Scope Ratings today affirmed the BB rating of the Spanish-based Tecnocom, Telecomunicaciones y Energía, SA and consolidated companies (‘Tecnocom’ or ‘the group’). The rating outlook has been changed from Stable to Positive.

The affirmation of the rating is driven by the group’s convincing operating performance, with key credit metrics developing broadly in line with expectations. The Outlook change reflects the company’s accelerated growth in Latin America and Scope’s expectations that Tecnocom is likely to further improve its Financial Risk Profile.

The group’s financial risk profile is driven by credit metrics consistent with a BB rated group: strong liquidity measures backed by solid operating cash flows, excellent access to committed credit and factoring facilities, and no significant debt maturing before 2018.

The rating, however, remains constrained by: the cyclicality of the group’s industry – information and communications technology (ICT); remaining high dependence on economic developments in its core market Spain and comparatively low profitability.

KEY RATING DRIVERS

Pro-cyclical industry. Tecnocom’s rating is to some extent constrained by industry-inherent risks, characterised by early-cyclical patterns of ICT services and medium entry barriers; however, low substitution risks. As a result, its cash flows can be hit once the investment cycle of customers have reached the peak. Such risks are partly mitigated by long-term, recurring service level agreements.

Strong position in core market of Spain, with long-lasting business relations. Although Tecnocom is still a relatively small player in terms of revenue (EUR 406m in 2015), Scope regards its market position to be very solid. Ranking among the top three ICT providers in Spain, the group benefits from its niche market position in methods of payment processing for financial institutions. Scope highlights the group’s excellent outreach to not only large blue chip customers with a high credit quality (i.e. 22 of IBEX 35 companies), but government authorities as well. Although service level agreements need to be renegotiated and extended annually, Scope believes the group’s expertise and reputation results in a high portion of recurring business with major customers (more than 80% of 2015 revenues from recurring services), and long-standing business relations, often spanning more than 15 years. The long-term nature of business relations is also due to its type of services, which makes it difficult for customers to switch providers or migrate IT systems within a short timeframe.

Full coverage of ICT services backing improving outreach to end-markets. Scope positively reflects Tecnocom’s product portfolio, which encompasses the full spectrum of ICT products and services, allowing the group to address a wide range of industries, among them banking and insurance. While the group historically has a strong exposure to major financial institutions (48% of revenues in 2015) it has also steadily increased its footprint in other industries, such as telecommunications, media and energy (26% of 2015 revenues), industrials (16%) and public authorities (11%).

High dependence on sustained recovery of core market. Although Tecnocom’s Latin American business strongly accelerated in 2015, Scope regards its high dependence on the Spanish market to be a major weakness for credit quality. With 78% of 2015 revenues generated in Spain, the group remains vulnerable to shocks in the country’s economic recovery, particularly for its banking sector. An accelerated expansion into the Latin American market (18% of 2015 revenues) would therefore enhance its credit strength. Given the stronger growth potential of emerging markets in Latin America, Scope expects Tecnocom to reduce dependence on Spain to below 70% over the next 2-3 years.

Low, but stable, profitability. Despite the ICT business’s inherent cyclicality, as well as pressures from larger competitors, Tecnocom’s EBITDA margin is regarded to be stable. This is a result of the ‘capital light’ business model which flexibly adjusts to project demand. In light of a further economic recovery in Spain, the cost cutting and restructuring efforts and the increasing share of Latin American business activities (which provide a double-digit EBITDA margin), the group’s EBITDA margin is expected to improve slightly to 5.7-6.0% in 2016/2017, compared to 5.3 % in 2015.

Robust free cash flows allow reduction in indebtedness. Tecnocom’s cash flow generation is characterised by robust operating cash flows and comparatively low capex requirements. Its low, single-digit free cash flow margin (1.2% in 2015) generally allows for a reduction in indebtedness.

Key credit metrics in line with expectations. Scope regards Tecnocom’s leverage – measured as lease-adjusted debt/EBITDAR of 3.4x as of December 2015 – and its EBITDAR fixed-charge coverage of 2.2x in 2015 to be in line with the assigned rating. Scope points to the high accrued cash cushion of EUR 50.4m at the end of 2015, which results in a strong lease-adjusted net debt/EBITDAR of 1.7x in 2015. However, Scope primarily bases its analysis of Tecnocom’s Financial Risk Profile on gross financial debt including operating leases as the group’s cash balance is strongly impacted by cash accruals at the end of each business year. While the high cash cushion could theoretically be used to redeem debt early or reduce credit lines, Scope believes the group would rather use the excess cash for prudent organic growth in Latin American markets and gradually scale back loan facilities. Reflecting Scope’s expectations about further EBITDAR growth, leverage is expected to improve gradually to 3.0x and EBITDAR fixed-charge coverage to 2.7x in 2016.

Financial risks strongly mitigated by strong liquidity. Over the next two years, Scope regards refinancing risks to be very limited, with operating cash flows expected at above EUR 15m annually, access to undrawn – mostly rolling – credit and factoring lines of more than EUR 60m and an unrestricted cash cushion of EUR 50.4m at YE 2015. Consequently, we believe Tecnocom is in a comfortable position to redeem debt maturities of just EUR 11m in 2016 and 2017 (excluding rolling credit lines).

OUTLOOK

The Positive Outlook reflects the group’s accelerated growth in Latin America as well as Scope’s expectations that Tecnocom’s leverage – measured as adjusted gross debt/EBITDAR - will gradually improve towards 3.0x over the next two years.

A higher rating would be warranted if it deployed excess cash to significantly reduce gross financial leverage to below 3.0x on a sustainable basis.

A rating downgrade would be required if operations deteriorated, resulting in a financial leverage above 4.0x.
 

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, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Sebastian Zank, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair, Managing Director

Rating history (Date | Rating action | Rating)
24 March 2016 | Affirmation | BB Positive
24 March 2015 | Affirmation | BB Stable
24 March 2014 | Initial rating | 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
- Annual reports/semi-annual reports of the rated entity
- Current performance record
- Detailed information provided on request
- 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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