TEXT-S&P affirms Empresas ICA SAB de CV 'BB-' rating
Overview -- Mexico-based construction company Empresas ICA's key financial metrics remain in line with our expectations for 2012. -- We are affirming our 'BB-' global scale and 'mxBBB+' national scale corporate credit rating on the company and 'B+' issue-level rating on its senior unsecured notes. -- The stable outlook reflects our expectation that the company will maintain an adequate liquidity and its leverage metrics to continue improving in line with its current financial profile. Rating Action On Dec. 18, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' global scale and 'mxBBB+' national scale corporate credit rating on Empresas ICA S.A.B. de C.V. (ICA). At the same time, we affirmed the 'B+' issue-level rating and the recovery rating of '5', indicating expectation of moderate (10% to 30%) recovery in the event of a payment default, to the company's senior unsecured notes due 2017 and 2021. The outlook is stable. Rationale The 'BB-' rating on ICA reflects our assessment of the company's "fair" business risk profile, "aggressive" financial risk profile, and "adequate" liquidity. Our assessment of ICA's business risk profile as "fair" reflects the inherent cyclicality of the construction industry, and the geographic concentration of its markets. These factors are counterbalanced by the company's status as the largest engineering, procurement, and construction firm in Mexico, with a long and positive track record throughout its different business divisions. It also reflects the company's diversified portfolio mix with investments in large projects with complex designs and heavy construction, as well as participation in road and water concessions, and airports. On Dec. 3, 2012, ICA announced that it will merge its homebuilding division ViveICA with Servicios Corporativos Javer (not rated). Following this transaction, we believe that ICA's business and financial risk profiles won't be significantly affected, as ViveICA contributed less than 5% of consolidated EBITDA and accounted for about 2% of the company's total debt. In our view, this recent sale reflects ICA's focus on the growth of its construction business and the expansion of operations in infrastructure development. The company's construction division generates 80% of revenues, and infrastructure unit 13%. The infrastructure division contributes 50% of EBITDA, and construction 48%. As of Sept. 30, 2012, the company's backlog reached approximately MXN42.5 billion, with two recently contracted toll road projects and a container port development on Mexico's west coast accounting for almost 25% of the backlog. Our assessment of ICA's financial risk profile as "aggressive" reflects limited financial flexibility associated with high leverage ratios that we expect to be in the 7.0x area by the end of 2012. Under our base-case scenario, we assume that the existing backlog will support a 15% revenue growth in 2013. The start of several concessions, including a couple of toll roads and water-related projects, will drive revenue growth. Our baseline forecast considers that the concessions division will maintain EBITDA margins close to 60%. We expect ICA's debt-to-EBITDA ratio to decline below 6.0x in 2013 and the mid-4x area in 2014. We also expect funds from operations to total debt will improve rapidly to 15% by 2015 from less than 5.0% in 2012 due to increased cash flow generation. Our assessment on ICA's financial risk profile incorporates our expectations that the company's financial policy would limit the use of debt at the holding company level to $850 million. Also, our analysis of the company's capital structure excludes nonrecourse debt to ICA (i.e., debt from the 'ring-fenced' airport operations and the debt from project finance structures of concession assets). Under this assessment, we expect ICA's deconsolidated debt-to-EBITDA ratio to approach 6.0x by 2013. Our senior unsecured debt rating is one notch below the corporate credit rating, reflecting 'moderate' recovery prospects in a default scenario, and the resulting structural subordination relative to other operating-subsidiaries' liabilities. (For our structural subordination methodology, see "Corporate Ratings Criteria 2008," published April 15, 2008, and "Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt," published August 10, 2009, on RatingsDirect). Liquidity Based on its likely sources and uses of cash during the next 12-18 months and our performance expectations, ICA has "adequate" liquidity. Other relevant factors in our assessment of ICA's liquidity profile include the following: -- ICA's sources of liquidity to exceed uses by at least 1.2x; -- Net sources to be positive, even if EBITDA is lower than our expectations by 15% during the next 12 months; and -- The company faces a smooth debt maturity profile for 2013-2016. As of Sept. 30, 2012, ICA's liquidity sources include a cash balance of approximately MXN6.9 billion and expected FFO of more than MXN2.7 billion during the next 12 months. Under our base-case scenario, we have incorporated capital expenditures in the MXN4.0 billion area for 2013, mainly to support the company's backlog. We believe, however, that part of the capital expenditures planned in 2013 are discretionary, and expect management to pull back on spending if operating performance is below expectations. We expect the company's cash flow generation to cover most of the annual capital investment requirements, which shall contribute to maintaining cash balances between MXN7 billion and MXN9 billion. Our assessment on ICA's liquidity also reflects our view the company will be able to cover debt service payments at the holding company level, mainly supported by dividends from each of the operating business divisions Furthermore, the company faces a manageable debt maturity schedule, as the bulk of its consolidated debt is structured as project finance and debt maturities are matched to the underlying cash flows. Recovery analysis The recovery rating on ICA's senior unsecured notes is '5', indicating expectation of moderate (10% to 30%) recovery in the event of a payment default. (For the complete recovery analysis, see Standard & Poor's recovery report published on RatingsDirect on Aug. 28, 2012.) Outlook The stable outlook reflects our expectation that ICA will improve its key financial metrics levels more commensurate with its current financial risk profile. In particular, we expect the company to strengthen its capital structure by year-end 2012 following payment of $1 billion in debt obligations related to the La Yesca project. Under our base-case scenario, during 2013 the company would not engage in large-scale projects that would require an increase in debt financing, but instead we expect a deleveraging trajectory that will drive its debt-to-EBITDA ratio to 6.0x, declining further to the mid-4x area by 2014, as a result of concessions coming online that would contribute to the improvement of cash flow generation. Also, we expect ICA to limit the use of debt at the holding company level to $850 million. We could lower the ratings if ICA deviates from its current financial plans during 2013. For example, if the company incurs additional debt at the holding company level, weaker-than-expected operating performance that results in sluggish cash flow generation, and consequently in a leverage ratio above 6.0x by year-end 2013. In the medium term, we consider that an upgrade is unlikely due to the company's relatively high debt that limits its financial flexibility. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010 -- 2008 Corporate Criteria: Our Rating Process, April 15, 2008 Ratings List Ratings Affirmed Empresas ICA S.A.B. de C.V. Corporate Credit Rating Global Rating Scale BB-/Stable/-- Caval - Mexican Rating Scale mxBBB+/Stable/-- Senior Unsecured B+ Recovery Rating 5 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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