DBRS Morningstar Confirms Corporación Grupo Avintia’s Issuer Rating at B (high) with a Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed Corporación Grupo Avintia, S.L.’s Issuer Rating at B (high) with a Stable trend.

KEY RATING CONSIDERATIONS
In 2021, Corporación Grupo Avintia (the Group) reported an improvement in key credit metrics compared with 2020, but the numbers fell short of its 2020 projections. The current inflationary environment has forced the Group to renegotiate open book projects that have not been started yet, as it seeks to reduce the impact of increasing input prices, mainly raw materials and electricity. In addition, the property development business is still recovering from the slowdown caused by the Coronavirus Disease (COVID-19) pandemic.

Considering the backlog, construction activity is expected to recover in 2022. Industrialized construction should increase considerably, thanks to the Community of Madrid’s "Vive Plan", improving EBITDA and profitability. In real estate business, the Group’s strategy for the current year is to sell or complete the sale of various real estate developments (e.g., in Santa Ponca, Canet de Berenguer, Santa Eulalia, Benicalap and Vigo). The Group will also divest the last real estate assets in Las Rozas and Torrejón de Ardoz between 2022 and 2023. Finally, the Group have some investments in non-control special-purpose vehicles, which are expected to be delivered in this year. As a result, DBRS Morningstar expects the Group’s EBITDA and cash flow from operations to improve over the following years and surpass the pre-pandemic levels, mainly driven by the increasing construction activity.

During 2021, the Group was able to cancel the EUR 50 million 4.0% Senior Secured Notes issued by its subsidiary, Avintia Proyectos y Construcciones, S.L., whose maturity was extended to March 2021 from September 2020 earlier. As of 31 May 2022, following the repayment of the Notes, adjusted total debt stood at about EUR 135.1 million and cash and cash equivalents amounted to EUR 87.0 million.

Although the Group faces significant challenges such as rising inflation and delays in backlog execution, the Stable trend takes into account increasing margins from industrialized constructions, greater contribution from the property development business, and the real estate divestments, which should help it improve and sustain the key financial metrics at a level consistent with the current rating category by the end of 2022. In addition, Corporación Grupo Avintia also benefits from a solid backlog of EUR 1.3 billion in its construction segment, which provides a certain degree of visibility to earnings and cash flow generation.

RATING DRIVERS
DBRS Morningstar considers a rating upgrade to be very unlikely in the near term. 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 (1) unexpected losses and delays in the recognition of earnings and cash flows from the Group’s property development business, (2) the inability to timely divest real estate assets to deleverage and sustain the Group’s overall creditworthiness, and (3) the ineffectiveness of the Group’s industrialized construction strategy to improve profitability and margins.

RATING RATIONALE
Corporación Grupo Avintia is a partially vertically integrated construction group with activities primarily in the construction, property development, and real estate businesses. The Group’s creditworthiness is supported by its: (1) established project control processes; (2) focus on known markets and solid domestic market position; (3) modest single contract exposure; and (4) development of the industrialized construction business line. The Group’s creditworthiness is constrained by its: (1) high industry risk characterised by cyclicality, intense competition, and volatility; (2) aggressive growth strategy, increasing project complexity, and limited internal capability; (3) relatively small scale operations with geographic and product concentration; and (4) partially fixed-price contracts.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar notes that this press release was amended on 17 March 2023 to include the analytical titles in the disclosures section.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the “Rating Companies in the Construction and Property Development Industry” (19 November 2021), https://www.dbrsmorningstar.com/research/388476, and “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (4 April 2022), https://www.dbrsmorningstar.com/research/394683, which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (17 May 2022), https://www.dbrsmorningstar.com/research/396929.

The primary sources of information used for this rating include annual reports and financial statements, interim financial statements, interim management statements, management projections and budgets, and external correspondence. DBRS Morningstar considers the information available to it for the purposes of providing this rating 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/402620/corporacion-grupo-avintia-sl-sensitivity-analysis-of-the-relevant-key-rating-assumptions.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Laura Gutiérrez, Assistant Vice President
Rating Committee Chair: Giuseppe Fresta, Senior Vice President and Team Lead
Initial Rating Date: 9 September 2021
Last Rating Date: 9 September 2021

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-- Rating Companies in the Construction and Property Development Industry (19 November 2021), https://www.dbrsmorningstar.com/research/388476.
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (4 April 2022), https://www.dbrsmorningstar.com/research/394683.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929.

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