Fitch Downgrades Arendal to 'CCC'
10 February 2016 - 4:34AM
Business Wire
Fitch Ratings has downgraded Arendal, S. de R.L. de C.V.
(Arendal)'s ratings to 'CCC' from 'B'. A full list of ratings
actions follows at the end of this press release.
The downgrade reflects the lack of progress the company has made
toward refinancing its short term debt, including its USD100
million notes due during May 2016. The current low oil price
scenario has caused Arendal's major customer, Pemex, to reduce
capex and extend its supplier payment terms. This has resulted in
significant lengthening of the company's working capital cycles as
its receivables with Pemex have grown. Positively, Arendal's
reputation and overall business profile continue to move forward as
evidenced by its increasing project backlog. This implies, however,
that the company will need additional debt to fund the working
capital needed to support these new projects, adding one more
challenge to its current financial situation.
The expected Recovery Ratings of 'RR4' reflect average recovery
prospects given default. 'RR4' rated securities have
characteristics consistent with securities historically recovering
31%-50% of current principal and related interest.
KEY RATING DRIVERS
Customer and Project Concentration
Arendal has gained increasingly larger projects 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. During 2015, Arendal generated about 80% of its revenues
from contracts with Pemex. Considering the available backlog,
revenues from Pemex as the ultimate client will likely continue to
represent a large portion of the company's revenue source.
Recovery Prospects
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%.
KEY ASSUMPTIONS
--Flat to low single digit revenue growth for 2016; revenue
growth accelerates in 2017 as the company executes the bulk of its
DUBA-Salina Cruz project.
--MXN1.5 billion in working capital flows for 2016 and
subsequent recovery of MXN1.2 billion in 2017.
--No dividend payments.
RATING SENSITIVITIES
Absent a successful refinancing, Fitch could downgrade the
ratings to CC within a month of the 2016 notes maturity.
Successful debt refinancing and funding of operations through a
combination of internal and external sources could result in the
rating being upgraded to B-.
LIQUIDITY
Arendal's cash balance at year-end 2015 was MXN889 million,
compared to MXN3.9 billion of short-term debt maturities. The
company's cash flow from operations was negative MXN893 million.
Free cash flow was negative MXN1.1 billion underperforming Fitch's
prior expectations, largely due to higher working capital
requirements. Accounts receivable with Pemex including costs
incurred not yet billed total about MXN1.8 billion.
FULL LIST OF RATING ACTIONS
Fitch has downgraded Arendal's ratings as follows:
--Long-term Foreign Currency Issuer Default Rating (IDR) to
'CCC' from 'B';
--Long-term Local Currency IDR to 'CCC' from 'B';
--Unsecured notes due 2016 to 'CCC/RR4' from 'B/RR4'.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999261
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999261
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystGilberto Gonzalez, CFAAssociate
Director+1-312-606-2310Fitch Ratings, Inc.70 West Madison
StreetChicago, IL 60602orSecondary AnalystAlberto de los
SantosAssociate Director+52 81-8399-9100orCommittee ChairpersonJoe
Bormann, CFAManaging Director+1-312-368-3349orMedia
Relations:Elizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com