Fitch Affirms Tecnoglass at 'BB-'; Outlook Stable

The ratings reflect Tecnoglass' competitive cost structure and above average growth profile supported by its solid order backlog and long-term relationships with customers. The ratings are tempered by production site concentration and high working capital needs that have resulted in weak cash flow from operations. The ratings also reflect the high cyclicality of the new construction industry. The Stable Outlook rests on Fitch's expectations that the company's EBITDA will expand above USD70 in 2018 as the company fulfils its backlog, resulting in a total debt/EBITDA ratio of 3.4x in 2018. KEY RATING DRIVERS Fragmented and Competitive Industry: Tecnoglass operates in a highly competitive and fragmented industry. Competition is based primarily on a manufacturer's ability to meet product specifications and delivery time frames, perceived quality and price. The company's competitors have varying degrees of specialization and end-market or geographic diversification, including a limited number of competitors with established brand names and greater financial resources. Low Cost Structure: Tecnoglass derives over 75% of total revenues from the U.S. market. About two-thirds of its revenues stem from the sale of windows and glass-based facades. The company transforms flat glass and aluminum into tempered or laminated glass windows and facades with insulation, noise reduction, high resistance and other features. This vertical integration coupled with competitive labor and transportation costs relative to U.S.-based competitors has been positive to Tecnoglass' profitability. Production Site Concentration: The company manufactures most of its products out of a mega facility in Barranquilla, Colombia. Fitch Ratings believes any disruption to this site could impair Tecnoglass' ability to manufacture or distribute its products, which could cause it to incur higher costs or longer lead times, lost revenue and reduced cash flow. The ratings do not contemplate a catastrophic event, but acknowledge the company's production concentration in a single facility. Solid Order Backlog: Tecnoglass grew rapidly from 2012, as it has gained new business, particularly in the U.S. Its growth slowed in 2017 as new construction in Colombia contracted and its U.S. order backlog was deferred during 1H17. This resulted in lower revenues relative to a high fixed cost base and lower EBITDA. The company's 2017 EBITDA is expected to close at around USD60 million, which compares unfavourably to USD63 million as of 2016. Despite lower 2017 EBITDA Fitch estimates Tecnoglass EBITDA will expand to about USD70 million in 2018 as its backlog is fulfilled. Tecnoglass' order backlog expanded to USD487 million as of June. 30, 2017 from USD398 million a year ago. Completed Investments: The company made aggregate investments of approximately USD160 million between 2012-2016 to support its growth. Most of these investments increased its capacity to produce aluminum extrusions and low emissivity (Low-E) glass. Low-E window products should remain a popular feature of energy-efficient buildings which, together with commercial construction continuing to grow in the U.S. at a mid- to high-single-digit pace, should support ongoing revenue and operating cash flow growth. Leverage Expected to Trend Down: Tecnoglass' gross leverage remained below 3.0x through 2015 despite debt rising to USD138 million as of year-end 2015 from USD78 million at year-end 2013. Total debt as of second-quarter 2017 was USD234 million and gross leverage was 4.3x. This leverage figure includes bad debt provisions for USD7 million which are not expected to occur in 2018. Fitch's base case suggests leverage should trend to around 3.5x in 2018 and fall below that threshold in subsequent years. Fitch's base case suggests Tecnoglass should be able to continue to finance modest acquisitions or organic investments without significantly pressuring its credit metrics. DERIVATION SUMMARY Tecnoglass' competitors are mostly regional and local window manufacturers that would typically be rated in the low 'BB' to 'B' rating categories. Characteristics of companies in these rating levels include, limited scale and breath of offering, replicable completive advantages, and low geographic and end market diversification. A fragmented industry where the number of industry players fluctuates with the cycle is also a feature of companies in those levels. A limited number of competitors of large scale, ample product offerings, meaningful geographic diversification, strong competitive positions and solid financial flexibility, such as Crh PLC (BBB) participate across a broad spectrum of products, including architectural glass. Tecnoglass' rating of BB- reflects its good market position in windows and glass-based facades, its low cost base and long-term expected growth rate. Against Latin American corporates rated at the BB-, Tecnoglass' financial profile compares favorably. Total adjusted debt/ EBITDA, Interest coverage and revenue growth for the median 'BB-' corporate are 4.0x, 3.3x and 6%, respectively. These compare with Fitch's expectations of 3.4x, 3.7x and 11%, respectively. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Sales growth resumes in 2018 and 2019, supported by existing backlog and growth in U.S. commercial construction; --Positive cash flow from operations in 2017 and 2018; --Gross leverage remains at or below 3.5x over the intermediate term; --Net leverage remains below 3.0x over the intermediate term. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action An upgrade is unlikely in the intermediate term. However, positive rating actions could be driven by a strengthening of Tecnoglass' business and financial positions. Stable operating cash flow generation through industry and economic cycles resulting in leverage levels of total debt/EBITDA at or below 2.0x and net debt/EBITDA below 1.5x would be considered positive. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action Negative Rating Triggers: Declining backlog and product sales, loss of competitive position, persistently negative cash flow from operations (CFFO), and reduced liquidity could affect the company's credit profile. Expectations of total debt/EBITDA persistently above 3.5x or net debt/EBITDA above 3.0x would likely result in negative rating actions. Large debt-financed acquisitions would also be negative. LIQUIDITY Adequate Liquidity: Tecnoglass' liquidity is considered adequate. The company held USD46 million in cash as of the second-quarter 2017 and faced no significant debt maturities until 2022 when USD210 million of notes mature. Recently completed investments mitigate the need for large capex in the next 2-3 years. The company's main funding needs will be working capital, which Fitch projects will increase as Tecnoglass executes its backlog, but should not prevent the company from generating positive cash flow from operations, which Fitch estimates at around USD20 million for 2018. This compares to USD16 million generated as of the LTM ended June 2017. The option to pay for the remaining USD29 million of the acquisition amount of Giovanni Monti and Partners Consulting and Glazing Contractors Inc (GMP) in shares of Tecnoglass, either in whole or in part, provides Tecnoglass' with flexibility to choose some combination of funding so as to maintain its liquidity position. FULL LIST OF RATING ACTIONS Fitch affirmed Tecnoglass' ratings as follows: --Long-Term Foreign Currency IDR at 'BB-'; --Local Currency Long-Term IDR at 'BB-'; --USD210 million senior unsecured notes due 2022 at 'BB-'. The Rating Outlook is Stable. Contact: Primary Analyst Gilberto Gonzalez, CFA Associate Director +1-312-606-2310 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Jose Luis Rivas Associate Director +57 1 307-5180 Committee Chairperson Joe Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: [email protected]. Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.   Source: