The Rating Outlook is Stable.
The proceeds from the issuance are expected to be used for general corporate purposes. The company expects to issue
Fitch has assigned an 'RR4' Recovery Rating to the proposed issuance reflecting average recovery prospects given default. 'RR4' rated securities have characteristics consistent with securities historically recovering 31%-50% of current principal and related interest.
Arendal's ratings are supported by the company's 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
KEY RATING DRIVERS:
Relevant Business Position
The company has a significant business position in the construction of pipelines when measured in kilometers built during the last few years. Arendal engages primarily 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 of the Mexican territory and to efficiently manage its technical and workforce resources. Arendal's competitive advantage among industry peers includes a historical project completion rate of 98% before or on settled dates. Fitch considers that these elements can contribute to Arendal maintaining its business position in the long term.
Revenue Diversification Potential
Fitch considers that the company's strategy to increase revenue diversification could contribute to a reduction of business risks and cash flow volatility over the long term. In Fitch's opinion, Arendal's recent experience in the construction of the
Project Concentration Risk
Arendal has gained increasingly larger projects over the years which have helped the company grow rapidly, but this growth has come with large-project concentration risks. A single large project can at times represent 40% of revenues or more. Additionally, the company's revenue mix is significantly oriented toward the public sector, with the Federal Government (Secretaria de Seguridad Publica) being its main customer during the last three years. During 2013, Arendal generated 53% of its revenues from contracts with Pemex. With the available backlog, concentration in the public sector and revenues from Pemex as the ultimate client will likely continue to represent a large portion of the company's revenue source.
Fast-Growing Resilient Operations
In the last five years, the company has continued to grow organically. As of
Growth Likely to Continue
Fitch expects Arendal to continue to grow rapidly in 2014 supported by a robust backlog and potentially from increased availability of energy-related infrastructure projects in
Short-term Debt Financing
Projects will require larger investments in working capital and to less extent capex and Fitch expects that most of these requirements will be funded with debt. Arendal's financing strategy has been primarily to raise new debt after securing a project, allowing the company to match debt payments with specific project revenues. Given that most projects have periods of completion that range between 18-24 months, financing tends to be short term, resulting in high levels of short-term debt. Liquidity and profitability depend on timely collection of accounts receivable and to a lesser extent on the availability of credit lines or alternative financing to support working capital needs.
Fitch expects Arendal's leverage metrics to increase as a result of financing the start-up of incremental construction engagements and that future financing will continue to be a combination of individual project cash flow pledged to specific debt instruments and subsequent issuances under the program. Fitch also expects that the company's long-term leverage measured as total debt/EBITDA will be in the range of 4.5x to 5.0x. Total debt including leases as of
Poor FCF generation and reliance on short-term debt financing can pressure the company's liquidity. Fitch expects high working capital needs resulting from rapid growth to lead to negative FCF in the medium term. However, sound cash flow generation after interest paid and before net working capital requirements will be considered a positive indicator of company performance. In its base case, Fitch considers that the company's cash balance will continue to be strong and recognizes that refinancing risk can be partially mitigated by the company's access to bank lending mainly as a result of the credit characteristics of the company's receivables. Company cash as of
In Fitch's opinion, under a stress scenario recovery of debt instruments associated with pledged contracts would have access to the existing accounts receivable to cover outstanding debt; the remaining balances would form part of the mass of unsecured creditors with average prospects of recovery between 31%-50%.
The ratings could be negatively pressured by a combination of the following factors, among others: Deterioration of Arendal's credit metrics as a result of higher than expected competition which pressures operating performance or, alternatively, delays in collectability of receivables that pressure cash flow. A rating downgrade could also be driven by limited access to financing sources affecting the company's liquidity position.
Factors which could lead to positive rating actions include lower project concentration, high level of repeat business or service type contracts in conjunction with strong credit metrics, liquidity, and full implementation of corporate governance practices.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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