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Global Credit Research - 22 Jul 2010
Buenos Aires, July 22, 2010 -- Moody's Latin America assigned a B3 local currency corporate family
rating and a Baa1.ar Argentina National Scale rating to Contreras
Hermanos S.A. ("Contreras"). The outlook
The B3 local currency corporate family rating and Baa1.ar .ar
Argentina National Scale rating reflect Contreras's small size,
earnings volatility and substantial geographic and project concentration.
In addition, the ratings are constrained by volatile cash flow that
the company experienced during the expansive cycle of Contreras'
top line growth in recent years. Contreras is the leading provider
of energy-related construction services, primarily serving
the oil and gas industry in Argentina, and has recently became a
niche player in the Brazilian market. Although the end market it
serves is cyclical and market conditions have been challenging,
the company's revenues during recent years have grown substantially
due to expansion investments in countries such as Brazil and Argentina.
Nevertheless, Contreras´ margins have been under pressure
and its revenues were exposed to significant concentration risk.
Contreras' ratings are supported by the company's sound business
model, its established track record in the industry as well as a
strategic focus in growing industry segments. An adequate balance
between public and private projects, as well as the relatively high
credit quality of its main private clients are also factors that support
the ratings. In addition, while the company's growth
rate has been high, Contreras has experienced declining margins,
although they remain solid and the company has managed its growth without
increasing debt materially.
Moody´s National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate between relative
risks. NSRs in Argentina are designated by the ".ar"
suffix. NSRs differ from global scale ratings in that they are
not globally comparable to the full universe of Moody´s rated entities,
but only with other rated entities within the same country.
Contreras' consolidated revenues for the fiscal year ending December
2009, totaled approximately AR$ 1.8 b (or U$
450 m), which is very low when compared to its international peers.
In addition, Contreras' revenues remain volatile. This
volatility is the consequence of tremendous growth over the last couple
of years, due to industry dynamics in both Argentina and Brazil.
Despite attempts to obtain greater diversification, Contreras'
revenues are expected to remain concentrated in the oil and gas segment.
The top three contracts represented more than 50% of total revenues
for the fiscal year ending December 2009, and the bulk of the order
backlog rests in only three projects. And while Contreras'
profit ratios are high in relation to its B3 rating, margins have
been under pressure. In spite of cost recovery protection clauses
on its contracts, cost overruns were not fully recovered,
either because of high inflation in Argentina or because of a delayed
recovery, which has had a negative effect on margins.
The company's ability to demonstrate pricing and bidding discipline
in a softened growth period and the recovery of its increased costs will
be a key rating consideration going forward.
Historically Contreras' liquidity has been comfortable, as
it was able to fund its cash needs internally. However, during
the last few years the company's free cash flow has been weak because
of significant working capital needs resulting from strong growth.
As a consequence, short-term debt has increased because of
the need to financing working capital to support growth. The need
for such investments in support of a high-growth strategy is likely
to decrease in the near to medium-term. The decline of its
WC needs should liberate funds for debt repayment.
Moody's acknowledges that Contreras has developed solid relationships
with banks and that it has demonstrated access to uncommitted bank facilities.
We also acknowledge that Contreras has entered in two longer-term
loans that helped it to reduce its exposure to short-term debt
to some extent. Nonetheless the dependence on uncommitted short
term credit facilities remains a credit negative.
The stable outlook reflects Moody's expectation that Contreras'
revenues will stabilize and that the company will be able to sustain or
improve its margins going forward. The stable outlook also anticipates
that Contreras will likely maintain a highly concentrated project portfolio.
If Contreras is not able to reverse the declining margin trend and to
reduce its working capital investment such that it fails to generate positive
levels of cash from operations, the ratings could come under downward
pressure. Quantitatively, if the EBITA margin drops to below
6%, cash from operations is negative and debt to EBITDA is
above 2.0 times, the ratings could be downgraded.
If Contreras is able to generate more stable revenues going forward while
margins recover to historical levels, the ratings could come under
upward rating pressure. In addition, a rating upgrade could
result from the continued development of ongoing projects that result
in high levels of internal cash generation for debt reduction.
In addition, a better-structured debt maturity profile that
reduces exposure to short-term debt and improved financial disclosure
could also add positive rating pressure.
Headquartered in Buenos Aires, Argentina, Contreras Hermanos
S.A. ("Contreras") is an Argentinean construction
company, focused on the civil and industrial infrastructure industry
segments, with a strong focus in the oil and gas industry.
Most of Contreras' operations are in Brazil and Argentina,
although it operates in various countries in South America . Contreras
reported consolidated revenues for the fiscal year ending December 31,
2009, of ARS 1.8 billion (about $ 450 million).
Vice President - Senior Analyst
Corporate Finance Group
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's assigns B3 and Baa1.ar ratings to Contreras
No Related Data.
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