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Rating Action:

Moody's assigns Ba3 rating to ICA and its proposed perpetual notes. Outlook is stable.

 The document has been translated in other languages

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.

RATINGS RATIONALE

"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 debt.

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 debt.

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.

REGULATORY DISCLOSURES

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 and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Mexico
Nymia C. Almeida
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's assigns Ba3 rating to ICA and its proposed perpetual notes. Outlook is stable.
No Related Data.
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