Scope Ratings today affirmed the BB rating of the Spanish-based Tecnocom, Telecomunicaciones y Energía, S.A. and consolidated companies (henceforth “Tecnocom” or ‘group’). The rating Outlook remains stable.

The affirmation of the rating is driven by the relatively stable financial profile of the group as illustrated by the 2014 financial year results.The group’s revenues are affected by the downward revision of the group’s growth prospects and the slower than expected integration of its Latin American operations. This is however balanced by an improvement in the Spanish market, where Tecnocom is the third largest player by revenues in the information and communications technology (ICT) segment. Tecnocom benefits from a diversified revenue mix of service offerings and end-markets served. Seventy-five percent of Tecnocom’s total earnings come from recurring revenues.

As outlined below, the group’s financial risk profile is driven by credit metrics consistent with a BB rated company: low debt/EBITDA, stable cash flow generation, solid liquidity ratios supported by undrawn available credit facilities.

The rating remains however constrained by the group’s concentrated exposure to Spain and its financial sector; the economic slowdown in some of its Latin American markets; the severe competitive pressure on margins exercised by much larger players; and the group’s relatively low profitability measured by the EBITDA margin, that remained below 6%.

KEY RATING DRIVERS

Strong positioning as the third largest player in the ICT market in Spain: although the group is a relatively small player in revenue terms, with EUR 375m in 2014, it is the third largest operator in the ICT market in Spain, and profits from its focus on niche sectors such as methods of payment processing.

Diverse revenue mix of service offerings and end-markets served: Tecnocom’s product portfolio encompasses the full spectrum of ICT products and services, allowing the group to work in a wide range of industries, among them banking and insurance, producing 49% of its revenues in 2014, while Telco, Media and Energy accounted for 26%.

Concentrated revenue exposure to Spain and the financial sector: in 2014, 79% of Tecnocom’s total revenues were generated in Spain, and 49% of the group’s revenues came from services to the financial sector, especially banking and insurance. Because of the pro-cyclical nature of the ICT industry, the group is heavily dependent on future economic developments in Spain, particularly in the banking sector. Although the group’s efforts to diversify into other markets such us Latin America are progressing slower than planned, Scope expects the group to benefit from a sustained recovery in the Spanish economy.

High portion of recurring revenues: according to the group’s estimates, 75% of its total revenues in 2014 are recurring. Because the group needs to renegotiate some contracts annually, Tecnocom is periodically exposed to a potential loss of contracts. In Scope’s view, this risk is mitigated by the type of services provided that makes it difficult to switch provider, or migrate the platform within a short time. The group also enjoys longstanding relationships with its main customers, which makes defections unlikely.

Solid credit metrics expected to remain stable: the group’s debt/EBITDA stood at 3.3x (Lease adjusted debt/EBITDAR 4.6x) as of December 2014, while its EBITDAR fixed charge cover stood at 2.1x. These metrics are expected to remain stable in 2015 at 3.6x and 2.1x respectively, and are in line with Tecnocom’s current rating.

Positive and stable cash flow generation: Tecnocom has a solid cash flow generation with EUR 16.3m of FFO in 2014, which is expected to remain at a similar level in 2015. These positive operating cash flows are sufficient to cover the group’s capex requirements and working capital.

Solid liquidity ratios: in Scope’s view, the group’s operating cash flow (EUR 14m) together with its unrestricted cash position of EUR 35.9m puts Tecnocom in a comfortable situation to redeem its financial obligations of EUR 19.9m in the short term. This solid liquidity is reinforced by the group’s undrawn committed credit lines of more than EUR 40m as of December 2014.

Low but stable profitability: despite the ICT business’s inherent sensitivity to the economic cycle and competitive pressures from larger competitors, Tecnocom’s EBITDA margin is stable. Scope expects the benefits from the restructuring plan carried out in 2013 and 2014 will allow Tecnocom’s EBITDA margin to improve slightly to 6.0% in 2015/2016, compared to 5.9% in 2014.

OUTLOOK
The stable Outlook reflects Scope’s expectation that the group’s net debt/EBITDA will remain below 2.0x over the next 12 months. Scope closely monitors the pace of Tecnocom’s consolidation process in Latin America and the development of its revenue mix and profitability. It also monitors the group’s ability to maintain the pace of cost reductions in the light of declining revenues. A slower than expected return to revenue and profitability growth could negatively affect the rating over the medium term, particularly if the net debt/EBITDA ratio of the group exceeds 2.5x.

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Torsten Hinrichs.

The rating analysis has been prepared by Rigel Patricia Scheller, Lead Analyst
Responsible for approving the rating: Guillaume Jolivet, Managing Director

Rating history
24.03.2015 I Affirmation I BB  Stable
24.03.2014 I Initial rating I BB Stable

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest

The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
- Website of the rated entity/issuer
- Annual reports/semi-annual reports of the rated entity/issuer
- Current performance record
- Detailed information provided on request
- Annual financial statements
- Interview with the rated entity
- External market reports
- Press reports / other public information
 

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating Corporate Rating Methodology is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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