Fitch Rates Tecnoglass' Proposed Sr. Notes 'BB-(EXP)'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned 'BB-' Issuer Default Ratings (IDRs) to Tecnoglass, Inc.'s (Tecnoglass) as well as a 'BB-(EXP)' rating to the proposed senior unsecured debt issuance of up to USD225 million with a up to a 7-year maturity. A complete list of rating actions follows at the end of this press release.

Proceeds from the bond issuance will be used to refinance existing bank debt and for general corporate purposes including the funding of working capital. The notes will be guaranteed on a joint several basis by Tecnoglass' main operating subsidiaries Tecnoglass S.A. and C.I. Energia Solar S.A. E.S, as well as by other subsidiaries. The notes guarantors generate all of Tecnoglass' EBITDA.

KEY RATING DRIVERS

Fragmented and Competitive Industry

The company operates in a highly competitive and fragmented industry. 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.

Low Cost Structure

Tecnoglass derives over 60% 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 aluminium into tempered or laminated glass windows and facades with insulation, noise reduction and other features. This vertical integration coupled with competitive labor and transportation costs relative to U.S.-based competitors has led to Tecnoglass' above-industry profitability.

Production Site Concentration

Tecnoglass manufactures most of its products out of a single mega facility in Barranquilla, Colombia. 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. The ratings do not contemplate a catastrophic event, but acknowledge the company's production concentration in a single facility.

Rapid Growth

Tecnoglass has grown rapidly in the last few years, as it has continued to gain new business, particularly in the U.S. Its order backlog has grown to USD402 million as of Sept. 30, 2016 from USD280 million as of year-end 2014. This has resulted in EBITDA growing to USD65 million from USD36 million over the same period. Fitch estimates Tecnoglass' EBITDA will close at around USD70 million and USD80 million in 2016 and 2017, respectively.

Completed Investments Should Reduce Funding Needs

Tecnoglass has made significant investments to allow for projected growth. Through the third-quarter of 2016 (3Q16) and since year-end 2014 it had made aggregate investments of about USD160 million. Most of these investments increase the company's capacity to produce aluminium extrusions and low emissivity (Low-E) glass. Fitch believes Low-E window products will remain a popular feature of energy efficient buildings which, together with commercial construction continuing to grow in the U.S. at a mid-high-single-digit pace should support the company's ongoing revenue and operating cash flow growth.

Relatively Low Expected Leverage

The company's gross leverage remained below 3x through 2015 despite debt rising to USD138 million as of year-end 2015 from USD78 million at year-end 2013. Total debt as of 3Q16 was USD203 million and gross leverage was 3.1x. Fitch's base case suggests leverage should remain around 3x, allowing Tecnoglass' to continue to finance modest acquisitions or organic investments without significantly pressuring its credit metrics.

Stabilizing Negative CFFO

Fast growth and to a lesser extent opportunistic purchases of raw materials have led to meaningful working capital requirements and weak cash flow from operations (CFFO). CFFO was negative USD5 million and USD1 million in 2014 and 2015, respectively, and is likely to remain negative during 2016. The company has been implementing a working capital optimization strategy which coupled with some reduction of raw material inventories should lead to positive CFFO in 2017.

KEY ASSUMPTIONS

-- Sales continue to grow at a double-digit pace through 2018 supported by existing backlog and continued growth in the U.S. commercial sector.

-- CFFO turns positive during 2017 and remains positive during 2018.

-- Gross leverage remains at or below 3.5x over the intermediate term.

-- Net leverage remains below 3x over the intermediate term.

RATING SENSITIVITIES

Negative factors that could affect the company's credit profile include declining backlog and product sales, loss of competitive position, persistently negative cash flow from operations, and reduced liquidity. Expectations of total debt/EBITDA persistently above 3.5x or net debt/EBITDA above 3x would likely result in negative rating actions. Large debt-financed acquisitions would also be negative.

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 2x and net debt/EBITDA below 1.5x would be considered positive.

LIQUIDITY

Tecnoglass' liquidity is considered adequate. Recently completed investments mitigate the need for funding over the next two years. A vast majority of the USD62 million in short-term debt is expected to be refinanced with the proceeds of this issuance, which would leave the company with no significant debt maturities over the next several years. Interest coverage would be around 4x. Cash as of September 2016 was USD18 million and is expected to reach around USD40 million post issuance.

The company is seeking to obtain USD30 million to USD40 million of committed credit lines which would be renewable after one year and would also support its liquidity profile.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings to Tecnoglass, Inc.:

--Long-Term Foreign Currency Issuer Default Rating (IDR) 'BB-';

--Local Currency Long-Term IDR 'BB-';

--Proposed up to USD225 million senior unsecured notes due 2022 'BB-(EXP)'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Oct. 21, 2016

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

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014094

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014094

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Source: Fitch Ratings

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