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Global Credit Research - 21 Jan 2011
Mexico, January 21, 2011 -- Today Moody's assigned a Ba3 corporate family rating to Empresas
ICA, S.A.B. de C.V. (ICA) and
a Ba3 rating to its proposed senior unsecured perpetual notes.
Proceeds from the new notes will be used to refinance existing debt and
for general corporate purposes, including equity contributions for
new and existing projects. The outlook on the ratings is stable.
"ICA's Ba3 ratings are based on its leading position in the construction
industry in Mexico; its long-term track record of participating
in the largest construction and infrastructure projects in Mexico;
and the company's diversified and solid portfolio of concessions
in the road, airport and water treatment sectors, most of
which have solid margins and favorable earnings prospects" said Nymia
Almeida, Vice President and senior analyst at Moody's. "Constraining
its ratings is ICA's small revenue size as compared to its global
peers; limited global geographic diversity; high leverage and
limited cash flow generation", added the analyst.
The rating on the proposed notes is based on the fact that they will be
unconditionally and irrevocably guaranteed by CICASA, CONOISA and
CONEVISA, the principal operating subsidiaries of ICA. Joint
ventures or project companies will not guarantee the notes. The
new notes will be the sole debt at the holding/issuer level. As
of September 30, 2010, about 8% of ICA's consolidated
debt was secured by specific assets, and about 25% of its
cash position was located at joint ventures which do not guarantee ICA's
ICA's Moody's-adjusted debt leverage of 6.6
times for the last twelve months ended in September 30, 2010 compares
to the company's reported 6 times. Moody's adjusts
the company's debt by adding operating leases with a multiple of
5 times. At year end 2010, Moody's estimates that approximately
35% of the company's total debt had no legal recourse against
ICA since it was related to the concession business. However,
we assume that, in case of need, ICA would probably support
the debt at the concession business given its high margin and long-term
profile. As of September 30, 2010, the CFE receivables
related to the financing of "La Yesca", which are scheduled
to be paid in 2012, represented 25% of ICA's consolidated
ICA's ratings are also supported by the company's strong management
team with solid track record in the execution of complex projects.
In addition, the company has a good though concentrated customer
profile since about 55% of its receivables are related, directly
or indirectly, to the Mexican federal government (rated Baa1 stable)
and another 39% are related to long-term concessions,
which overall have solid cash flows and margins. ICA's ratings
are also supported by the favorable growth potential for its most important
business lines, construction and infrastructure: the Mexican
government was one of the least affected by the global crisis and has
demonstrated sufficient budget and financial flexibility to keep investing
in necessary infrastructure projects. These credit strengths are
offset by the company's revenue volatility derived from the inherent
unpredictability of the construction industry; the often variable
government construction spending; and the geographic concentration
in Mexico, where the company generates 93% of its construction
revenues and 95% of infrastructure/concession revenues.
During recent years, while ICA has remained the dominant construction
company in Mexico (with 15% of the total construction market;
55% of the toll-roads concession market; and 16%
of the airports market as estimated by the company), it has faced
increasing competition mostly from larger and better capitalized foreign
construction companies such as OHL, Abengoa, Odebrecht,
and Andrade Guitierrez, as well as from well-funded local
companies such as CICSA and IDEAL. Somewhat offsetting this competitive
risk is the company's favorable operating track record as well as
its solid long-term business relationship with major government-related
entities such as Pemex (Baa1 stable) and CFE (Baa1 stable), which
in 2009 represented about 40% of ICA's revenues. This
advantage is particularly relevant when partnering with select international
and local companies to bid for large construction or concession projects.
In the last twelve months ended in September 30, 2010, ICA's
revenue was 79% driven by construction-related business;
13% by infrastructure and concession projects; and 8%
by housing. In turn, construction provided for 40%
of EBITDA; infrastructure and concessions for 53%; and
housing for 7%. ICA's business strategy is to increase
the share of infrastructure and concessions of its total revenues so that
it can improve its margins. However, the company could also
choose to sell certain mature infrastructure assets to provide funds for
new projects. In case the net result is an increase of revenues
and EBITDA from infrastructure/concession projects, the relatively
stable nature of this business in comparison with the construction business
could contribute to a lower overall business risk for ICA.
ICA's liquidity position is weak and is a negative ratings factor.
The company's MXP3,618 million in cash on hands as of September
30, 2010, although in line with management's minimum
cash target of 10% of revenues, was insufficient to cover
the MXN5,474 million in short term debt. In addition,
approximately 25% of the cash balance is at joint ventures and
is not fully or immediately accessible. Although a portion of short
term debt will be refinanced with proceeds from the proposed notes,
Moody's believes that this would not represent a significant change
in refinancing risk. ICA is thus dependent on approximately MXN15
billion in uncommitted revolving credit lines, of which one third
was unused at the end of the third quarter 2010. Liquidity risk
is somewhat mitigated by ICA's solid banking relationships as well
as relatively modest committed revolving credit lines that mature in late
2011. Moody's ratings assumes continued renewal of ICA's
credit lines. Regarding foreign exchange exposure, Moody's
assumes that the company will continue to match foreign currency revenues
with foreign currency debt, thus significantly reducing the impact
of currency fluctuation. Moody's expects that the proposed
perpetual notes will be swapped into pesos.
The stable outlook on the ratings is based on Moody's expectation
that ICA will be successful in maintaining its market share of construction
and concession business and that the latter's portfolio, specifically,
will provide for stable earnings contributions. Moody's does
anticipate, however, that the construction business revenue
growth and margin may decline in 2012 due to lower government spending,
typical during Mexico's presidential elections years. The
stable outlook also assumes that the company's leverage will not
change significantly over the next couple of years.
ICA's ratings could be upgraded if the company's maturing
concession portfolio either increase dividends to ICA or can be monetized
via asset sales, with the proceeds used for debt reduction.
In this sense, the ratings could be positively affected if the company
manages to reduce its Moody's-adjusted leverage to around
4 times on a sustained basis, while maintaining positive revenue
growth and stable margins.
Conversely, ICA's ratings could be downgraded if revenue growth
or margins are affected by an increasingly competitive business environment;
if debt leverage increases further; or if it becomes difficult for
the company to renew its revolver credit lines, which today fund
its working capital needs.
The principal methodology used in this rating was Global Construction
Methodology published in November 2010.
The methodology-indicated rating for ICA is B2, two notches
below ICA's Ba3 ratings. Supporting the gap is the company's
solid concession business.
ICA is a Mexican holding company which began operations in 1947.
The company is the largest engineering, procurement and construction
company in Mexico and the largest provider in Mexico of construction services
to both public and private-sector clients. It is engaged
in a full range of construction and related activities, involving
the construction of infrastructure facilities, as well as industrial,
urban and housing construction. In addition, it is engaged
in the development and marketing of real estate, the construction,
maintenance and operation of airports, highways, bridges and
tunnels and in the management and operation of water supply systems and
solid waste disposal systems under concessions granted by governmental
authorities. During the last twelve months ended in September 30,
2010, its revenues and adjusted EBITDA amounted to USD2.7
billion and USD415 million, respectively.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
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Please see the ratings disclosure page on our website www.moodys.com
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Nymia C. Almeida
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's de Mexico S.A. de C.V
Moody's assigns Ba3 rating to ICA and its proposed perpetual notes. Outlook is stable.
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
No Related Data.
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