DBRS Downgrades Avintia PyC’s Issuer Rating to B (high) from BB (low), Withdraws Rating and Assigns New Rating to Grupo Avintia

DBRS Ratings Limited (DBRS) downgraded Avintia Proyectos y Construcciones, S.L. (Avintia PyC or the Company) to B (high) from BB (low) as a result of its more aggressive growth strategy focused on infrastructure projects, reduced segment diversification and weaker than previously forecast key financial metrics. DBRS then withdrew/discontinued the rating. Concurrently, DBRS assigned a new B (high) rating to Grupo Avintia, S.L. (Grupo Avintia or the Group), the parent company of Avintia PyC. The reason is that the parent company and its major subsidiaries have provided intercompany guarantees, and thus DBRS treats them as a consolidated credit and will use Grupo Avintia as the main reference point for the ratings. Based on a Recovery Rating of RR3, which reflects a substantial anticipated recovery of between 60% and 80% of the current outstanding balance of the EUR 50 million 4.0% Senior Secured Notes (the Notes), the Notes were confirmed at BB (low), which is one notch higher than the Issuer Rating. It is noted that EUR 14.9 million of the Notes was voluntarily repaid in December 2018 such that the outstanding balance as of 31 December 2018 was EUR 35.1 million. The trends on all ratings are Stable.

The Notes are fully and unconditionally guaranteed by deeds of commitment to grant second-ranking mortgages on three real estate properties held by related parties. DBRS expects that the amount of debt secured by the first mortgages will not be increased. In addition, Grupo Avintia fully and unconditionally guarantees any present and future obligations of Avintia PyC, including the Notes.

Grupo Avintia is a partially vertically integrated construction group with activities primarily in the construction and property development businesses (the hotel business was sold in the beginning of 2019). On one side, the Group’s creditworthiness is supported by (1) its established project control processes; (2) its strategy focused on known markets and solid domestic market position; (3) its modest single contract exposure; and (4) the Notes being fully and unconditionally guaranteed by second-ranking mortgages on real estate properties. On the other side, the Group’s creditworthiness is constrained by its: (1) high industry risk characterised by cyclicality, intense competition and volatility; (2) a more aggressive growth strategy, increasing project complexity and limited internal capability; (3) relatively small scale operations with geographic and product concentration; and (4) mostly fixed-price contracts and weaker than previously forecast key financial metrics. DBRS reports the consolidated financial data of Grupo Avintia as a whole.

In particular, Grupo Avintia’s business risk profile is expected to weaken in the medium term, as the Group is now pursuing a more aggressive growth strategy, with material planned expansion in civil works and energy projects, which are considered to be outside of its core areas of expertise, especially when compared with residential and commercial construction. In addition, the recent sale of the hotel business has reduced the Group’s overall segment diversification. As a result of fixed-price contracts, increasing labour and subcontracting costs, project delays and low barriers to entry in the sector, Grupo Avintia has also reported weaker than previously expected profitability and cash flow generation, which in turn have led to weaker than previously forecast key financial metrics.

DBRS considers Grupo Avintia’s overall creditworthiness to currently be within the current rating category. This view is based on the Group’s solid order backlog and property development portfolio, which are expected to benefit from the improving macroeconomic conditions in Spain. Hence, the decision to maintain all trends at a stable level. DBRS considers a rating upgrade to be very unlikely in the near term. However a change in the trend to negative or a rating downgrade could be considered in the near term if the Group fails to restore, as currently forecast, its key financial metrics to a level commensurate with the current rating category or issues arise from projects associated with their more aggressive growth strategy.

Notes:
All figures are in euros unless otherwise noted.

The principal applicable methodology is “Rating Companies in the Construction and Property Development Industry” (December 2018). Other applicable methodologies include the “DBRS Criteria: Guarantees and Other Forms of Support” (January 2019); “DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries” (November 2018); “DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers” (October 2018). These can be found can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include: the unaudited 2018 consolidated annual accounts of Grupo Avintia S.L.; the unaudited 2018 individual annual accounts of Avintia Proyectos y Construcciones S.L.; all the material provided by the company’s management through correspondence and in-person meetings, including the company’s strategy and financial forecasts. DBRS considers the information available to it for the purposes of providing these ratings to be of satisfactory quality. These ratings included participation by the rated entity.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Giuseppe Fresta, Vice President
Rating Committee Chair: Charles Halam-Andres, Managing Director
Initial Rating Date: 27 September 2017
Last Rating Date: 8 March 2019

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