Morningstar DBRS Confirms Issuer Rating on Corporación Grupo Avintia, S.L. at B (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Issuer Rating on Corporación Grupo Avintia, S.L. (Avintia or the Group) at B (low) with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating action reflects the improved estimated results for F2024, which showed an increase in revenues to EUR 622 million with an EBITDA margin at 3.1%, and the expectation of ongoing similar operating performance. However, the credit rating action also considers the uncertainty around the property development business in the medium term, which leads to a low visibility with regards to cash flow generation, the underperformance of the Group against their own forecast and the delays in the information provided.

The Stable trend reflects an activity level which continues to be supported by the construction backlog which is now around EUR 900 million. The recent Spanish government announcement regarding their intention to build more affordable social housing may boost the Company's backlog in particular as the Company has strong experience and technical capabilities. However, Morningstar DBRS remains prudent as this process could take long time.

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 remains higher than 3.0%, debt-to-EBITDA less than 8.0 times (x), and EBITDA margin significantly higher than 2% on a sustained basis, coupled with the receipt of consistent and timely financial information. Morningstar DBRS could consider a credit rating downgrade if the financial metrics deteriorate in the upcoming years with cash flow-to-debt ratio of less than 2.0%, debt-to-EBITDA of less than 10.0 times (x), and EBITDA margin of less than 1.8%. A further significant restatement of the audited financial statements could also negatively affect the credit rating.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS expects the Group to generate revenues above EUR 600 million while slightly improving the EBITDA margin at 3.3% in F2025 and 3.6% in F2026 from 3.1% estimated for FY2024. The improvement takes into account the increase in the proportion of industrialised construction over the traditional construction. In addition, the change in the property development strategy focusing on build-to-rent units to be sold once construction is completed, while improving profitability, at the same time increases the risk of delays in cash flow generation. Morningstar DBRS notes that management forecasts higher revenues and profitability for the 2025-26 period but, given the high volatility in the construction and property development sector and the overestimated projections in previous years, Morningstar DBRS remained extremely prudent in its base case.

FINANCIAL OUTLOOK
Although gross debt has decreased over the last two years, Morningstar DBRS expects a significant increment on indebtedness as the Group expects to boost the property development business. For F2025, Morningstar DBRS expects debt-to-EBITDA to surpass 6.5x to continue increasing to more than 7.5x on F2026 if the Group is able to continue with the development of the build-to-rent units. Morningstar DBRS anticipates cash flow-to-debt to remain around 7.0% on average for 2025 and 2026, reflecting some delays on the execution of the business plan.

CREDIT RATING RATIONALE
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, coupled with the high industry risk characterised by cyclicality, intense competition, and volatility; (2) increasing the proportion of fixed-price contracts; and (3) lack of visibility on the property development business.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781.

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

(B) Weighting of FRA Factors
In the analysis of Avintia, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Avintia, the BRA and the FRA carry approximately equal weight.

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 (25 June 2024) https://dbrs.morningstar.com/research/434735.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (15 April 2024) https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781

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/431153.

The primary sources of information used for this credit rating include audited financial accounts, interim accounts, management forecast. 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://www.dbrsmorningstar.com/research/446363.

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: Robert Streda, Senior Vice President
Initial Rating Date: 9 September 2021
Last Rating Date: 25 January 2024

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

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