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Rating Action:

Moody's downgrades Andrade Gutierrez Engenharia's ratings to Caa2; outlook remains negative

Global Credit Research - 31 Aug 2016

Approximately USD500 million of rated debt affected

New York, August 31, 2016 -- Moody's Investors Service, ("Moody's") has today downgraded to Caa2 from B2 the corporate family rating assigned to Andrade Gutierrez Engenharia S.A. (AGE) and to Caa2 from B2 the rating on its guaranteed notes issued by Andrade Gutierrez International S.A. (AGInt). The outlook for all ratings remains negative.

Ratings changed:

Issuer: Andrade Gutierrez Engenharia S.A. (AGE), Brazil

--Corporate Family Rating: to Caa2 from B2

Issuer: Andrade Gutierrez International S.A. (AGInt), Luxemburg

-- USD500 million senior unsecured notes due 2018: to Caa2 from B2 foreign currency rating

The outlook for all ratings remains negative

RATINGS RATIONALE

The downgrade reflects the continued deterioration of the market fundamentals for engineering and construction companies in Latin America, and particularly in Brazil, along with AGE's limited ability to generate operating cash flows under such adverse conditions, which materially increases its short term liquidity pressures.

The Caa2 rating considers AGE's weakened credit metrics, tight liquidity and the low likelihood that its operations and financial profile will recover in the next 12 to 18 months amid the unfavorable environment for infrastructure investments in Latin America. Accordingly, the rating comprises a higher probability that the company will need to rely either on asset sales or a capital increase to meet the entirety of its debt service requirements through mid-2018 or will enter into a debt restructuring with potential losses to creditors.

In March 2016, AGE reported a project backlog of BRL22.2 billion, reflecting a 12% reduction in the business portfolio since fiscal year end 2015 and a 26% accumulated reduction since 2014. The backlog reductions have been accompanied by large cash outlays, driven by delays in the collection of receivables and foreign exchange losses, which jeopardized the company's liquidity position. As a result, its cash balance fell to BRL1.8 billion on 30 March 2016, down from BRL2.8 billion on 01 January, 2015.

Also in March 2016, AGE entered into a leniency agreement with Brazil's Prosecutors Office to settle certain corruption allegations. The settlement was homologated by the Brazilian Courts in May 2016. Moody's viewed this settlement as a positive development, since it eliminated uncertainties for AGE to do business in Brazil, but the associated monetary penalties created further pressure on the company's liquidity and credit metrics. The settlement with authorities comprises a penalty of BRL1 billion to be paid in annual instalments for 12 years, adjusted by the country's base rate (SELIC), which is currently at 14.25% per year. The company agreed to collaborate with the investigations and remediate any wrong doings. In exchange, it will not be restricted to do business with the Brazil government or its related entities. This settlement is effectively completed, but there are some additional ongoing negotiations between the company and other government entities.

The company's leverage ratio has been impacted by large non-recurring items in 2015, such as contract cancellations and provisions. In 2016, Moody's estimates that AGE's adjusted debt to EBITDA ratio will likely exceed 10 times due to the reduction in the production rate of several projects and weaker backlog growth reflective of political uncertainties, fiscal constraints and steep reduction in commodity prices, which are affecting the trends for the metals and mining and oil and gas industries. We expect such adverse conditions to continue at least through 2017. Conversely, we do anticipate some improvement in working capital needs with collection of delayed receivables and stable operating margins supported by the company's initiatives to improve efficiency and cost reductions. But those events will not be enough to alleviate the pressure on AGE´s credit metrics over the short term.

The ratings remain supported by AGE's solid track record of execution in large scale and complex infrastructure projects and experienced management team. Historically, the parent company, AGSA, has been supportive to AGE, reducing dividend requirements in times of weaker results and increasing equity contributions when needed.

The negative outlook reflects the challenges ahead of the management to streamline the company's operations and address its liquidity situation on a timely fashion to meet the entirety of its upcoming debt payments and promote an effective leverage reduction.

Additional negative rating actions can be considered if AGE fails to meet short term financial obligations, breaches covenants that trigger debt acceleration or enters into a debt restructuring that results in higher than expected losses to creditors.

An upward rating movement would require AGE to adequate its capital structure, with adjusted leverage trending towards 6.5x total adjusted debt to EBITDA and interest coverage ratios (measured by EBIT to Interest) above 1.0x on a sustainable basis. An adequate liquidity profile and operating performance would be further considerations in a rating upgrade or outlook change.

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

Andrade Gutierrez Engenharia S.A. (AGE) is the second largest engineering and heavy construction company in Brazil, with net revenues of BRL5.5 billion (USD1.5 billion) as of LTM 31 March 2016. The company's backlog of BRL22.2 billion was comprised of 54 diversified projects including hydro power plants, basic infrastructure projects, industrial and civil construction, and oil and gas projects, of which 21% were located in Brazil, 49% in other Latin American countries and 30% in Africa, Europe and Asia. As of 31 March 2016, the company's outstanding cash position was BRL1.8 billion for a total gross debt of BRL3.9 billion that includes its off balance debt guarantees and contingency liabilities.

AGE is one of the main subsidiaries of Andrade Gutierrez S.A. (AGSA, unrated), one of the largest infrastructure conglomerates in Brazil, with strategic interests in telecommunication services and public concessions in transport, energy and sanitation. In addition to 100% ownership in AGE, the Andrade Gutierrez group indirectly holds, 10.26% of Contax (unrated), 17.0% of CCR S.A. (Ba3, negative), 6.7% of Companhia Energetica de Minas Gerais -- CEMIG (B1, negative), and 8.3% of Companhia de Saneamento do Parana -- SANEPAR (Ba3, negative), among other smaller stakes in infrastructure and concession companies. AGSA reported consolidated net revenues of BRL6.5 billion (USD 1.7 billion) as of fiscal year end 2015.

REGULATORY DISCLOSURES

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.

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.

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 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 for additional regulatory disclosures for each credit rating.

Cristiane Spercel
Vice President - Senior Analyst
Corporate 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

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

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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