The day after Tecnoglass Inc. released its third-quarter earnings, Fitch Ratings assigned the company an issuer default ratings of BB-, while Moody’s handed out its equivalent at Ba3 for the firm’s corporate family rating. Fitch gave a BB- rating to the Barranquilla-based glassmaker’s proposed $225 million USD of senior unsecured notes due in 2023. Moody’s rated the debt issuance at Ba3.
“Proceeds from the notes will be used to repay all of the company’s outstanding debt and other general business purposes,” said Moody’s in a statement. “The outlook of the ratings is stable.” Fitch Ratings added that the notes will be guaranteed on a joint several basis by two of the firm’s operating subsidiaries, Tecnoglass S.A. and C.I. Energia Solar S.A. E.S, in addition to other subsidiaries.
Moody’s is encouraged by recent performance. The agency says its ratings are “supported by the company’s solid credit metrics, including its EBITA margin at 17.5%, an adequate interest coverage of 3.4 times, and leverage of 3.6 times for the last 12 months ended June 30, 2016.”
Fitch Ratings also highlighted the rapid growth and low-cost structure of the glassmaker, which also manufactures other building materials. It noted that nearly two-thirds of the company’s revenue comes from the United States, while, from a products perspective, two-thirds of revenue comes from high-value windows and glass products.
These both project to continue fueling growth, particularly given Tecnoglass’ focus on low emissivity glass, a feature many energy-efficient builders will continue to covet in the United States. “The company transforms flat glass and aluminum into tempered or laminated glass windows and facades with insulation, noise reduction, and other features,” said Fitch. “This vertical integration, coupled with competitive labor and transportation costs relative to U.S.-based competitors, has led to Tecnoglass’ above-industry profitability.”
Moody’s did note, however, that the such concentration could also lead to potential problems down the line. “Balancing these positives are Tecnoglass’ narrow business lines and small operating scale when compared to other rated peers, the volatile nature of the industry in which it operates, and the negative working capital associated with its growth,” said Moody’s.
In short, the company’s expansion and investments in recent years have been a boon while also causing some complications. Earnings are spiking — with Fitch projecting EBITDA of around $70 million USD and $80 million USD for 2016 and 2017 — and so is its order backlog.
But related investment layouts, while helpful in terms of growth, have curtailed cash flow. Fitch stated that aggressive raw material purchasing has been one reason for the company’s cash flow from operations being negative in both 2014 and 2015. A “working capital optimization strategy,” says Fitch, should help turn this around in 2017, however.
Moody’s view further helps to minimize cash-flow concerns. “Except for working capital, cash needs will be limited as the company has already completed its expansion program and the plant has capacity for growth,” said Moody’s. “Additionally, the company is not anticipating to pay dividends other than $3 million USD in 2016.”
Fitch Ratings also highlighted the fragmented and competitive industry that Tecnoglass operates in. “The company operates in a highly competitive and fragmented industry,” said Fitch in a statement. “Competition is based primarily on a manufacturer’s ability to meet product specifications and delivery timeframes, perceived quality, and price. Tecnoglass’ competitors have diverse degrees of specialization and end-market or geographic diversification, including a limited number of competitors with established brand names and greater financial resources.”
On top of being so tied to one market geographically — the United States — the company’s lack of location diversity is another concern. Tecnoglass operates primarily out of one large plant in Barranquilla on Colombia’s Caribbean coast. With very little catastrophic exposure, there is little to worry about in that respect. But having so many eggs in a single basket is notable. “Fitch believes that any disruption to this site could impair the company’s ability to manufacture or distribute its products, which could cause the company to incur higher costs or longer lead times, lost revenue, and reduced cash flow generation,” said Fitch.
But ultimately, as long as some of the key concerns can be avoided, the outlook comes along with encouraging words from Moody’s assessment. “The stable outlook reflects Moody’s expectation that Tecnoglass will be able to execute its organic growth plan in the U.S. while maintaining its strong margins and adequate liquidity profile,” said the agency.