesos ($214 million) in sales and 1.44 billion pesos in adjusted earnings before interest, taxes, depreciation and amortization from its prison business, according to the statement. Debt linked to the business stood at 10.1 billion pesos as of Dec. 31.

Credit Rating

The builder said it won the contracts in 2010 and invested 13.8 billion pesos in the prisons, which it developed with technical assistance from CGL. The prisons, owned and run by the government, began operating in 2012.

ICA raised about $215 million last year by selling some of its shares in airport operator Grupo Aeroportuario del Centro Norte SAB. It also sold its stake in a tollway operator to majority owner Goldman Sachs Group Inc. for about $395 million.

Moody’s cut ICA’s credit rating on May 17 by one level to B2, or five steps below investment quality, citing high leverage and delays in public-works spending. S&P followed suit on May 21, reducing ICA’s ranking to B+, four levels below investment grade.

The builder’s sales fell 17 percent to 23.4 billion pesos during the first nine months of 2013 as project delays hurt construction revenue, it said Oct. 25. Net income fell 77 percent to 384 million pesos.

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