New York, April 01, 2020 -- Moody's Investors Service, ("Moody's") has
today placed Tecnoglass Inc.'s Ba3 corporate family rating and
the senior unsecured rating on its 2022 notes on review for downgrade.
Prior to this rating action Tecnoglass rating outlook was stable.
The action follows out expectation of weaker than anticipated operating
performance and challenging business prospects through at least 2021.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. Business conditions and
revenue-growth potential are deteriorating rapidly for construction
companies globally. The spread of the coronavirus and the associated
quarantines, social distancing measures, travel restrictions
and logistics disruptions have led to suspensions and delays in construction
activity. Today's action reflects the impact on Tecnoglass of the
breadth and severity of the shock, and the potential broad credit
quality deterioration it has triggered. We regard the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety.
The review for downgrade was prompted by our consideration that Tecnolgass
is at substantial risk of a rapid deterioration on its operational and
liquidity profile in the context of the Coronavirus outbreak given its
exposure to the US residential and commercial construction market and
geographic concentration of its production facilities in Colombia.
During the review, we will focus on Tecnoglass' ability to refinance
its 2022 notes, considering tightening capital markets conditions.
We will also use the period to analyze the evolution of the coronavirus
outbreak in Colombia and the US and its effects on Tecnoglass' profitability
and cash generation.
Currently the US account for 85% of Tecnoglass revenues and 90%
of backlog. In the US, construction activity has been suspended
in a few cities and slowed in others. At the same time, projects
are being delayed because of economic weakness. In terms of production,
the bulk of Tecnoglass manufacturing capabilities are highly concentrated
in Barranquilla, Colombia. Since 26 March, Colombia
declared a 19-day national lockdown to stop the spread of coronavirus.
Neither measure has affected Tecnoglass operations, as projects
in its pipeline and production continue without disruption. Still,
until the contagion is contained in both countries, Tecnoglass is
exposed to the risk of major disruptions.
During 2019, the company's operating performance improved,
providing better prospects for recovery once the crisis is over.
The company's revenues were $431 million, 16.1%
higher than in 2018 and resulting in a 18.6% CAGR since
2012. Also, Tecnoglass' EBITA margin, including
our standard adjustments, was 15.0%; adequate
for the Ba3 rating and higher compared with the 14.3% EBITA
margin as of year-end 2018. This improvement reflects lower
operating leverage, resulting from higher revenues. Prior
to the coronavirus outbreak, we were anticipating further margin
expansion in 2020. Capacity utilization is still low (between 56%
and 89%, depending on the specific part of the process),
resulting in further opportunities to achieve economies of scale as revenue
grows. But the effect of the disruptions on Tecnoglass' credit
quality now depends on how much revenue it loose amid potential construction
halts and delays, how quickly they are resumed and the degree to
which its access to funding is hurt. Strong order backlogs will
provide some revenue support once construction activity is fully restored.
Tecnoglass backlog is now 5.3% higher when compared to the
end of 2018. Economic stimulus measures, also have the potential
to limit revenue declines.
Tecnoglass' liquidity is tempered by refinancing risk as its $210
million senior notes are due in January 2022. To maintain adequate
liquidity, the company will need to refinance before the end of
2020 under increasingly volatile conditions in the capital markets.
Considering cash balance as of the end of 2019 of $48 million and
some $20 million available under committed lines, Tecnoglass
should be able to cover fixed costs, taxes and interests during
a temporary stoppage. However, any indication that the effect
will take longer than a couple of months will pressure liqudity significantly.
Some measures the company could take under a more stressed scenario include
to invoke the force majeure provision under its take or pay contracts
should a mandatory stoppage occurs. Also, although not a
base case, the company could have headcount reduction amid a more
challenging environment. Other measures to preserve cash could
include a closer management of working capital and to refrain to declare
dividends and extraordinary capex. The company could also draw
funds from uncommitted outstanding lines as a liquidity cushion.
The ratings are unlikely to be upgraded in the short term. Positive
rating pressure would not arise until the coronavirus outbreak is brought
under control, construction activity is fully restored in the US
and lockdowns in Colombia are over. At this point Moody's would
evaluate the balance sheet and liquidity strength of the company and positive
rating pressure would require evidence that the company is capable of
substantially recovering its financial metrics and restoring liquidity
headroom within a 1-2 year time horizon.
Ratings could be downgraded if there is no indication of an ongoing plan
to refinance the 2022 global notes by mid-2020. A downgrade
will also arise as an indication of a significant cash burn that threatens
Tecnoglass' ability to cover corporate expenses such as interests,
taxes and working capital with internal sources.
Tecnoglass Inc. is a Colombian company engaged in the production
of high-specification architectural glass and windows for both
commercial and residential markets in the US and Colombia. The
company operates a 2.7 million square foot (sq ft) plant located
in Barranquilla, Colombia. In 2019, about 86%
of the company's revenue was generated in the US, 12% in
Colombia and 2% in Panama and other countries in Latin America.
The company was established in 1984 and has been listed on the Nasdaq
since 2013 and the Colombian Stock Exchange since January 2016.
The company's market capitalization as of January 2019 was $359
The principal methodology used in these ratings was Manufacturing Methodology
published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Vice President - Senior Analyst
Corporate Finance Group
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MD - Corporate Finance
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