Grupo Aval Acciones y Valores SA Proyecto Ruta del Sol Tramo 2 Call

Feb 15, 2017 AM EST
GRUPOAVAL.BG - Grupo Aval Acciones y Valores SA
Grupo Aval Acciones y Valores SA Proyecto Ruta del Sol Tramo 2 Call
Feb 15, 2017 / 09:00PM GMT 

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Corporate Participants
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   *  Luis Carlos Sarmiento
      Grupo Aval Acciones y Valores SA - President & CEO

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Presentation
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Operator   [1]
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 Welcome to Grupo Aval's conference call regarding Proyecto Ruta del Sol Tramo 2. My name is Hilda and I will be your operator for today's call.

 Grupo Aval is an issuer of securities in Colombia and in the United States, registered with the Colombia's National Registry of Shares and Issuers, RNVE, and the United States Securities and Exchange Commission. As such, it is subject to the control of the Superintendency of Finance and Compliance with the applicable US Securities regulation as a foreign private issuer under Rule 405 of the US Securities Act of 1933.

 The information provided in this call includes forward-looking statements by the Company, which are based on facts and circumstances as currently known. Actual results may vary from those stated in this call as a consequence of developments in the investigations and the decisions of any governmental, judicial or arbitral authority involved in this matter and the final agreement reached with respect to the Proyecto Ruta del Sol Tramo 2, among others.

 Grupo Aval shall not be responsible for any decision taken by investors in connection with this call. Grupo Aval expressly disclaims any obligation to review, update or correct the information provided in this call. The call is not intended to provide full disclosure on the subject discussed.

 Today's call will be conducted by Mr. Luis Carlos Sarmiento, President and CEO of Grupo Aval. I will now turn the call over to Mr. Luis Carlos Sarmiento. Mr. Sarmiento, you may begin.

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 Luis Carlos Sarmiento,  Grupo Aval Acciones y Valores SA - President & CEO   [2]
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 Good afternoon, everyone, and thank you for joining the call. We decided to hold this call, given the vast amount of questions and enquiries that we have received from investors, analysts and other interested parties with regard to the series of events and news related to Odebrecht transnational bribery scandal and its possible effects on Proyecto Ruta del Sol Tramo 2, Corficolombiana and Grupo Aval.

 I hope to cover all the questions you might have. If I do leave some unanswered, chances are that we do not have the information ourselves. In any case, if, after the call, there are other topics you would like to discuss with us, please do contact us and we will try to clarify all of your doubts. There are several events in motion as we speak. The moment we have additional information relevant to the market, we will make sure to inform you of any new developments.

 I would like to break this call in three main topics. First, I will share with you facts that I consider relevant and that I believe served to add context to the extent of our involvement in this project. Secondly, I will review for you, chronologically, all the events that have transgressed since the Lava Jato scandal erupted in Brazil. And, finally, I will try to answer other specific questions that we have received in the past few days from the investor and analyst community.

 To begin, the facts. Grupo Aval owns approximately 10% of Corficolombiana directly, and indirectly through three of the banks that Aval controls an additional 48%, or a total combined 58% stake in this affiliate. Aval receives 44% of the economics of Corficolombiana on its own financial statement.

 Corficolombiana is, by nature, an investment/merchant bank that generates revenues through three main lines of business; treasury, investment banking advisory, and investments in financial and non-financial operating companies. Corficolombiana's investments in non-financial companies are concentrated in four industries; energy, infrastructure, hotels and agro industry.

 Corficolombiana is an industry leader in infrastructure, as reflected by the fact that it is the country's largest toll road builder and operator. Corficolombiana is the majority shareholder in all but one of the infrastructure projects in which it participates. That is Ruta del Sol 2. The reason that Corficolombiana is not a majority shareholder in Ruta del Sol 2 is that Corficolombiana did not have the road building experience required by the government when this toll road was put up for bid back in 2009.

 Consequently, Corficolombiana sought partnerships with the then leading infrastructure companies in the world and, after a thorough selection process, decided to partner with Odebrecht as a, Latin America's largest engineering construction company. Odebrecht's main requirement was to be given operating control of the company that ultimately won the auction in late December 2009. This company is known today as Concesionaria Ruta del Sol 2, or CRDS.

 Corficolombiana participated in CRDS through a wholly owned affiliate, Episol, with a 33% stake, Odebrecht with 62% and the Solarte Group with 5%. Concesionaria Ruta del Sol 2 is the only partnership we have with Odebrecht. We're not associated with them in the Magdalena project, nor in any other project.

 Episol's cash investment in CRDS amounts to approximately [COP86 billion], which is approximately [$29 million]. However, through retained earnings, the investment of Episol in CRDS has grown to [COP0.35 trillion], which is approximately [$117 million], which is equivalent to 1.7% of the total assets of Corficolombiana, and to 0.2% of Grupo Aval's total consolidated assets. Corficolombiana's share of CRDS' net income for 2016 was [COP95 billion], which is approximately [$30 million] and, given our stake in Corficolombiana, this figure accounted for less than 2% of Grupo Aval's net income for the year.

 As mentioned by us in previous statements, since 2009 the company has contributed with approximately 6% of the total net income of Corficolombiana, and less than 1% of the total net income of Grupo Aval.

 CRDS has not distributed cash dividends to Corficolombiana and was not expected to do so in the next decade, as it first needed to finish the construction of the road and then it had to meet its obligations with the banks.

 The financial obligations of CRDS, which are the most relevant liability of the company as of December 31, 2016, was [COP2.4 trillion], which is approximately [$800 million]. 50% of such loans were granted by banks owned by Grupo Aval in both a revolving facility, which funded working capital requirements, and a long-term facility, which funded part of the construction.

 The loans are, as of January 30, 2017, past due 30 days and, as a consequence, banks have begun to constitute loan loss reserves. These loss reserves are not material as of January 31, and if they continue to be past due as of the end of this month, the additional amount required to be provisioned will not be material either. If, by the end of the first quarter this year, this matter has not been resolved, which is not our expectation, but if it has not been resolved, our banks would have to constitute additional provisions to reach a total of [COP120 billion], or [$40 million], in provisions.

 The loan loss reserves are tax deductible at a 40% rate this year. After such tax impact is deducted and minority interest is calculated, the provisions required in the first quarter of 2017 would have a negative impact in Aval's net income of approximately [$18 million]. This $18 million is a non-material figure if we compare with the net income we consistently generate.

 Now, let me address a chronology of events related to the Odebrecht scandal. On June 12, 2015, Brazilian police arrested Marcelo Odebrecht, the Head of Odebrecht SA. Mr. Odebrecht was accused of spearheading a $2.1 billion bribery scheme at state-run oil firm, Petrobras. The investigation looked into whether subcontractors may have colluded with top Petrobras executives to overbill the company and pay bribes.

 That same month, we requested that senior Odebrecht executives came to Colombia to explain what had happened and to reassure us that the charges were contained to Brazil and would not contaminate our partnership and/or the Ruta del Sol project. Senior executives from Brazil visited with us later on that month and gave us all sorts of plausible reassurances.

 There were no suspicions in anybody's mind that the corruption at Odebrecht would spill into Colombia. However, on December 21, 2016 we found out through press reports that Odebrecht had reached a plea agreement with the US Department of Justice in which Odebrecht SA confessed to several acts of corruption in several countries, including Colombia, where the company confessed to offering bribes for $11 million in order to obtain infrastructure contracts. In the first few days of January, 2017, we found out that bribes were paid in connection with the contracts associated with CRDS.

 Since the very first few days in January, we have been in close touch with government officials, with the Agencia Nacional de Infraestructura, ANI and with the Attorney General's office, the Fiscalia, to offer any assistance whatsoever that could be required from us. Because we had absolutely no knowledge of our partner's illegal actions, we officially requested to be made part of the case as victims of the actions of Odebrecht. On January 18, we were informed that the ANI had requested that an arbitration proceeding ruled that the Ruta del Sol 2 contract was null and void.

 The forum of the arbitration had been in place for about two years and had been considering a different matter between CRDS and the ANI. The ANI based its request solely on the base Odebrecht's confession to bribery, and not on the state of the construction project itself, which is deemed to be acceptable. We have presented a motion of opposition to the ANI's request, arguing that the non-culprit shareholders of CRDS would be unjustly affected by the declaration of the contract's nullity.

 By procedure, our opposition should motivate a conciliation hearing in which the parties should try to reach an agreement. We are very confident that, in such hearing, we will reach a mutual agreement to terminate and liquidate the contract. We're also confident that a formula for the liquidation of the contract will be agreed upon. And finally, we are confident that as a result of such formula, the financial system will be paid in full for the loans that are currently owed by CRDS. Our expectation is also that at least the cash investments of the partners in that concession will be recovered as a result of a liquidation formula.

 On January 23, the country's General Prosecutor, [La Procuraduria], filed a class action suit against CRDS in a state court that they will not administer [Tribuna de Cundinamarca]. The class action suit seeks that a judge orders the President of the country to choose and appoint a governmental entity to take over the concession and related contracts and assets. The President has not made public his determination on this matter yet.

 On January 30, Corficolombiana's former President, Jose Elias Melo, who resigned of his own accord approximately one year ago, was asked to go to the Fiscalia for questioning. We have no further information regarding this procedure, nor knowledge of him being charged with any accusations.

 Jose Elias was President of Corficolombiana for 10 years and left the company for personal reasons. There is no association between his leaving the company and the Odebrecht crime. On February 10, [Tribuna de Cundinamarca], where the class action suit had been filed by La Procuraduria, agreed to issue a preventive injunction, [medidas cautelares], including the following interim measures.

 The interim suspension of the effects of the concession contract on [deal, one], the current arbitration proceeding which the ANI requested the nullification of the contract reaches a final decision. Or two, the Tribuna de Cundinamarca reaches a final decision with respect to the class action, initiated at the request of the La Procuraduria, to instruct the President of Colombia to appoint a governmental entity in charge of the administration of toll road project Ruta del Sol 2 during the suspension of the concession contract.

 Thirdly, to cease or freeze the bank accounts and dividends of the following companies with respect to Proyecto Ruta del Sol. One, Concesionaria Ruta del Sol; two, Construtora Norberto Odebrecht Colombia; three, Odebrecht Latinvest Colombia; four, Estudios y Proyecto del Sol; and fifth, [CSS Constructores].

 Additionally, to cease and freeze the bank accounts of the following individuals: Gabriel Ignacio Garcia Morales, former Vice Minister of Transportation; and Odebrecht executives, Luiz Antonio Bueno, Luiz Antonio Mameri and Luiz Eduardo da Rocha Soares.

 On February 10, we were informed that the arbitrators in the arbitration proceeding considering the ANI's request to nullify the contract resigned their positions. The reason behind their resignation was associated to the fact that the scope of the arbitration proceeding initially installed approximately two years ago had been altered.

 On February 13, the parties to the arbitration, the ANI and CRDS, met to try to come up with a new list of arbitrators, and agreement was not reach. Thus, on February 14, the Bogota Chamber of Commerce designated new arbitrators who have the next few days to accept or reject their designation.

 On February 14, media reports indicated that a Fiscalia confidential document had been leaked and that on it, one of the government officials who accepted Odebrecht bribe had stated that Mr. Melo knew about the bribes. We have no further information regarding this allegation. In any case, we continue to support the Fiscalia's efforts to get to the bottom of this case, and any actions that it might take to accelerate the case's resolution.

 We are also fairly confident that we can resolve the ANI and Procuraduria's aspirations with the same agreement to terminate and liquidate the contract. Our aspiration is that the same agreement to terminate the contract can be considered and accepted by the newly appointed arbitrators, or by the Tribuna de Cundinamarca. We expect this to happen within the first quarter of this year.

 Before the contract is terminated, the road build should continue to be maintained, tolls should continue to be collected, and [to the best of the concession's] cash resources, its obligations with employees and suppliers should be met. As no other sources of income are going to flow into the concession, we believe it is imperative that a termination is reached in a short period of time. From our conversation with government officials, we believe that they agree on this point.

 Finally, let me refer to other specific enquiries that we have received over the past few days. The laws that rule the repercussions for shareholders in the Ruta del Sol 2 concession project are three. First, Law 80 of 1993; secondly, Law 1150 of 2007; and for a part of the project that's specifically an addition granted in 2014, Law 1474 of 2011.

 Consequently, the nullity of the Ruta del Sol 2 contract has no implications on Episol as a concessionaire or builder of toll roads. Furthermore, the nullity of the contract has no repercussions on the four infrastructure projects that we were awarded in Corficolombiana or fourth generation concessions. Of those four projects, two are wholly owned by Corficolombiana, and two will be controlled by Corficolombiana and have Iridium of Spain as a partner.

 The early termination of the contract is solely based on the confessed bribes made by Odebrecht to government officials, and is not associated to how the road was being built and operated. There is no ambivalence on this issue.

 Our interest on offering loans to fourth generation concession projects has not changed because of the issue being discussed. Having said so, for our banks, and all the other banks exposed to Ruta del Sol, it is of the upmost importance to see this resolved as soon as possible. Aside from the loans granted to Ruta del Sol, one of our banks made financial leases to Odebrecht in connection with another one of their projects, whose current balance is approximately [$14 million]. These leases are current as of today and are adequately guaranteed by the assets themselves.

 As mentioned before, Aval has a direct 10% stake in Corficolombiana, additional Banco de Bogota, Occidente and Popular have combined stakes of 48% in the company. On a regular basis, these banks perform a valuation exercise of their equity investments which are audited by KPMG. We do not expect any impairment of their investment in Corficolombiana at this point, because the value of that company should not be materially affected due to the limited financial repercussions that Ruta del Sol might have on Corficolombiana, its undeterred potential for growth, and its diverse sources of income.

 However, and given the vast amount of news, the price of shares of Corficolombiana have been negatively affected this year. We believe that a major driver in the decline of the price has been speculation.

 With this, I conclude my presentation; however, before I sign off, I would leave you with these last thoughts. First, I have shared all my knowledge about the Odebrecht scandal with you. Secondly, we are all equally informed. Thirdly, I hope that this information puts you in a position to be able to assess any potential financial repercussions and legal ramifications. Lastly, I want to reiterate that Grupo Aval, Corficolombiana and Episol were not aware of the acts committed by Odebrecht. We condemn those acts and we will continue to offer our full cooperation with all the government entities involved to get this matter resolved as fast as possible.

 For the past 60 years the results of this financial Group, that I've probably led for the past 17 years, have been based solely on principles of high standards, strong ethics, and respect for the law. It is tough to be so negatively affected by who we thought was the optimal partner, due to its business acumen and technical expertise. As we get through this and move on, we will use every single lesson that we have learned from this and we will put in place every additional control that we deem necessary to stop something similar from ever happening again.

 Thank you, and rest assured that as more information becomes available, we will keep the market posted. Thank you, Hilda.

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Operator   [3]
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 Thank you. Ladies and gentlemen, please note that our transcript of today's call, as well as a Spanish translation, will be made available shortly at Grupo Aval's website. We thank you for participating. You may now disconnect.




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