Business Context and Reporting Period
This Form 6-K filing by Grupo Aval Acciones y Valores S.A. (Grupo Aval) covers the period ending February 16, 2017. The document is a transcript of a conference call held on February 15, 2017, addressing the impact of the Odebrecht transnational bribery scandal on Grupo Aval's infrastructure affiliate, Corficolombiana, and specifically the "Proyecto Ruta del Sol Tramo 2" (CRDS) concession.
Key Financial Metrics and Exposure
- Ownership Structure: Grupo Aval holds a 58% combined stake in Corficolombiana (10% direct, 48% indirect via controlled banks) and recognizes 44% of Corficolombiana's economics.
- CRDS Investment: Corficolombiana's affiliate, EPISOL, holds a 33% stake in CRDS. The initial cash investment was approximately Ps$86 billion (US$29 million), growing to Ps$0.35 trillion (US$117 million) via retained earnings.
- Asset Significance: The CRDS investment represents 1.7% of Corficolombiana's total assets and 0.2% of Grupo Aval's consolidated total assets.
- Income Contribution: CRDS contributed less than 2% to Grupo Aval's 2016 net income (Ps$95 billion share for Corficolombiana). Historically, the project contributed approximately 6% of Corficolombiana's net income and less than 1% of Grupo Aval's.
- Debt and Liquidity: CRDS held financial obligations of Ps$2.4 trillion (US$800 million) as of December 31, 2016. Grupo Aval banks provided 50% of this financing. As of January 30, 2017, these loans were past due by 30+ days.
- Provisioning Impact: If the default persists through Q1 2017, banks may need to provision Ps$120 billion (US$40 million). After tax and minority interest adjustments, the estimated negative impact on Grupo Aval's Net Income is approximately US$18 million, described by management as non-material.
Material Changes and Legal Developments
The filing details significant legal and operational changes stemming from Odebrecht's confession to bribery in Colombia:
- Contract Nullification Request: On January 18, the Colombian National Infrastructure Agency (ANI) requested arbitration to nullify the CRDS concession contract based on Odebrecht's bribery confession, not construction quality.
- Class Action and Injunctions: On January 23, the General Prosecutor filed a class action suit seeking government takeover of the concession. On February 10, a court issued a preventive injunction suspending the contract's effects, ordering the appointment of a government administrator, and freezing bank accounts of CRDS, Odebrecht entities, and specific individuals.
- Arbitration Status: Original arbitrators resigned on February 10 due to scope changes. New arbitrators were designated by the Bogota Chamber of Commerce on February 14.
- Executive Questioning: Corficolombiana's former President, Jose Elias Melo, was questioned by the Attorney General on January 30. Grupo Aval states he resigned a year prior for personal reasons and denies knowledge of any wrongdoing.
Outlook, Management Commentary, and Risks
- Management Stance: CEO Luis Carlos Sarmiento asserts Grupo Aval, Corficolombiana, and EPISOL were unaware of Odebrecht's illegal acts and have positioned themselves as victims. The company is cooperating fully with authorities.
- Resolution Expectations: Management expects a mutual agreement to terminate and liquidate the contract within Q1 2017. They are confident the financial system will be paid in full and that partner cash investments will be recovered.
- Operational Continuity: Until termination, the road must be maintained, tolls collected, and obligations to employees/suppliers met using existing cash resources.
- Broader Impact: Management states the nullity of the CRDS contract has no implications on Corficolombiana's four other 4th-generation infrastructure projects. No impairment of the equity investment in Corficolombiana is expected despite recent share price declines attributed to speculation.
- Risks: Risks include the potential for additional loan loss provisions if the resolution is delayed beyond Q1 2017 and the uncertainty of the final liquidation formula.
Key Facts for Investor Verification
- Verify the timeline and outcome of the new arbitration proceedings designated on February 14, 2017.
- Monitor the status of the Ps$2.4 trillion debt owed by CRDS and the specific provisioning actions taken by Grupo Aval's banks in Q1 2017 financial reports.
- Confirm the final liquidation formula agreed upon with the ANI and the Colombian government to ensure full repayment of loans and recovery of equity.
- Track any further legal developments regarding the questioning of former Corficolombiana President Jose Elias Melo.
- Assess the impact of the frozen bank accounts on the ability of CRDS to maintain the toll road and pay suppliers during the suspension period.