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Rating Action:

Moody's confirms Andrade Gutierrez Participações B3 global scale rating, upgrades national scale rating to B1.br from B2.br; outlook is stable

 The document has been translated in other languages

Global Credit Research - 16 Jan 2017

Sao Paulo, January 16, 2017 -- Moody's America Latina (Moody's) confirmed the global scale Corporate Family Ratings (CFR) of Andrade Gutierrez Participações S.A ("AG Par" or "the company") at B3 and upgraded the national scale CFR to B1.br from B2.br. The outlook for the ratings is stable. This concludes the review process initiated on 06 September 2016.

RATINGS RATIONALE

The confirmation of AG Par's CFR at B3 on the global scale and upgrade to B1.br from B2.br on Brazil national scale follow the completion of a refinancing transaction and the anticipated changes on the company's capital structure. On 06 January 2017 AG Par issued a BRL1.6 billion senior secured debentures due 2023, the proceeds of which were used to repay debt at AG Par, AGC, and at the parent company Andrade Gutierrez S.A ("AG SA"). Net proceeds of up to BRL 200 million could be used to repay existing debt at AG SA or any of its subsidiaries.

The rating action also reflects the reduced uncertainty on the probability of default for the company's debt given the elimination of certain cross default provisions with its sister company Andrade Gutierrez Engenharia S.A. ("AGE" rated Caa2, negative), as well as certain covenant provisions that have been recently violated and were pending waivers from note holders. After the refinancing AG Par will also benefit from an extended debt maturity profile with no material debt maturity until 2021. AG Par's CFRs also reflect the relatively stable cash flow profile of AG Par's participation in the relatively mature toll road industry through its share ownership in CCR S.A (CCR rated Ba3/A2.br).

On the other hand, AG Par's B3/B1.br CFR ratings take into consideration : (i) AG Par's increased leverage following the refinancing, reflected in market value leverage (as adjusted by Moody's) rising to 31% as of 30 September 2016 pro forma for the transaction, compared to 19% as reported, (ii) indirect exposure to a further liquidity deterioration of the sister company AGE through cross default provisions with AG SA in AG Par's debt, and dividend upstreaming to the parent, (iii) expectation that the higher borrowing costs and cash flow leakage related to investments participations in BRIO and MESA will result in weaker FFO interest coverage in next 12-18 months, and (iv) the reduced diversification of cash flows following the sale of shares in Companhia de Saneamento do Parana (Sanepar rated Ba3/A1.br, negative).

The 2017 bonds are secured by AG Par's shares of CCR through a fiduciary alienation contract which guarantees that the value of the collateral, reviewed on a monthly basis, remains between 150% and 200% of the debt outstanding throughout the final maturity of the debt. The fiduciary alienation contract provides that should the collateral value drops below 150% of debt outstanding, the company must add additional shares of CCR or provide cash supplement to bring collateral back to the 200% threshold. In Moody's view fiduciary alienation of assets are not typically part of recovery and liquidation proceedings and therefore creditors of the 2017 bonds would benefit from the transfer of ownership of the CCR shares in the scenario of a bankruptcy and liquidation proceedings at the level of AG SA that would include the company.

The 2017 bonds do not contain debt maintenance financial covenant, but limits the incurrence of debt to the maintenance of debt outstanding below BRL 1.7 billion for all new debt borrowed at AG Par starting from the issuance of the 2017 bonds, and to an incurrence test of 1.75x net debt / dividends received at the level of Andrade Gutierrez Concessões (AGC). While Moody's expects that this would provide a borrowing capacity of around BRL 300 million in 2017, the agency notes that further debt incurrence would also be constrained by the reduced pool of AG Par's unpledged assets which now mainly consists of its 6.7% participation in Companhia Energetica de Minas Gerais (CEMIG B1/Baa1.br)'s shares.

Moody's regards AG Par's liquidity profile as adequate. As of 30 September 2016 the company had a cash position of BRL 242 million. While AG Par's debt refinancing will not result in a cash inflow as all new debt will be used to prepay existing debt, it will provide the company with a long-dated maturity profile with no material debt maturities until 2021 when 30% of the 2017 bonds value become due. Notwithstanding the BRL 290 million proceeds from the sale of AG Par's participation in Sanepar in December, Moody's expects the company will generate negative free cash flow going forward driven by a reduction in dividend received and high borrowing costs, which will result in a reduction of its cash position in the next 12 to 18 months.

In the last twelve months ended 30 September 2016, AG Par's FFO interest coverage remained stable of 1.8x both in LTM September 2016 and FY 2015, as higher dividend received from the invested assets at AGC level were mitigated by higher interest expenses. Going forward Moody's expects FFO interest coverage will remain at low levels below 2.0x, driven by subdued level of dividend received (including the absence of dividends from Sanepar from 2018 onwards) and higher borrowing costs.

Rating Outlook

The stable outlook reflects AG Par adequate liquidity profile, following the successful completion of a refinancing transaction and the anticipated changes on the company's capital structure.

What Could change the rating Up

Visible improvements in cash flow generation driven by higher dividends received and/or a reduction in borrowing costs such that FFO interest coverage moves above 3.0x on a sustained basis could lead to a rating upgrade. A significant improvement in the credit profile of the sister company AGE could also exert positive pressure on the ratings.

What Could change the rating Down

A deterioration in AG Par's cash flow profile and/or the market value of its invested assets such that FFO interest coverage drops below 1.0x and/or market value leverage exceeds 35% on a sustained basis could lead to a rating downgrade. Challenges to contain further cash leakages from non-core minority participations MESA and BRIO would also exert negative pressure the ratings.

Headquartered in Belo Horizonte, Brazil, AG Par is an investment holding company with minority equity participations in infrastructure and utilities assets operating in Brazil. AG Par's main participations are CCR (through a 17% equity ownership - rated Ba3/A2.br, negative) and CEMIG (6.7% - B1/Baa1.br, negative). In addition to those assets, which AG Par holds via the intermediate holding company Andrade Gutierrez Concessões (AGC), the company also has a direct minority participation in the hydro-electric generation project MESA/Santo Antonio (2.1%) and a 50% stake in the arena management company BRIO. AG Par is wholly owned by AG SA, a top holding ultimately owned by the local Brazilian family holdings São Estevão, São Miguel and Sant'anna. For the twelve months that ended on 31 December 2015, AG Par generated a net income of BRL39.5 million, down from BRL 444.5 million in the prior year.

LIST OF AFFECTED RATINGS :

Issuer: Andrade Gutierrez Participações S.A (AG Par), Brazil

-- Corporate Family Ratings: Confirmed at B3 (Global Scale) and Upgraded to B1.br from B2.br (Brazil National Scale)

-- Outlook: Changed To Stable From Rating Under Review.

For further information, please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Investment Holding Companies and Conglomerates published in December 2015. Please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_189530.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

Information types used to prepare the rating are the following: financial data, debt documentations, public information, Moody's information, and regulatory fillings.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_193459.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_193921 for detailed information.

Entities rated by Moody's America Latina Ltda. and the rated entities' related parties may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities within the 12 months preceding the credit rating action. Please go to the link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_193920 for a list of entities receiving products/services from these related entities and the products/services received.

The date of the last Credit Rating Action was 6/9/2016.

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see ratings tab on the issuer/entity page on www.moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com.br for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.br for additional regulatory disclosures for each credit rating.

Paco Debonnaire
Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

No Related Data.
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