TEXT-Fitch cuts Abengoa to B+; outlook stable
(The following statement was released by the rating agency)
July 25 - Fitch Ratings has downgraded Abengoa, S.A.'s Long-term Issuer Default Rating (IDR) to 'B+' and senior unsecured rating to 'B+'/'RR4' both from 'BB'. The Outlook is Stable.
The downgrade follows the poor performance in the bioenergy business in Q112 with EBITDA of EUR1m and Fitch's assumption that this segment will not see a meaningful recovery until mid-2013. Forward looking bioenergy market fundamentals are driven by crush margins, the differential between the ethanol sales price and the input cost of corn. Crush margins are currently at negative levels caused by a severe drought in the US driving up forward corn prices.
Fitch expects that this situation will materially impact the mix of Abengoa's cash flows at the corporate level. Given the anticipated discrete EBITDA contribution of the bioenergy business (this segment still generated around 12% of FY11 corporate EBITDA), Abengoa's earnings are forecast by Fitch to be mainly derived from its engineering & construction business (E&C). Fitch anticipates that Abengoa's leverage (adjusted net debt to EBITDAR plus dividends) will be above 3.0x in the next couple of years, which is no longer commensurate with a 'BB' category rating, particularly in view of the earnings bias towards E&C..
Fitch adjusts leverage calculations to reflect the non-recourse nature of the concessions business by excluding related EBITDA and project finance debt but including dividends.
Abengoa's non-recourse concession portfolio is largely focused on solar projects and transmission lines with limited exposure to bioenergy plants. As a result, dividends up-streamed to the corporate level are unlikely to be significantly impacted by the negative outlook on bioenergy.
Abengoa has historically de-levered via asset sales and not through organic growth. Despite being an integral part of the company's strategy, Fitch notes that this approach embeds a higher risk to its business profile. Although political support for the solar industry remains in place, any weakening may create uncertainty for potential buyers of such assets.
The E&C segment is performing in line with Fitch's expectations with stable margins of around 10%. Abengoa's backlog remains relatively stable (around EUR7bn in March 2012) and represents more than 20 months of average business.
The Stable Outlook is supported by Abengoa's E&C business' solid performance with a healthy order book. Fitch notes that the Group remains significantly diversified from the Spanish economy, representing around 27% of group revenue, followed by Brazil (21%), the US (19%), the rest of Europe (15%) and Latin America (11%). Fitch does not expect a growing exposure to Spain in the future, as group committed capex (March 2012) is focused on the US (60%) and Latin America (29%).
Abengoa's liquidity position as of March 2012 was around EUR2.8bn of cash at the corporate level which should be sufficient to cover the financial needs until 2014. Abengoa S.A. extended EUR1.6bn of its syndicated loans beyond 2014, in May 2012. Before this extension, the company was facing EUR0.5bn of maturities in July 2012 and EUR1.3bn in July 2013. Fitch views this transaction as positive in the short term as it improves Abengoa's liquidity profile but refinancing risk may appear in 2014.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Significant reduction in corporate adjusted leverage on a sustained basis below 3x along with stable or increasing organic growth from recourse activities.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Inability to keep leverage below 4x on a sustained basis and/or a significant decrease in the order book resulting in working capital outflows.
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