Giralda Holding Conexion (Konecta) Assigned Preliminary 'B+' Ratings; Outlook Stable

  • Spain-headquartered customer relationship management (CRM) and business process outsourcing (BPO) provider Konecta has announced that it will be acquired by Intermediate Capital Group (ICG) and its senior management.
  • The group will be acquired by a new intermediate holding company, Giralda Holding Conexion, S.L.U., which intends to raise a new €320 million senior secured, first lien term loan B (TLB), supported by a €60 million first lien revolving credit facility (RCF), and refinance the group's existing capital structure.
  • We are assigning our preliminary 'B+' long-term issuer credit rating to Giralda Holding Conexion, S.L.U. and our preliminary 'B+' and '3' recovery rating to the group's senior secured facilities.
  • The stable outlook reflects our expectation that low-single-digit-percentage GDP growth in Spain and Latin America will drive similar revenue growth for Konecta, with adjusted EBITDA margins sustained above 10%, and adjusted debt to EBITDA sustained below 5x.
DUBLIN (S&P Global Ratings) March 13, 2019--S&P Global Ratings today took the 
rating actions described above. We assigned the preliminary 'B+' ratings 
following the announcement that ICG and its senior management will jointly 
acquire Konecta. The transaction is expected to close on March 19, 2019. 
Konecta plans to finance the acquisition and refinance its existing capital 
structure by issuing a €320 million senior secured, first lien TLB, supported 
by a €60 million senior secured RCF.

The final ratings will depend on the successful completion of the proposed 
transaction and receipt and satisfactory review of all final transaction 
documentation. Accordingly, the preliminary rating should not be construed as 
evidence of final ratings. If we do not receive final documentation within a 
reasonable time frame, or if final documentation departs from the material 
reviewed, we reserve the right to withdraw or revise the ratings. Potential 
changes include, but are not limited to, use of loan proceeds, maturity, size, 
and conditions of the loans, financial and other covenants, security, and 

We assess the group's business risk profile as weak given its relatively 
concentrated client base, small absolute size, and the fragmented nature of 
the CRM/BPO market. This is mitigated by the group's good position in its 
chosen markets and relatively flexible cost base.

Konecta generates about one-third of its total revenue from two clients, both 
of which are large multinationals. Despite the long-standing nature of their 
relationships, we consider Konecta to have relatively limited bargaining 
power. Additionally, the group has relatively limited sector diversity 
compared with some of the larger global players, such as Teleperformance, and 
Sitel, with telecommunications and financial services accounting for about 70% 
of total revenue in 2018. We also consider the CRM/BPO market to be highly 
competitive and fragmented, with Konecta's share of 1%-2% comparing less 
favorably with Teleperformance's roughly 6% and Convergys' 4%-5%. Given the 
scale benefits of offshoring for CRM/BPO providers, only the global market 
leaders have EBITDA margins above 15%, which we consider to be average for the 
general support services subsector as a whole.

Konecta's business risk profile is supported by the group's good position in 
the Spanish and Latin American telecom and financial services end markets, 
with leading positions in Spain, Colombia, Argentina, and Peru. The group's 
revenue is fairly well diversified geographically, given its small size. In 
2018, the group generated revenues of about €830 million, pro forma for the 
acquisition of Uranet, which closed in early 2019 but would have added €57 
million of revenues in 2018. Including Uranet, around 43% of 2018 revenues 
were derived from Spain, 15% from Colombia, 11% from Brazil, 10% from Peru, 
and the majority of the balance from other countries in Latin America. We also 
consider the group's cost base to be relatively flexible, with staff costs 
accounting for about 70% of total revenue, and about half of the group's 
full-time equivalent workforce on temporary contracts (linked to the duration 
of the campaign), which provides some margin protection in the event of a 

We expect flat revenue growth for Konecta in 2018 due to expected currency 
headwinds in Argentina and Brazil offsetting solid growth in Spain. In 2019 we 
expect a recovery toward GDP growth, of about 2%-3%. We anticipate adjusted 
EBITDA margins of about 10.5% in 2018 and modest margin expansion toward 11% 
in 2019 due to the company realizing benefits from its acquisition of 
modestly-higher-margin Brazilian BPO service provider Uranet, synergies, and 
operational improvements.

Our assessment of Konecta's financial risk considers adjusted debt to EBITDA 
of about 4.2x expected at the end of 2019, pro forma for the transaction and 
the acquisition of Uranet. In our calculation of debt at transaction close, we 
include €42 million of Latin American debt that we believe will remain 
outstanding and €40 million of expected drawings under the company's factoring 
facility. When forecasting outstanding amounts under the factoring facility, 
we consider peak historical usage.

At the close of the transaction, a significant portion of the capital 
structure will comprise of shareholder loans. In our calculation of credit 
ratios, we treat these securities as equity since their governing documents 
contain features that we believe make them act as subordinated loss-absorbing 
capital, such as stapling provisions, and the absence of contractual payments 
due before the maturity of the loans. We expect free cash flow in the €25 
million-€30 million range in 2019 given Konecta's relatively low interest 
burden, but recognize the uncertainty in its less predictable markets, such a 
Brazil and Argentina, that could result in volatile free cash flow. In 2019, 
we expect free cash flow will be used to pay mandatory amortization on the 
Latin America local debt, repayment of the small RCF drawing expected at 
close, and tuck-in acquisitions.

The stable outlook reflects our expectation that low-single-digit-percentage 
GDP growth in Spain and Latin America will drive similar revenue growth for 
Konecta, with adjusted EBITDA margins sustained above 10% and adjusted debt to 
EBITDA sustained below 5x.

We could lower the rating if growth headwinds in Latin America result in a 
continued revenue decline or if high restructuring costs or operation missteps 
compress EBITDA margins to below 10%. We could also lower the rating if the 
company adopts a more aggressive financial policy and maintains adjusted debt 
to EBITDA above 5x. Additionally, the rating could be lowered if ICG group or 
an affiliate takes a position in Konecta's TLB, which we believe would create 
conflicting interests within the group and would cause us to reconsider 
whether the shareholder loan has sufficient equity-like characteristics to be 
treated as equity when calculating credit metrics.

We view an upgrade as unlikely over the next 12 months. Longer term, we could 
raise the rating if Konecta improves its market share and customer and 
geographical diversification, and expands EBITDA margins to above 15%, which 
we consider average for the general support services subsector. We could also 
raise the rating if we anticipate that Konecta will adopt a more conservative 
financial policy with adjusted debt to EBITDA sustained below 4x, which would 
likely come from an indication that the sponsor would relinquish effective 
control over Konecta.
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