Fitch Upgrades Cementos Argos

Fitch Ratings has upgraded Cementos Argos, S.A.’s long-term national ratings to ‘AA+(col)’ from ‘AA(col)’, following the resolution of the Positive Watch. This upgrade applies to the following:

• Issuance of Ordinary Bonds for COP $640,000 million
• Program for the Issuance of Ordinary Bonds and Commercial Papers for up to COP $3.0 trillion
• Program for the Issuance of Ordinary Bonds and Commercial Papers for up to COP $2.0 trillion

The Long-Term Rating Outlook is Stable. The short-term national rating for the Ordinary Bond and Commercial Paper Issuance Programs was affirmed at ‘F1+(col)’.

The upgrade reflects the anticipated strengthening of Cementos Argos’ capital structure and enhanced financial flexibility due to the use of USD1.2 billion from a transaction with Summit Materials for debt repayment. Fitch projects the company’s gross and net leverage to approach 2x by 2024. Despite reduced geographic diversification from deconsolidating its U.S. operations, Cementos Argos’ profitability, reduced financial expenses, and reallocation of capital to more profitable operations are expected to support operating cash flow generation. The company’s non-controlling investment in Summit Materials provides exposure to the U.S. market, contributing to its financial flexibility.

Key Rating Factors:

Strengthened Capital Structure: Cementos Argos received approximately USD$1.2 billion from its transaction with Summit Materials (NYSE: SUM), earmarked for debt repayment. By 2024, debt payments are expected to total COP4.7 trillion, reducing the company’s debt from COP6.9 trillion at the end of 2023. The reduction in debt is expected to lower short-term debt maturities, spread out long-term amortizations, and maintain leverage near 2x.

Lower Leverage: Cementos Argos’ net leverage was 2.4x at the end of 2023, supported by favorable operating results. The transaction with Summit Materials allowed for U.S. asset monetization and debt repayment. Fitch forecasts that leverage will remain close to 2x through 2024, supported by stable EBITDA and moderate debt requirements.

Geographic Concentration: The deconsolidation of U.S. operations has reduced the company’s geographic diversification, concentrating operations in Colombia and Central America and the Caribbean (CAC). These regions are expected to account for approximately 58% and 42% of EBITDA, respectively. While this increases exposure to regional economic cycles, the expected improvement in profitability, stable EBITDA, and stronger capital structure should offset the risks.

Financial Flexibility: The non-controlling 31% stake in Summit Materials provides exposure to the U.S. market and supports financial flexibility. Cementos Argos has implemented cost and productivity efficiency programs, which are expected to improve its cost structure and profitability.

Negative Free Cash Flow: Fitch projects that operating cash flow (FCO) will remain stable, averaging COP730,000 million annually from 2025. However, due to demanding dividend payments and share buybacks, free cash flow (FFL) is expected to remain negative, with a margin of approximately -4%.

Competitive Position: Cementos Argos remains a leading producer of cement and concrete in Colombia and Central America. The company holds significant market shares in Colombia, the Dominican Republic, Panama, and Honduras.

Rating Derivation:

Cementos Argos has a more robust business and credit profile compared to Ultracem, S.A.S. (rated A(col) with a Negative Outlook) due to its broader geographic presence and lower leverage. However, compared to Colombina S.A. (rated AA+(col) with a Positive Outlook), Cementos Argos’ business profile is more vulnerable to economic cycles, although this is partially offset by its stronger capital structure.

Key Assumptions:

• Deconsolidation of the U.S. operation in 2024 and investment registration via the equity method.
• Debt repayment totaling USD1.2 trillion, with USD700 million for U.S. debt and USD500 million for Colombia.
• Annual cement sales volume growth in the low single digits between 2024 and 2027.
• EBITDA margin near 22%.
• Average exchange rate of COP4,152 per USD1 for the projection period.
• Capex and dividend distribution aligned with management projections.
• Share buybacks between 2024 and 2026 totaling approximately COP450,000 million.

Rating Sensitivity:

Negative/Downgrade Factors:

• Net debt-to-EBITDA leverage exceeding 2.5x on a sustained basis.
• Liquidity levels below 1x.
• Equity investments or debt-financed acquisitions that weaken the credit profile.
• Dividend distributions or value extraction mechanisms that increase leverage and pressure FFL.

Positive/Upgrade Factors:

• Greater geographic diversification of EBITDA generation.
• Sustained net debt-to-EBITDA leverage below 2x.
• Liquidity consistently above 1.5x.
• Interest coverage above 6.5x.
• Positive FFL generation throughout the cycle.

Liquidity:

The transaction with Summit Materials has improved Cementos Argos’ liquidity by reducing short-term debt concentrations. The remaining debt is primarily in long-term bonds with amortizations spread over time. The company’s stake in Summit Materials, a New York Stock Exchange-listed company, also supports financial flexibility. Cementos Argos maintains uncommitted credit quotas of COP2.5 trillion.

Issuer Profile:

Cementos Argos is a nearly 90-year-old company specializing in cement, concrete, and aggregates production in Colombia and CAC. Following the integration with Summit Materials in 2024, the company deconsolidated its U.S. operations, which accounted for 55% of EBITDA in 2023.

Criteria Applied:

• Corporate Finance Rating Methodology (December 22, 2023)
• National Scale Grading Methodology (December 22, 2020)
• Parent-Subsidiary Rating Link Methodology (July 13, 2023)