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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB-/Stable to GS Inima Environment S.A.U (GS Inima).

The rating is driven by GS Inima's activities in the low-risk water concessions business (average concession term of 25 years), which benefits the company with stable and predictable cash flows and supports a relatively strong financial risk profile due to low leverage, which is mainly related to long-term project finance loans without recourse to the issuer. The rating is constrained by the limited size, the high exposure to emerging markets, and the concentrated concession portfolio.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB-. GS Inima's business risk profile benefits from its activities in the low-risk water concession business – a market with high barriers to entry – which provides the company with strong cash generation power and high profitability. The company focuses on long-term water concession contracts, mostly signed with municipalities or government agencies and, to a lesser extent, with industrial customers. Modest size, exposure to emerging markets and concentrated concession portfolio weigh on the assessment.

GS Inima is a global specialist in the water concessions segment, which offers stable and predictable cash flows over long periods and is resilient to economic cycles, with revenues largely indexed to inflation. Although relatively small in terms of revenues (2023: EUR 349m; up 17% YoY) and reported EBITDA (2023: EUR 101m; up 19% YoY), the company's focus on the strategic business of water concessions gives it a unique market position, as concessionaires with long-term contracts typically benefit from a monopoly-like structure in their service areas and regulated revenues.

Geographical diversification is weak. Although the group is present on four continents, 46% of its 2023 revenue and 64% of its backlog as of June 2024 are linked to its main country of operation, Brazil. While the company is also present in other regions, mainly Oman (19% of the backlog as of June 2024), the United Arab Emirates (7%), Algeria (5%), Spain (3%) and Mexico (2%), its concessions portfolio is mainly exposed to markets with comparatively less developed regulatory frameworks or higher sovereign risk.

The reliance on the Brazilian business is seen as a credit weakness as it comes at the cost of a high degree of dependence on political will, regulatory frameworks and customer demand, although the company's track record in the country (since 1995) provides some comfort in terms of the quality and predictability of water concession policy, while demand risk is largely mitigated through long-term contracts and the inability of customers to easily compare or switch between suppliers. This inelastic demand acts as a "shield" around GS Inima's existing portfolio of contracts and the recurring revenues they generate, as evidenced by various contract renewals in recent years.

GS Inima's Scope-adjusted EBITDA margin* has been around 30% for the last three years. The relatively high profitability indicates barriers to entry for competitors and points to continued profitability in the future. Any potential pressure on margins is largely mitigated by indexation clauses, as most of the concessions have tariff structures that provide for contractual adjustments in line with inflation. Although tariff structures can be complex, they are typically designed to align costs with revenues. Profitability is also protected by the presence of energy pass through clauses (99.8% of contracts as at end-June 2024), ensuring that the company is not exposed to energy price risk, and "take or pay" clauses for 100% of the contracted capacity, resulting in resilient and stable operating cash flows.

Overall, Scope believes that GS Inima will continue to demonstrate robust profitability, supported by its activities in regulated water activities that enhance cash flow predictability. For the coming years, Scope expects an EBITDA margin of between 20% and 25%, lower than in previous years, partly due to the higher proportion of revenues generated by construction activities, which temporarily dilutes the company's EBITDA margin. However, the margin will recover as the concessions enter the operational phase.

In addition, GS Inima benefits from an average concession term of 25 years as of June 2024, which provides good cash flow visibility. This indicates that future revenues are well protected by competitive barriers.

Financial risk profile: BBB-. The financial risk profile reflects GS Inima’s good credit metrics, supported by a sound and resilient cash flow generation profile.

Cash generation is strong, driven by GS Inima's business model focused on water concessions with limited obsolescence risk over the next few years. Water concessions offer resilient cash flows as the business is fully insulated from the cyclical macroeconomic environment (particularly in the case of household demand), and due to of the presence of a fixed tariff component that provides a minimum floor that ensures cash collection even in the absence of consumption. This characteristic is maintained even in the case of exceptional events such as the Covid-19 pandemic, where other types of concessionaires - such as transport infrastructure - were more affected.

Debt protection, as measured by EBITDA interest cover, was robust and stood at 5.5x in 2023 (4.1x in 2022). Interest cover is expected to decline in the coming years on the back of a substantial leveraging with debt expected to rise to around EUR 950m by YE 2026 from EUR 398m as at YE 2023 to finance growth. However, interest cover is expected to remain between 2.5x to 3.0x supported by the group’s protected business model with stable and predictable inflation-linked revenues (which provide a natural hedge), and the company’s use of hedging and pre-hedging instruments (41% of the debt portfolio as at end-June 2024 is fixed-rate or hedged).

GS Inima has a solid financial position, with most of its cash and cash equivalents allocated to the concession project companies, with no restrictions on their transfer to the holding company, or to the country subsidiaries, once obligations under project finance agreements are met.

More than 70% of GS Inima's financial debt consists of non-recourse project loans (with a weighted average maturity of 12 years). The remaining debt is mainly corporate debt used to finance operations. For its financial analysis, Scope focuses on GS Inima's leverage on a recourse debt basis but recognises the relevance of the infrastructure business when considering leverage on a consolidated basis. Scope believes that the company would support the infrastructure projects in times of financial distress and reflects this with a 25% consolidation of non-recourse debt and cash.

Scope forecasts Debt/EBITDA to remain at around 2x based on the expected, steady growth in the company’s EBITDA in line with the increasing debt, thanks to the high visibility of future cash generation from existing operational concessions. However, volatility in this metric could arise from delivery delays and/or cost overruns on concession projects currently under construction

Liquidity: adequate. Liquidity is adequate, benefitting from unrestricted cash balances of EUR 95m and cash equivalents of above EUR 100m available as at end-June 2024. Scope applies a 75% haircut to the cash held in the concession companies to reflect the 25% non-recourse addition in its leverage calculation. Liquidity is further enhanced by EUR 20m of undrawn committed credit lines. These resources are enough to cover EUR 63m of short-term maturities (incl. EUR 27m in non-recourse debt) over the next 12 months.

Supplementary rating drivers: credit neutral. Scope has made no rating adjustments related to peer group considerations, parent support, or governance and structure.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that GS Inima will maintain predictable cash flows thanks to its long-term contractual concessions with strong remuneration mechanisms. Scope also expects the group will deliver on its growth targets (successful conclusion of projects under construction), maintaining Debt/EBITDA ratio, consistently at around 2.0x, with a 25% consolidation of non-recourse debt as well as an EBITDA interest cover of between 2.5x to 3.0x.

The upside scenarios for the ratings and Outlooks are (individually):

1. Debt/EBITDA of below 1.5x as well as EBITDA interest cover of above 4x
    
2. Greater diversification of operations into more mature markets (a scenario currently considered remote), improving the credit quality of the concession portfolio's country exposure

The downside scenarios for the ratings and Outlooks are (individually):

1. Debt/EBITDA of above 2.5x
    
2. EBITDA interest cover of around 2x
    
3. Deteriorating credit quality of the concession portfolio’s country exposure

Environmental, social and governance (ESG) factors

GS Inima is a key player in the circular economy due to its core business of water management across the value chain. The company’s applied technologies, such as reserve osmosis, will further enhance water management efficiency, key to maintaining its competitive position. From a social perspective, GS Inima provides the essential services of drinking water and desalination in countries exposed to water scarcity and infrastructure gaps.

All rating actions and rated entities

GS Inima Environment S.A.U.

Issuer rating: BBB-/Stable, new

*All credit metrics refer to Scope-adjusted figures
 
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this Credit Rating and/or Outlook, (General Corporate Rating Methodology, 16 October 2023; Construction and Construction Materials Rating Methodology, 24 January 2025), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating was to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and/or Outlook and the principal grounds on which the Credit Rating and/or Outlook are based. Following that review, the Credit Rating and/or Outlook was not amended before being issued.

Regulatory disclosures
The Credit Rating and/or Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and/or Outlook is UK-endorsed.
Lead analyst: Michel Bove, Director
Person responsible for approval of the Credit Rating: Philipp Wass, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 31 January 2025.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

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