RPT-Fitch: More acquisitions likely from EMEA engineering and construction
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Dec 13 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says credit profiles of EMEA engineering and construction issuers (E&C) are stronger going into 2014, allowing for moderate bolt-on acquisitions or higher investment in infrastructure concession assets.
This follows years of organic international growth, divestment strategies and dividends from infrastructure concession assets, which allowed Fitch-rated EMEA E&C issuers to offset a dismal European construction market in 2013.
In a report published today, Fitch says it expects the investment cycle to reverse in 2014, which may increase aggregate leverage for the sector modestly, following years of deleveraging from divestment strategies. E&C issuers are more likely to take equity stakes in concession projects that they also build and design as the sector moves towards a more integrated approach.
The E&C outlook varies across countries and is dependent on fiscal flexibility within each country, with emerging markets offering significant opportunities to offset the still declining European market. Around 65% of the aggregate order book for the sector is focused outside domestic markets with a bias toward emerging markets, driven by Ferrovial (BBB-/Stable), OHL (BB-/Stable) and Abengoa (B+/Stable).
Weaker rated issuers with project concentration risk and a limited track record in their countries of operations are at greater risk of project losses. However, to varying degrees this inherent sector risk is incorporated into the issuer's business risk profiles and current ratings.
Higher rated peers with strong liquidity are able to be selective when tendering for contracts without facing pressures to compete for thin-margin projects to secure continued favourable working capital from advance payments. Fitch expects a faster pace of bank debt disintermediation in a sector where companies are mostly unrated and have therefore relied on bank lending. This follows inaugural bond issuance during 2013 from Salini (BB/Stable) and Astaldi (B+/Positive) that refinanced the majority of their bank debt. The concentration of internationally focused E&C players based in countries with weak banking markets and a desire to fund their business with medium-term debt is a structural driver of this disintermediation.
The report, "2014 Outlook: EMEA Engineering and Construction", is available at www.fitchratings.com or by clicking on the link below.
Link to Fitch Ratings' Report: 2014 Outlook: EMEA Engineering and Construction
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