Fitch Downgrades Arendal to 'CCC'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Arendal, S. de R.L. de C.V. (Arendal)'s ratings to 'CCC' from 'B'. A full list of ratings actions follows at the end of this press release.

The downgrade reflects the lack of progress the company has made toward refinancing its short term debt, including its USD100 million notes due during May 2016. The current low oil price scenario has caused Arendal's major customer, Pemex, to reduce capex and extend its supplier payment terms. This has resulted in significant lengthening of the company's working capital cycles as its receivables with Pemex have grown. Positively, Arendal's reputation and overall business profile continue to move forward as evidenced by its increasing project backlog. This implies, however, that the company will need additional debt to fund the working capital needed to support these new projects, adding one more challenge to its current financial situation.

The expected Recovery Ratings of 'RR4' reflect average recovery prospects given default. 'RR4' rated securities have characteristics consistent with securities historically recovering 31%-50% of current principal and related interest.

KEY RATING DRIVERS

Customer and Project Concentration

Arendal has gained increasingly larger projects which have helped the company grow rapidly, but this growth has come with large-project concentration risks. A single large project can at times represent 40% of revenues or more. Additionally, the company's revenue mix is significantly oriented toward the public sector. During 2015, Arendal generated about 80% of its revenues from contracts with Pemex. Considering the available backlog, revenues from Pemex as the ultimate client will likely continue to represent a large portion of the company's revenue source.

Recovery Prospects

In Fitch's opinion, under a stress scenario recovery of debt instruments associated with pledged contracts would have access to the existing accounts receivable to cover outstanding debt; the remaining balances would form part of the mass of unsecured creditors with average prospects of recovery between 31%-50%.

KEY ASSUMPTIONS

--Flat to low single digit revenue growth for 2016; revenue growth accelerates in 2017 as the company executes the bulk of its DUBA-Salina Cruz project.

--MXN1.5 billion in working capital flows for 2016 and subsequent recovery of MXN1.2 billion in 2017.

--No dividend payments.

RATING SENSITIVITIES

Absent a successful refinancing, Fitch could downgrade the ratings to CC within a month of the 2016 notes maturity.

Successful debt refinancing and funding of operations through a combination of internal and external sources could result in the rating being upgraded to B-.

LIQUIDITY

Arendal's cash balance at year-end 2015 was MXN889 million, compared to MXN3.9 billion of short-term debt maturities. The company's cash flow from operations was negative MXN893 million. Free cash flow was negative MXN1.1 billion underperforming Fitch's prior expectations, largely due to higher working capital requirements. Accounts receivable with Pemex including costs incurred not yet billed total about MXN1.8 billion.

FULL LIST OF RATING ACTIONS

Fitch has downgraded Arendal's ratings as follows:

--Long-term Foreign Currency Issuer Default Rating (IDR) to 'CCC' from 'B';

--Long-term Local Currency IDR to 'CCC' from 'B';

--Unsecured notes due 2016 to 'CCC/RR4' from 'B/RR4'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999261

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999261

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160209006417/en/

Fitch Ratings
Primary Analyst
Gilberto Gonzalez, CFA
Associate Director
+1-312-606-2310
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Alberto de los Santos
Associate Director
+52 81-8399-9100
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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