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Rating Action:

Moody's downgrades Abengoa Mexico to B3 / B1.mx / MX-4, ratings remain on review for downgrade

 The document has been translated in other languages

24 Nov 2015

Mexico, November 24, 2015 -- Moody's de México (Moody's) has today downgraded Abengoa Mexico S.A. de C.V.'s issuer rating to B3 / B1.mx from B2/Ba1.mx. Concurrently, Moody's downgraded the national scale rating of its up to MXN3 billion short term certificados bursátiles (local notes) program to MX-4 from MX-3. The ratings remain under review for possible downgrade.

..Issuer: Abengoa Mexico, S.A. de C.V.

Downgrades:

.... Issuer Rating, Downgraded to B3 from B2; Placed Under Review for further Downgrade

.... Issuer Rating, Downgraded to B1.mx from Ba1.mx; Placed Under Review for further Downgrade

....Senior Unsecured Commercial Paper, Downgraded to MX-4 from MX-3; Placed Under Review for further Downgrade

Confirmations:

....Senior Unsecured Commercial Paper, at NP

RATINGS RATIONALE

The downgrade on Abengoa Mexico´s ratings mirrors the downgrade to B3 from B2 of the ratings of Abengoa S.A., Abengoa Mexico's parent company on November 19, 2015. The action was driven by a further deterioration of Abengoa S.A.'s liquidity situation in Q3 2015. A negative free cash flow of EUR 510 million led to a severe decline of immediately available cash sources to EUR 346 million, which we consider to be insufficient for the company. The sizeable cash outflow will nearly completely eliminate the positive effect from the contemplated rights issue of EUR620 million (net of fees), and put additional pressure on Abengoa S.A. to seek alternative cash sources, such as asset disposals and additional commitments from its banks for the next couple of quarters.

For further detail on the rating action on Abengoa S.A., please refer to moodys.com.

Abengoa Mexico's ratings continue under review for possible downgrade. During the review period we will assess the parent company's ability to execute its plan for liquidity improvement and reduce corporate leverage through a capital increase and asset disposals. Additionally, we will focus on further analyzing the mechanisms for cash transferring within Abengoa S.A.´s group.

On a stand-alone basis, Abengoa Mexico's B3/B1.mx issuer ratings reflect the company's experience in the Mexican construction market and longstanding relationship with relevant customers like CFE (Baa1, stable), the Mexican public electric utility. The rating also considers positive business prospects in Mexico and the strong technical capabilities that the company could access through its parent company, Abengoa S.A. Furthermore, we note that the company has been able to have a strong operating performance in recent years despite a more challenging operating environment. Balancing these positives are the company's small size in terms of revenues, compared construction companies rated globally, concentrated market base with public counterparties in Mexico, and a relatively weak business diversity assessment. The rating is further pressured by liquidity risk that could arise should its parent company's liquidity deteriorate further, given the inexistence of ring fencing provisions.

For the first nine months of 2015 Abengoa Mexico's operating results were solid, with a revenue growth rate of 27% when compared to the same period of prior year, given its strong two-year backlog as of January 2015, and despite a more challenging operating environment in the country. Moreover, the company was able to add new contracts, further increasing its backlog which adds visibility for future performance. In May 2015, the company announced that it signed a contract with PEMEX to develop, along with Italian company ENEL S.p.A. (Baa2 stable), a $950 million cogeneration plant. As of September 30, 2015 we estimate backlog / LTM revenues to be around 4 times.

Additionally, Abengoa México's leverage ratio of 2.2x as of September 2015 is low for the B3 / B1.mx rating and favorably compares with the universe of rated construction companies. Abengoa Mexico is involved in the engineering, procurement and construction of concession projects, but does not bear in its balance sheet those projects, usually consolidated at the holding level. Therefore, its credit metrics are not distorted by the debt related with equity requirement concessions that usually affects other construction companies, particularly when concessions are not in a mature stage. Also, the company has low leverage requirements as it can partly fund working capital needs through withdrawals from its cash position in the group's centralized treasury.

On the other hand, Abengoa Mexico's ratings also reflect our assessment that there is a high correlation between Abengoa Mexico's default risk vis-a-vis the default risk of its parent company, Abengoa S.A. Main drivers behind our assessment include the existence of cash pooling policies between Abengoa Mexico and Abengoa S.A and a high business dependence of Abengoa Mexico on Abengoa S.A.

Abengoa Mexico's credit profile has been affected by its parent company's tight liquidity, given cash pooling practices among both entities. The centralized treasury in Abengoa S.A. concentrates excess cash from all the subsidiaries without restrictions allowing the group to cover temporary cash shortfalls at a subsidiary level. Given Abengoa Mexico's strong cash generation, it has run surplus in the centralized treasury and we expect this trend to continue. However, given the lack of restrictions of the group to extract cash in the centralized treasury, this may not be available for Abengoa Mexico's needs should the group's liquidity continue to weaken.

As of the end of September 2015, net position in the centralized treasury was MXN 7.4 billion. This positively compares with the MXN 3.7 billion the company had as of the end of 2014 reflecting its strong cash generation. Although Abengoa Mexico's position in centralized treasury is enough to cover its cash needs, absent of it, its liquidity profile is very weak. As of September, only MXN 103 million were in the Mexican subsidiary's cash balance, which are not enough to cover short term maturities amounting MXN 2.1 billion.

Abengoa Mexico's ratings could be downgraded if its credit metrics deteriorate, for example if adjusted gross debt to EBITDA increases to 4.0 times and EBITA interest coverage falls below 1.0 times with no recovery prospects. Further negative pressure would arise if liquidity deteriorates, most likely due to difficulties in rolling over short-term debt or from deterioration in the operating environment stemming from economic slowdown and/or increased competition. Likewise, a negative rating action on Abengoa S.A. could result in a negative rating action for Abengoa Mexico.

Given the linkage between Abengoa Mexico and its parent company, a positive rating action for Abengoa Mexico is subject to a positive rating action to Abengoa S.A.'s rating and not envisioned in the short run. On a stand-alone basis, Abengoa Mexico's rating or outlook could improve if the positive trend continues with the company consistently growing its revenue base, while diversifying its backlog with other clients and projects to reduce the revenue concentration risk. An upgrade would also require a solid capital structure with low exposure to short term debt.

Headquartered in Mexico City, Abengoa Mexico is a fully owned subsidiary of Abengoa S.A. The company was founded in 1981 to conduct Abengoa S.A.'s business in Mexico. The company is well integrated into its parent's operation, with its main activity being the engineering & construction (E&C) of projects related with the energy industry. For the last twelve months ended in September 2015, Abengoa Mexico's revenue and Moody's-adjusted EBITDA margin were USD 254 million and 24.7% respectively.

The principal methodology used in these ratings was Construction Industry published in November 2014. Please see the Credit Policy page on www.moodys.com.mx for a copy of this methodology.

The period of time covered in the financial information used to determine Abengoa Mexico, S.A. de C.V. 's rating is between 01/01/2012 and 09/30/2015 (source: Audited Financial Statements).

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 June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

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.

The ratings have been disclosed to the rated entity prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action was 11/08/2015.

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 rating action on the support provider and in relation to each particular 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.mx.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

This Rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

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

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.

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

Please see ratings tab on the issuer/entity page on www.moodys.com.mx 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 our website www.moodys.com.mx for further information.

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

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

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

Sandra Beltran
Asst Vice President - Analyst
Corporate Finance Group
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

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
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 downgrades Abengoa Mexico to B3 / B1.mx / MX-4, ratings remain on review for downgrade
No Related Data.
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