OREANDA-NEWS. Fitch Ratings has downgraded Tunisia-based construction group Servicom's National Long-term rating to 'B-(tun)' from 'B(tun)' and National Long-Term senior unsecured rating to 'CCC+(tun)' from 'B(tun)'. The Outlook is Stable. The National Short-term rating has been affirmed at 'B(tun)'. Fitch has also downgraded the outstanding 2018 bond's National Long-Term rating to 'CCC+(tun)' from 'B(tun)'.

The downgrade reflects Servicom's breach of Fitch's negative guidelines (5.2x funds from operations (FFO) leverage in 2014 vs 4.0x negative guideline, negative Cash Flow from Operations (CFO) in 2014). Moreover Fitch also forecasts only a limited improvement in Servicom's financial profile over the next two years while liquidity is also tight. Fitch will monitor any improvement as Servicom's management is shifting its focus from growth to profitability and working capital.

KEY RATING DRIVERS
Rising Debt Burden
Fitch expects Servicom's debt to further rise in 2015 and 2016 due to continued cash outflow in a context of rising capital expenditure. FFO adjusted leverage will remain above 5x, a level more consistent with a 'B-(tun)' rating. Fitch considers that Servicom's deleveraging capabilities are limited over the foreseeable future. A sustainable improvement in credit metrics will depend on management's capacity to boost EBITDA and improve working capital.

Tight Liquidity
Fitch expects Servicom's liquidity to remain under pressure due to sustained negative free cash flow (FCF). Servicom has access to TND15m of revolving credit facilities, of which TND7m was undrawn at FYE14 compared with TND26m of short-term debt. The company is dependent on local banks to renew available facilities and finance working capital. Servicom managed to increase its revolving credit facility by TND2m in 2014 and has raised TND20m of equity, which helped support liquidity. The planned TND20m bond issue in 2015 is expected to help refinance TND12m commercial paper and improve the debt maturity profile.

High Concentration Risk
Servicom's main clients are the Tunisian government and its agencies, which account for 68% of the group's revenues. This high customer concentration is an additional risk for Servicom. Moreover the exposure to the public sector implies long payment delays and impacts working capital. However, Fitch understands management is working on increasing the share of the private sector in order to improve collection delays.

Limited Size and Geographic Diversification
The ratings continue to reflect the company's small size in the Tunisian construction sector (including telecom network deployment) compared with Fitch-rated peers in Tunisia and internationally. The business is mainly domestic (90% of revenue) and geographical diversification is limited despite growing shares in Morocco and France.

Sponsor's Support
Servicom's ratings factor in support from Africinvest as a recent new shareholder (indirectly holding 22% of shares post equity injection).The equity fund made management shift focus to profitability and returns from growing the business and is willing to enforce a disciplined management strategy aimed at achieving adequate credit ratios over the medium term.

Below Average Recovery Prospects
The TND8m bond is an unsecured, unguaranteed debt obligation of Servicom SA. Servicom S.A.'s bondholders are structurally subordinated to creditors at operating subsidiary level (around 60% of debt outstanding as at YE2014). The resulting below average recovery prospects are reflected in the bond's rating of 'CCC+(tun)', one notch below the National Long-term rating of 'B-(tun)'.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Servicom include:
- Sustained revenue and EBITDA growth supported by construction activity and expansion into new territories
- Profitability to remain at the historical average (EBITDA margin around 14%)
- Some improvement in working capital management
- Capex increase in line with management reported expansionary capex plan
- No dividends
- Bond issuance in 2015

RATING SENSITIVITIES
Future developments that could, individually or collectively, lead to positive rating action include:
-Improved working capital management
-Capacity to lessen reliance on banks and shareholders

Future developments that could, individually or collectively, lead to negative rating action include:
-Increased liquidity risks
-Evidence of weakening bank support