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Rating action

Scope Ratings has today assigned a first-time issuer rating of BB+/Stable to Grupo Aldesa S.A. The agency has also assigned a first-time rating of B+ to the subordinated debt issued by Aldesa S.A. The short-term rating is S-3.

Rating rationale

The rating is driven by the company's financial metrics, strengthened by the investment agreement with CRCC International Investment Group (CRCCII Group, fully owned by China Railway Construction Corporation Limited). In May 2020, the CRCCII Group completed the acquisition of 75% of Aldesa, while the remaining 25% continues to be owned by the Fernández family. Following this transaction, Aldesa used a cash injection from CRCC (equity and an intercompany loan) to redeem a EUR 250m bond due in 2021 and repay revolving credit facilities, thus resolving the previous refinancing pressure related to the bond maturity.

Positive rating drivers are also the group’s adequate diversification by segment, which includes investment activities (mainly concessions) that support Aldesa’s profitability. Scope anticipates further pressure on margins in 2020. However, the agency expects profitability to recover in the next few years as a result of the new focus on activities with less volatile, recurring income. Currently, Aldesa holds top 10 positions in its key markets of Spain and Mexico. In Scope’s view, Aldesa’s operations could benefit from the parent’s market recognition as well as potential synergies arising from its integration with CRCC, particularly in western markets where CRCC intends to strengthen its presence. Further, Scope expects Aldesa’s market position to be bolstered by CRCC’s larger scale, enhancing not only its ability to participate in tenders but also its market visibility. Going forward, this should help to generate business, improve the company’s competitive position, and support its medium-term objective of significantly increasing its backlog.

Scope expects Aldesa’s leverage to remain low on a recourse basis due to its planned focus on activities generating cash-based, recurring income, which will be mostly financed with non-recourse project finance debt. Aldesa’s adequate debt protection, as measured by Scope-adjusted EBITDA interest cover (2019: 1.8x), is also expected to improve, backed by the strong reduction in Scope-adjusted debt on a recourse basis.

The rating is constrained by Aldesa’s status as a tier-three construction company, which limits its ability to offset economic cycles and market events and thereby leads to more volatile cash flows. Moreover, its core industry of construction is cyclical, but risks are partially mitigated by the company’s segment diversification, which includes more stable concessions activities. Aldesa’s geographic diversification is still weak in terms of non-domestic projects. Further, the company is highly exposed to legislative changes in its emerging markets, as many of its contracts are agreed with governments.

Aldesa’s standalone issuer rating benefits from a two-notch uplift for parent support, based on Scope’s assessment of a moderate link between CRCC and Aldesa. While there is no full, explicit guarantee in place, Scope’s view is supported by: i) the complementary businesses of CRCC and Aldesa, in similar construction sub-segments but different geographies, with Aldesa expected to play an important role in CRCC’s strategy to expand abroad; ii) the centralised treasury, with CRCC expected to continue to finance Aldesa’s operations via intercompany loans; iii) CRCC’s majority ownership; and iv) Aldesa’s strong integration into CRCC’s operations, with decisions approved by committees led by CRCC representatives (compliance, human resources, investments, and strategy).

Scope assess Aldesa’s liquidity as adequate, with cash balances of EUR 70m available as at end-June 2020. Liquidity is enhanced by the investment agreement signed with CRCC, through which Aldesa has reduced the need to refinance the bond due in 2021 and cancelled revolving credit facilities. Apart from the intercompany loan, which Scope expects to be renewed yearly under similar conditions, the company has no significant short-term obligations.

Outlook and rating-change drivers

The Outlook for Aldesa is Stable. In Scope’s view, Aldesa’s revenues and cash flow will be adversely affected by the Covid-19 pandemic in 2020 before gradually recovering from 2021 on. Scope expects Aldesa’s operations to benefit from the parent’s market recognition and synergies arising from its integration with CRCC. CRCC is also expected to continue to provide intercompany loans to finance Aldesa’s equity requirements at the project level while also combining its operations in larger projects, with Aldesa acting as the ‘front face’ and providing a platform for CRCC’s expansion into targeted western markets.

A negative rating action may be taken if leverage on a recourse basis moves above 2.5x. Potential drivers include a stronger-than-expected impact of the Covid-19 pandemic on construction, slowing down the recovery in both revenues and the backlog, and/or a weaker relationship with the parent.

A positive rating action is seen to be remote but may be possible if the company substantially increases its backlog and the percentage of recurring EBITDA in its portfolio, while maintaining a Scope-adjusted debt/EBITDA ratio below 2x on a recourse basis. A further shift into investment activities could lead to such an improvement.

Long-term and short-term debt ratings

During the first half of 2020, Aldesa redeemed its recourse debt, including the high-yield EUR 250m bond due in 2021 and outstanding revolving credit facilities. As of June 2020, Aldesa had a EUR 180m intercompany loan provided by CRCC. The intercompany loan is subordinated, in accordance with Spanish insolvency law, and is expected to be renewed yearly. Scope assigns a 50% equity credit to this debt category, which assumes yearly renewal, the possibility of coupon deferral, and subordination by law. The B+ rating is based on the subordinated status of the debt and the risk and possibility of the introduction of senior (un)secured debt in the path to default (volatility of the capital structure).

The company intends to place commercial paper to finance short-term working capital requirements. The S-3 short-term rating is supported by adequate internal and external liquidity, good relationships with local banks on key markets, as well as short-term liquidity support from the parent.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed it´s standard cash flow forecasting for the company.

Methodology
The methodologies used for this ratings and rating outlook (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Construction Corporates, 17 January 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list. The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Rigel Patricia Scheller, Director
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 7 October 2020.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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