Scope Ratings changed its Outlook to Stable from Positive on Spanish-based construction group Ortiz Construcciones y Proyectos SA (Ortiz). The outlook change follows a slower-than-expected recovery of operating profits and an increase in leverage as measured by debt/EBITDA.

At the same time, Scope affirms the BB- Corporate Issuer Credit Rating (CICR) on Ortiz. The CICR on Ortiz is supported by its (i) diverse revenue mix (ii) strong order backlog of EUR 4.2bn and (iii) adequate financial risk profile. The latter is driven by credit metrics consistent with a BB- rated company, solid free cash flows, and an adequate liquidity position supported by the group’s undrawn, committed credit facilities.

However, Ortiz’s rating is constrained by its limited size and the contraction of Spanish business, despite the economic recovery and increase in domestic construction output. In addition Scope views the strong exposure to the cyclical construction market as credit-negative.

KEY RATING DRIVERS

Well-established, second-tier, corporate group in Spanish construction. Although Ortiz is smaller than most of its peers, with revenues of EUR 374m in 2015 (excluding partially consolidated concessions), it profits from a long track record and an established, though weakened, position in its core market of Spain. However, its limited size and market position also indicate a heightened sensitivity to unforeseen shocks and stronger volatility in cash flows, as observed in FY 2015.

Diverse revenue mix of sectors and end-markets. Ortiz’s activities includes a number of sectors, with construction and energy providing 31% and 35% of revenues in 2015; services, concessions and real estate accounted for the rest (34%). In the international energy sector, Ortiz is gaining a considerable foothold. This revenue mix helps the group offset the strong contraction of its Spanish business, while benefiting from higher growth in the international energy market.

Improving geographical diversification partially mitigating revenue falls in Spain. In 2015, 54% of Ortiz’s total revenues were generated in Spain. Nevertheless, Scope acknowledges that the group has effectively diversified into international markets, such as in Latin America, with revenues increasing steadily to 46% in 2015 from 10% in 2011 – partially mitigating the falls in Spanish revenue of 12% YoY.

Profitability maintained above 10% EBITDAR margin. With an EBITDAR margin of above 12% for 2015, Ortiz has kept profitability above 10% since the financial crisis, except for 2012. Ortiz benefits from the high EBITDA of its concessions business of over 60%, balancing construction activity with its inherent sensitivity to the economic cycle and pressures from larger competitors. Scope expects the EBITDAR margin to increase to above 13%, bolstered by the rising contribution from concessions activities.

Diversified backlog at all-time high of EUR 4.2bn. The group benefits from an order backlog of EUR 4.2bn, including non-dependent concessions, as of December 2015 (+36% YoY). The backlog provides visibility over revenues for the next few years; however, these will only materialise evenly over a long time horizon as 70% stem from concessions. Geographically, projects from Spanish customers represent around 36% of Ortiz’s order backlog, signaling the further reduction in domestic exposures in the next few years.

Positive free cash flows despite the pressure on revenues. Despite the revenue pressures in 2015, Ortiz showed solid free cash flows of EUR 16.9m in 2015 (2014: EUR 5.6m), which Scope expects will remain positive.

Weakened credit metrics in 2015, but further deleveraging expected for 2016. The group’s debt/EBITDAR increased to 5.3x in 2015 from 3.7x in 2014 (debt/EBITDA 2015: 4.6x; 2014: 3.3x) as a result of a 9% revenue decline. However, net debt was down to EUR 110m compared to EUR 120m in 2014. Positive free cash flows and a reduction in net debt support our expectations with regard to a further deleveraging in 2016.

EBITDA cash-interest cover remained strong at 3.8x (2014: 3.3x). Scope expects EBITDA cash-interest ratios to remain at about 4.0x, indicating that Ortiz can safely meet its interest obligations. In view of the significant intra-year working capital swings and the dependence of reported financial debt on contract completion, credit protection measures such as debt/EBITDAR are subject to high variations. Therefore, Scope has concluded to place more emphasis on cash-interest cover ratios in its financial risk profile analysis going forward.

LIQUIDITY AND DEBT REPAYMENTS

The group has modified its financing profile substantially in the last 24 months, using a EUR 50m bond issuance in 2014 and syndicated financing of EUR 120m in 2015. Both were used to repay short-term bilateral credits representing the group’s finance structure prior to 2013. As a result, short-term debt was transformed into long-term debt, and the availability of committed credit lines with maturities beyond 12 months increased strongly – both positively affecting Ortiz’s liquidity and financial flexibility.

Scope expects free operating cash flow for 2016 to be above EUR 20m. Thus, Scope believes the group can comfortably redeem EUR 43m of financial obligations in 2016, bolstered by an unrestricted cash position of EUR 60m and undrawn committed credit lines of EUR 65m as of December 2015. In addition, we expect Ortiz to maintain substantial headroom on financial maintenance covenants to be met under the syndicated facility.

OUTLOOK

The Outlook is Stable and incorporates Scope’s expectation of a gradual reduction of indebtedness in the medium term. The deleveraging, however, greatly depends on the successful execution of the existing order backlog.

A negative rating action would be considered if the group’s debt protection, as measured by EBITDA/cash interest, were to decrease below 3.0x from levels of about 4.0x currently.

A positive rating action is tied to a substantial increase in the size of the group, leading to a broader spread of project-related risks and improved diversification. At this stage, Scope believes that any such substantial enlargement of the group in terms of revenues is remote. For this reason, Scope has not formulated an indicative financial ratio that would result in a positive rating action.

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, Dr. Sven Janssen.

The rating analysis has been prepared by Philipp Wass, Lead Analyst
Responsible for approving the rating: Werner Stäblein, Committee Chair
 
Rating History - Ortiz Construcciones y Proyectos SA
(Date | Rating action | Rating)
31 May 2016 I Affirmation I BB- I Stable
29 May 2015 I Affirmation I BB- I Positive
28 May 2014 I Initial Rating I BB- I 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
• Valuation reports
• Annual financial statements
• Annual reports/semi-annual reports of the rated entity
• Information provided on request
• Data provided by external data providers
• External market reports
• Press reports / other public information
• Interview with the rated entity

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 methodologies applicable for this rating (Corporate Rating Methodology, Rating Methodology - European Construction Corporates) are 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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