Fitch Downgrades Galvao Participacoes' IDR to 'CCC'

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the foreign and local currency Issuer Default Ratings (IDRs) for Galvao Participacoes S.A. (GalPar) to 'CCC' from 'B-' and the national long-term rating to 'CCC(bra)' from 'BB+(bra)'. Fitch has also downgraded the national long-term rating for GalPar's fully owned subsidiary, Galvao Engenharia S.A. (GESA), to 'CCC(bra)' from 'BB+(bra)'. The ratings have been removed from Negative Watch. A complete list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The downgrades reflect GalPar's and GESA's intensifying liquidity risks. The group has been facing growing difficulties in obtaining working capital funding to operate, pay suppliers, and lengthen its debt maturity profile. Allegations of involvements in the Lava-Jato investigation and potential heavy fines, has led banks to become more restrictive towards the group. Important projects, such as the BR-153 toll road, are on hold as Banco Nacional de Desenvolvimento Economico e Social (BNDES) is demanding additional guarantees to provide the long term financing. The challenging conditions and delays in receiving payments for completed projects and recognizing claims related to contract amendments with Petroleo Brasileiro S.A. (Petrobras), worth more than BRL500 million, have also negatively impacted GESA's cash flow generation and increased refinancing risk.

Fitch considers positive the group's effort to sell some of its assets in order to improve liquidity, which would alleviate short term pressures if successful. By the end of February 2015 the GalPar and GESA's cash position remained tight at BRL154 million, compared with BRL429 million of debt due until August 2015. The ratings of GalPar and GESA are the same, given the mutual financial and operating support and cross guarantees provided. GESA should continue in the medium term to provide support to its affiliates in the form of debt guarantees, and indirectly through dividends streamed up to GalPar.

The latest financials available for GALPAR and GESA are June 2014 which reported weak credit metrics. As of June 30, 2014, GALPAR and GESA, on a consolidated basis, cash positions were low at BRL272 million and BRL183 million, respectively, which covered only 32% and 49% of their short term debts of BRL847 million and BRL371 million. In the same period, the consolidated total debt for GalPar was BRL2.1 billion and for GESA BRL597 million which resulted on net leverage of 3.8x and 3.2x, respectively.

KEY ASSUMPTIONS

--Ongoing and challenging negotiations for the company with the banks to support its working capital needs and rollover its short term debt;

--Sale of assets under tight conditions which could provide the company access to significant amount of cash;

--No expectation of short term progress in receiving the late payments and claims from Petrobras.

RATING SENSITIVITIES

The company's ratings could be downgraded if the company formally files for bankruptcy protection.

An upgrade is unlikely at this time given the group's challenging operating and financing scenario. A successful sale of assets above Fitch expectations would be positive.

Fitch has downgraded the following ratings:

Galvao Participacoes S.A.

--Foreign currency IDR to 'CCC' from 'B-';

--Local currency IDR to 'CCC' from 'B-';

--National scale rating to 'CCC(bra) from 'BB+(bra)';

--BRL300 million senior unsecured debentures due 2020 to 'CCC(bra)' from 'BB+(bra)'.

Galvao Engenharia S.A.

--National scale rating to 'CCC(bra) from 'BB+(bra)'.

Fitch has removed the ratings from Negative Watch.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Scale Ratings Criteria' (Oct. 30, 2013).

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981461

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Fitch Ratings
Primary Analyst
Alexandre Garcia
Associate Director
+55-11-4504-2616
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar - Sao Paulo - SP - CEP: 01418-100
or
Gustavo Mueller
Associate Director
+55-21 4503-2632
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55-21-4503-2627
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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