DBRS Morningstar Confirms the Issuer Rating of Grupo Avintia at B (high) and the Rating of Avintia PyC’s Senior Secured Notes at BB (low); All Trends Remain Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Issuer Rating of Grupo Avintia, S.L. (Grupo Avintia or the Group) at B (high). Grupo Avintia is the parent company of Avintia Proyectos y Construcciones, S.L. (Avintia PyC or the Company), the Group's key operating subsidiary and issuer of the Senior Secured Notes (the Notes). Grupo Avintia fully and unconditionally guarantees any present and future obligations of Avintia PyC, including the Notes. The Group and its major subsidiaries have provided intercompany guarantees in line with the requirements set out under the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support”.

Concurrently, DBRS Morningstar also confirmed the rating of the outstanding EUR 50 million 4.0% Senior Secured Notes now due on 1 March 2021 at BB (low). 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 Notes, the Notes are rated one notch higher than the Issuer Rating. In addition, 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 Morningstar expects that the amount of debt secured by the first mortgages will not be increased.

All trends are Stable. The Stable trend status takes into account that, despite the significant headwinds and uncertainties facing Grupo Avintia’s construction operations as a result of the Coronavirus Disease (COVID-19) pandemic, its property development and real estate businesses will sustain the Group’s key financial metrics at a level consistent with the current rating category.

KEY RATING CONSIDERATIONS

In 2019, as a result of fixed-price contracts, increasing labour and subcontracting costs, project delays, and low barriers to entry in the sector, Grupo Avintia continued to report weaker than previously expected key credit metrics, although these were still consistent with the current rating category. In H1 2020, against the backdrop of the coronavirus pandemic, the Group has taken measures to strengthen its liquidity position and balance sheet, including a six-month extension of the maturity of the Notes to 1 March 2021 from 1 September 2020 and additional EUR 40 million of senior unsecured debt guaranteed at 70% by the “Insituto de Credito Oficial” (as part of a package of Government measures in response to the coronavirus crisis).

As the coronavirus pandemic spreads and its consequences unfold, it is hard to anticipate the ultimate impact on the variables that drive Grupo Avintia’s credit quality. Because of the suspension and slowdown in the majority of the constructions works in Spain, the Group’s construction revenues and EBITDA are expected to contract materially in 2020. However, the Group’s overall results will be supported by the revenue and EBITDA generated by the sale of various residential complexes (on average, 90% presold and already in an advanced 80%+ construction status), and by the completion of the sale of the residential building in Las Rozas (part of the security package of the Notes).

RATING DRIVERS

Given the current circumstances, DBRS Morningstar considers a rating upgrade to be very unlikely. However, a trend change to Negative or a rating downgrade could be considered if the Group’s financial risk profile materially weakens as a result of a (1) more marked deterioration in the Group’s construction operations, (2) unexpected losses and delays in the recognition of earnings and cash flows from the Group’s property development business, and (3) the inability to timely divest real estate assets to deleverage and sustain the Group’s overall creditworthiness.

RATING RATIONALE

Grupo Avintia is a partially vertically integrated construction group with activities primarily in the construction and property development businesses. 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. The Group’s creditworthiness is constrained by its (1) high industry risk characterised by cyclicality, intense competition, and volatility heightened by the current coronavirus pandemic; (2) 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.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal applicable methodology is the Rating Companies in the Construction and Property Development Industry (28 November 2019). Other applicable methodologies include the DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating (25 November 2019); DBRS Morningstar Criteria: Guarantees and Other Forms of Support Rating (22 January 2020); and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (22 August 2019). These can be found can be found at: http://www.dbrsmorningstar.com/about/methodologies.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for these ratings include: partial unaudited consolidated annual accounts for 2019, the Group’s business and financial projections, the Group’s contingency plan in relation to the coronavirus pandemic, a meeting with management, and all written correspondence as of today. DBRS Morningstar considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/363535/grupo-avintia-sensitivity-analysis

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. 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: 30 April 2019

DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500

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--Rating Companies in the Construction and Property Development Industry (28 November 2019),
https://www.dbrsmorningstar.com/research/353795/rating-companies-in-the-construction-and-property-development-industry
--DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating (25 November 2019),
https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships
--DBRS Morningstar Criteria: Guarantees and Other Forms of Support Rating (22 January 2020),
https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
--DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (22 August 2019),
https://www.dbrsmorningstar.com/research/349584/dbrs-criteria-recovery-ratings-for-non-investment-grade-corporate-issuers

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.