Morningstar DBRS Downgrades Corporación Grupo Avintia, S.L.’s Issuer Rating to B (low) from B (high) With Stable Trend and Removes the Under Review with Negative Implications Status

DBRS Ratings GmbH (Morningstar DBRS) downgraded the Issuer Rating of Corporación Grupo Avintia, S.L. (the Group) to B (low) from B (high) and removed the Under Review with Negative Implications status that had been placed on it on 26 October 2023. The Issuer Rating now carries a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
This credit rating action is being taken because of heightened concerns regarding the visibility of future financial performance caused by the continuing changes and inconsistencies in the information provided by the Group to Morningstar DBRS. In particular, significant restatement in the audited 2021 financial accounts and the extremely low profitability in 2021 and 2022 as well as the uncertainties related to 2023 results have driven the negative rating action. In addition the Group’s underperformance against our expectation during the last three years and the lack of visibility in the property development business will continue to weigh negatively on the overall rating assessment.

CREDIT RATING DRIVERS
Although a credit rating upgrade is not likely at this time, Morningstar DBRS could consider an upgrade if the cash-flow-to-debt ratio were to improve to above 3.0%, debt-to-EBITDA to below 8.0 times (x) and EBITDA margin to well above 2% on a sustained basis. Morningstar DBRS could consider a credit rating downgrade if the financial metrics continued to deteriorate in the upcoming years. Receipt of consistent and timely financial information is necessary for the stability of the rating. A further significant restatement of the audited financial statements could also negatively affect the credit rating.

EARNINGS OUTLOOK
Although the construction business is characterized by low profitability, the Group has suffered an EBITDA margin deterioration during the last three years. Delays in executing the industrialized construction backlog, the lower number of collaborative contracts to mitigate the rise in inflation, and increasing energy and raw material costs have led to a weaker financial profile for the Group. Since 2019, when the EBITDA margin stood at 2.9%, the Group's profitability has deteriorated each year, reaching 1.6% by the end of 2022. Although it seemed that the Group had recovered after the COVID-19 pandemic with an EBITDA margin at the end of 2021 at 3.9%, the restatement of the 2021 annual accounts showed an EBITDA margin deterioration to 1.0%.

FINANCIAL OUTLOOK
The Group has continually repaid its gross debt during the last two years. At the end of 2022, gross debt decreased to EUR 114.3 million from EUR 177.2 million in 2021 while, at the end of September 2023, it stood at EUR 82.8 million. However, despite the Group’s efforts to control leverage, the low EBITDA generated in the last years has negatively impacted its financial leverage, with an adjusted debt-to-EBITDA at 14.6x at the end of 2022 and 41.7x at the end of 2021. Adjusted cash- flow-to-debt has also worsened recently, standing at 3.1% in 2022 and 0% in 2021.

CREDIT RATING RATIONALE
Corporación Grupo Avintia is a partially vertically integrated construction group with activities primarily in construction and property development. The Group’s creditworthiness is supported by its (1) knowledge of the markets in which the Group operates with a solid domestic market position and (2) strong construction backlog. The Group’s creditworthiness is constrained by its (1) low profitability obtained during the last years in addition to the high industry risk characterised by cyclicality, intense competition, and volatility; (2) increasing fixed-price contracts; and (3) aggressive growth strategy, increasing project complexity, and limited internal capability.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Governance (G) Factors
The Governance factor had a relevant effect on the credit rating as it comprises the quality and accuracy of information.

This G factor is new and was not present in the prior credit rating disclosure as the information provided in the last years did not include significant errors nor inconsistency of information.

The delays and inconsistency in the financial information provided as well as underperformance against expectation have been included in the credit rating assessment with a negative impact.

There were no Environmental/Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
-- Weighting of BRA Factors
In the analysis of Corporación Grupo Avintia, S.L., the relative weighting of the BRA factors was approximately equal.

-- Weighting of FRA Factors
In the analysis of Corporación Grupo Avintia, S.L., the relative weighting of the FRA factors was approximately equal.

-- Weighting of the BRA and the FRA
In the analysis of Corporación Grupo Avintia, S.L., the BRA and the FRA carry approximately equal weight.

Morningstar DBRS notes that the above press release was amended on 2 February 2024 to incorporate the disclosure confirming that this credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom. The date of the “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” was also updated.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Construction and Property Development Industry (7 November 2023) https://dbrs.morningstar.com/research/422997

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

The primary sources of information used for this credit rating include audited financial accounts, interim accounts, management information, and external correspondence. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/427121.

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

Lead Analyst: Laura Gutierrez, Assistant Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: 9 September 2021
Last Rating Date: 26 October 2023

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.