OREANDA-NEWS. Fitch Ratings has affirmed Spain-based engineering and construction group Grupo Aldesa, S. A.'s Issuer Default Rating (IDR) at 'B' and maintained the Negative Outlook. At the same time, Fitch has affirmed wholly owned subsidiary Aldesa Financial Services S. A.'s senior secured rating at 'B'/'RR4'/'49%'.


Improving Operating Performance: In 2015 the operating performance of Aldesa's recourse business improved for the first time since the financial crisis. Aldesa posted strong sales growth with net turnover increasing by 35% with expansion in all regions where it operates. The main cause was a higher level of execution of works following strong backlog growth over 2013 and 2014.

This translated into material improvement in EBITDA and FFO generation on the back of a strong recovery in the profitability of the industrial business. Conversely, construction activities profitability has deteriorated further because of a less favourable project and customer mix.

Negative Outlook: The Negative Outlook reflects the risk Fitch's expectations of improvements in revenue and profitability are not realised, and that Aldesa's financial profile remains outside the sensitivities for a 'B' rating. Fitch will focus on Aldesa's ability to generate sustainable FFO, allowing for material deleveraging towards an FFO adjusted net leverage of 4.5x.

Diversified Niche Player: Aldesa benefits from strong technical skills in niche sub-segments of the construction industry, such as tunnelling and railways. The rating is also underpinned by a robust and geographically diversified order book, satisfactory end-market diversification, a solid record in risk management and by the absence of material maturities over the coming years. Aldesa's relatively small size with sales of less than EUR1bn in 2015 remains a concern.

Risks to FFO Improvement: We expect FFO generation to recover further over the foreseeable future. We believe Aldesa will continue to be able to leverage its technical skills, notably in tunnelling and railways, to increase its level of activity in the profitable segments of the construction industry. However, shifts in project and customer mix as well as fiercer competition in its key markets could dampen any sustained recovery in FFO.

Fragile Spanish Sector: The recovery of Spain's construction industry remains fragile, and pressure on profitability will only gradually ease. In Spain and Mexico, we expect growth to be driven by increasing demand from the private sector as public-sector investment will be held back by constraints on government spending. The underlying shifts in project mix and customer mix are likely to weigh on FFO generation growth as civil works contracts are typically more profitable and competition is fiercer with private customers. In Poland, competition is expected to remain a significant factor, pushing down price and margins.

Unwinding of the Net Working Capital: Fitch now expects a reduction in advanced payments in Mexico, a higher rate of construction activity and further reduction in days payable to lead to an unwinding of the current negative position, mostly over 2016. Fitch deems the current liquidity of the company sufficient to withstand the expected resorption of the negative net working-capital (NWC) position.

Over the past years, a fast-growing backlog in Mexico, where contracts generally featured advance payments, and shorter payment delays from clients in Spain have translated into a Fitch's calculated negative NWC position.

Weak Financial Structure: Fitch's adjusted FFO net leverage metrics improved to 4.9x in 2015, above our expectations for the rating, from 6.8x in 2014. The main drivers were stronger FFO improvement and lower than expected net debt as the partial reduction of the NWC position did not materialise over 2015. We expect the delayed NWC unwinding to lead to an FFO adjusted net leverage of 6.0x in 2016, reflecting a modest overall improvement in Aldesa's financial position from 2014.

The sustained strengthening of Aldesa's financial structure to come more in line with a 'B' rating will be determined by the extent of the FFO generation improvement, given the limited opportunity to crystallise dividends or value from the portfolio of investments.

Backlog Remains Robust: The total backlog decreased 4% in 2015 to EUR1.4bn, of which EUR1.1bn related to construction projects. For the time being, the decline in the order book is not a negative rating factor, as we expect new contracts to result in higher margins. The deterioration remains limited and has been driven by the high level of construction activity, more than offsetting the increase in new orders of 5%. We view the resulting decline in the backlog-to-revenue coverage ratio to 1.7x in 2015 from 2.4x in 2014 as more sustainable.

Project concentration risk remains high, but this is mitigated by management's prudent approach and the geographical diversification of the backlog mostly in high investment-grade countries.

Solid Track Record: Aldesa has robust risk management policies in place with no large loss-making contracts, a record of good execution and no evidence of large disputes. Management has taken a number of strategic steps that have helped the company avoid the restructuring or even bankruptcy that has affected its competitors. Aldesa was one of the few second-tier contractors to diversify outside Spain by concentrating on niche sub-segments such as railways and tunnelling. Using its presence in these sub-segments, it has managed to achieve a top 10 market position in Mexico.

Fitch's Adjustments: Fitch focuses its analysis on cash flow generated at the recourse group (Fitch's rating perimeter), primarily the engineering and construction (E&C) segment. Fitch adjusts leverage calculations for Aldesa to reflect the non-recourse nature of concessions by excluding related FFO and non-recourse debt, but including sustainable dividends.

Our net debt calculation is substantially higher than that reported by Aldesa. We take into account off-balance - sheet obligations related to working-capital management facilities (EUR72m at end 2015 of factoring and confirming) and operating leases (EUR12m at end2015). We also assume that an additional EUR71m of cash is not readily available for debt repayment because of seasonal working-capital swings (over Q1) and cash held in countries with foreign-exchange restrictions and other barriers to accessing liquidity


Fitch's key assumptions within our rating case for the issuer include

- Growth to remain positive, albeit at a much moderate rate than in 2015 (3%-4% in 2016-2018)

Annual Recourse EBITDA around EUR49m-EUR55m in 2016-2018

Reversal of the current negative NWC position

No dividends from non-recourse subsidiaries

No material assets disposal over the foreseeable future


Future Developments That May, Individually or Collectively, Lead to Positive Rating Action

FFO adjusted net leverage around 4.5x and FFO fixed charge cover around 2.0x on a sustained basis.

Significant improvement in the operating risk profile driven by increased scale and internationalisation, reduced concentration risk and funding diversification.

A material increase in steady income upstreamed from the concession business without a releveraging of assets.

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action

FFO adjusted net leverage failing to decline towards 4.5x and FFO fixed charge cover failing to improve towards 2.0x.

Failure to significantly improve FFO generation in 2016.

Deterioration of the liquidity profile with liquidity score below 1.0x and an increased dependency on factoring and short-term lines.

Negative FCF on a sustained basis.

Evidence of supporting weakening non-recourse activities or a material increase in new concessions leading to equity contributions from the recourse business.


Fitch views Aldesa's liquidity as adequate. At year-end 2015, available liquidity consisted of readily available cash for EUR155m and EUR104m of undrawn committed banking facilities, of which EUR100m is related to a revolving credit facility maturing in March 2018. In our view, this provides ample headroom to cover debt maturities of EUR12m (including the Cofides put option) in the next twelve months, the expected reversal of the NWC position and a sudden loss in working-capital management facilities.


Issuer Default Rating (IDR) affirmed at 'B' and the Negative Outlook maintained. At the same time, Fitch has affirmed wholly owned subsidiary Aldesa Financial Services S. A.'s senior secured rating at 'B'/'RR4'/'49%'.

Grupo Aldesa S. A.

Issuer Default Rating 'B';

Aldesa Financial Services

Senior secured 'B'/'RR4'/'49%';