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Jan 17 (The following statement was released by the rating agency)
Fitch Ratings has placed Tunisia-based construction group Servicom's National Long- and Short-term ratings of 'B(tun)' on Rating Watch Negative (RWN). Fitch has also assigned Servicom a senior unsecured rating of 'B(tun)' and simultaneously placed the rating on RWN.
The RWN reflects Servicom's increased leverage in 2013 to a level inconsistent with its ratings. The business continues to generate negative cash flows, leaving little scope for de-leveraging over the next two years.
Servicom is in the process of raising TND20m of equity, which if successful, should allow leverage to return to levels more consistent with the current ratings and provide some buffer to liquidity. Under such a scenario, Fitch expects funds from operations (FFO) adjusted net leverage to improve to around 3x in 2014 from 5.2x forecast for FY13. Additionally, the capital increase will provide Servicom with funding flexibility for business growth.
The capital increase, of which TND9.4m will be through a share offering in the Tunis Stock Exchange, is subject to the approval of the financial market authority, Conseil du Marche Financier. The transaction is expected to be closed in 1Q14. Fitch expects to resolve the RWN once the transaction is completed and following a full review of Servicom's credit metrics.
KEY RATING DRIVERS
Fitch expects Servicom's FFO adjusted net leverage to increase to 5.2x at FYE13, from 3.7x at FYE12, and to remain above 5x if the capital increase is not successful. If the TND20m capital increase is successful FFO adjusted net leverage should fall to around 3x in 2014 and remain at 3.5x over the next two years, levels which are compatible with its current ratings. Under the new shareholder agreement related to the capital increase, Servicom has committed to maintain net debt/EBITDA below 2.5x (forecast at 4.2x at FYE13). This commitment is likely to enforce more disciplined financial management.
New Organisation Structure
To accommodate the capital increase, Servicom's founding shareholders have grouped their interests in a new entity Servicom Holding SA. Servicom Holding SA owns 53% of Servicom shares and will fund its share of the capital increase through a contribution from the founding shareholders, the participation of a local equity fund, Maghreb Private Equity Fund II, and by raising bank debt. The bank debt at Servicom Holding SA will be on a non-recourse basis to Servicom. This new shareholding structure will likely force Servicom, from 2015 onwards, to upstream dividends to repay the bank loan. The Fitch rating case has assumed a 60% dividend payout ratio starting from 2015, which should cover the bank loan amortisation. Considering the above, we view the new organisation structure as neutral to Servicom's ratings.
Material Funding Needs
Fitch expects continued business growth to generate material funding needs. Servicom demonstrated strong access to bank funding and debt markets in 2013. The announced capital increase should support Servicom's funding needs. However, additional funding requirements may arise if the group is to maintain business growth over the next three years.
Servicom's cash from operations (CFO) is negative due to high working capital needs resulting from exposure to the state and state-related entities with long payment delays but low payment risk. Receivables collection rose to 357 days in 2012 from 288 days in 2011 and is likely to have remained high in 2013. This is likely to have kept CFO negative in 2013. According to Fitch's rating base case, FCF will remain negative over the next two years and refinancing risk high.
Fairly Limited Scale/Exposure to Tunisia
The ratings reflect the company's small size in the Tunisian construction sector (including telecom network deployment) compared with Fitch-rated peers both in Tunisia and internationally. The business is mainly domestic (90% of revenue) and geographical diversification is limited despite growing shares in Morocco and France. Although Fitch views positively Servicom's expansion into these lower-risk markets, it is not without execution risk.
Strong Growth Continues; Resilient Performance
Servicom continues to post strong growth despite a weak economic environment in Tunisia, benefiting from its niche position in public infrastructure projects. Revenue is expected by Fitch to have risen to TND47m in 2013 from only TND26m in 2011. Servitra, the subsidiary operating in infrastructure projects, expects revenue to have grown to TND18m in 2013 from only TND10m in 2011. Fitch expects Servicom's revenue growth to slow due to the execution risk of overseas expansion and economic uncertainty in Tunisia.
Affirmation of the Servicom's rating is subject to the successful completion of the capital increase, leading to an improvement in leverage to below 5x and coverage to above 2x (forecast at 2.2x at FYE13). A failure to complete the capital increase, resulting in leverage at above 5x and coverage below 2x, and negative CFO, would be negative for the ratings.