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.
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.
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.
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.
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.
Gilberto Gonzalez, CFA
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Jose Luis Rivas
+57 1 307-5180
Joe Bormann, CFA
Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: firstname.lastname@example.org.
Additional information is available on www.fitchratings.com. 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.
Based On a Solid Profile, Fitch Ratings Affirms Its BB- Rating for Tecnoglass with a Stable Outlook
Fitch Ratings today affirmed its BB- ratings for the Barranquilla-based window-maker Tecnoglass (NASDAQ: TGLS), with a stable outlook, thanks to a solid profile, a competitive cost structure, and above-average growth. The BB- rating and stable outlook apply to both the company’s long-term foreign currency issuer default rating and long-term local currency issuer default rating (IDR).
According to the New York-based “big three” rating agency, Tecnoglass’ rating of BB- reflects its good market position in windows and glass-based facades, low cost base, and long-term expected growth rate. Against Latin American corporates rated at the BB-, Tecnoglass’ financial profile compares favorably, the agency added.
Fitch Ratings said in a statement that key assumptions within rating case for the company include sales growth continues in 2018 and 2019, supported by existing backlog and growth in U.S. commercial construction. The agency also noted its assumptions for Tecnoglass’ to maintain positive cash flow from operations in 2017 and 2018, gross leverage remaining at or below 3.5x over the intermediate term, and net leverage remaining below 3.0x over the intermediate term.
Photo: A Tecnoglass employee working within the company’s factory in Barranquilla, Colombia (Photo credit: Liliana Padierna)
Earlier this year, in March, the company, whose shares are listed on the NASDAQ and the Colombian Bolsa de Valores, bought Giovanni Monti and Partners Consulting and Glazing Contractors, Inc. (GM&P), a glazing and consulting contractor in Miami, for $35 million USD.
“The option to pay for the remaining $29 million USD of the acquisition amount of Giovanni Monti and Partners Consulting and Glazing Contractors Inc. in shares of Tecnoglass, either in whole or in part, provides Tecnoglass’ with the flexibility to choose some combination of funding so as to maintain its liquidity position,” stated Fitch.
This move was announced just three months after the company acquired Miami-based E.S. Windows, LLC for $13 million USD. The Florida company is the largest importer and reseller of the Barranquilla-based window and building materials maker’s products in the United States.
Despite these new acquisitions, Fitch said that liquidity is considered adequate. “The company held $46 million USD in cash as of the second-quarter 2017 and faced no significant debt maturities until 2022 when $210 million USD of notes mature,” stated Fitch. “Recently completed investments mitigate the need for large capital expenditure in the next two to three years.”
Santiago Giraldo, who was named chief financial officer of Tecnoglass in August, said he was pleased with the affirmation in what has been a challenging year but one that has been weathered well given the ongoing diversification strategy of a company that makes about 80% of its total sales to the United States.
“We expect to grow approximately 6% compared to 2016,” said Giraldo. “Additionally, it is important to see the credit that is given to our business model and cost structure, where we continue to obtain the highest margins in the industry and which gives us the flexibility to continue growing.”
Fitch added that 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.”
““It is important to see the credit that is given to our business model and cost structure,” said Santiago Giraldo, CFO of Tecnoglass. (Photo credit: Liliana Padierna)”
Tecnoglass grew rapidly from 2012, as it has gained new business, particularly in the United States. Its growth slowed in 2017 as new construction in Colombia contracted and its U.S. order backlog was deferred during the first half of 2017. The company’s 2017 EBITDA is expected to close at around $60 million USD, which compares unfavorably to $63 million USD as of 2016.
Despite lower 2017 EBITDA, Fitch estimates Tecnoglass EBITDA will expand to about $70 million USD in 2018 as its backlog is fulfilled. Tecnoglass’ order backlog expanded to $487 million USD as of June 30 of this year from $398 million USD a year ago.
Though Tecnoglass in recent years has been selling more products within Colombia, as well as Panama, its main market continues to be the United States. “The U.S. is such a big country and a powerful buyer that we still have a lot of growth to do in the U.S.” Tecnoglass COO Christian Daes told Finance Colombia in September. “The market for windows in the U.S. is over $30 billion USD, and we are hardly making 200 and some million dollars in sales. So that means there is still a long way for us to go.”
Fuente: Finance Colombia