RPT-Fitch Places Salini Impregilo's 'BB' IDR on RWN
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Feb 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has placed Salini Impregilo S.p.A.'s (Salini) 'BB' Long-term Issuer Default Rating (IDR) and senior unsecured rating on Rating Watch Negative (RWN).
The RWN reflects the sizable cost overruns and difficulties surrounding the Panama Canal extension project. The final cash impact, which may take several years to determine, is dependent on Salini's ability to be reimbursed for its share of cost-overruns. Despite Salini's strong liquidity, the eventual effect on future profitability could negatively impact credit metrics, leading to them weakening against our deleveraging profile. Notwithstanding the Panama Canal project, Salini's trading figures to 3Q13 were in line with expectations. Fitch will review the RWN upon presentation of FY13 results in March, updated management cash flow forecasts or further information around dispute settlements.
KEY RATING DRIVERS
The Panama Canal contract is Fitch's key credit concern. This situation underlines the inherent risk of carrying out large scale construction projects outside known domestic markets. However, Fitch recognises that this project was originally tendered for by Impregilo before its merger with Salini and is therefore considered a legacy issue with Salini having a good track record of project risk management. Fitch notes that there are no other big losses on large contracts, Salini's management has been proactive in resolving this dispute and that the greater size of the group has diversified the risk profile of the combined companies.
Recoverability of Cost-overruns
Cost overruns for the consortium delivering the Panama Canal project have been cited as USD1.6bn with Salini sharing a 38% stake. Fitch understands that a large part of Salini's share has already been accrued for in prior periods. The project is around 70% complete and expected completion is in late 2015. Management believes there is a likelihood that claims for cost-overruns will be successful, although the timeline is unclear. Prior year rating guidance indicated negative pressure should further project losses be incurred, which cannot currently be ruled out. Fitch will closely monitor Salini's leverage headroom under our guidance with an FFO adjusted net leverage above 2.0x leading to negative rating pressure.
Large Liquidity Buffer
Salini's credit profile is supported by a significant cash position of EUR1.0bn as of September 2013 that has recently improved with the successful disposals of Shanghai Pucheng (EUR65m) and TEM (EUR67m) operations. Liquidity strengthened even further in November 2013 with the approval of a new unsecured revolving facility of EUR100m. Fitch believes this is sufficient to withstand seasonal volatility in working capital or any delays in receivables from the Panama Canal project.
Solid Business Profile
Salini's business profile is commensurate with a 'BB' category engineering and construction issuer. However, Salini has a greater concentration to larger projects than its peers, which underlines the importance of strong project risk management. With EUR4.1bn pro-forma revenues in 2012, the group ranks among the top 15 European construction companies. While smaller than some competitors, the group is highly specialised in complex high value-added segments (i.e. hydro-electric plants, metro, railways, highways) offering higher margins. The Salini Impregilo integration benefits from wide geographical diversification, with presence in 50 countries worldwide and a well-balanced mix between mature and emerging markets.
Strong Order Book
The group has not diversified into the more stable service and concession businesses, like some of its major peers. However, the solid order backlog (EUR36bn at September 2013) increases visibility of future revenues. The backlog corresponds to 8.5x annual revenue, the highest among Fitch-rated construction companies. However, the top 10 contracts represent approximately 50% of the total backlog. The long duration of some contracts in the metro and dam segments (up to seven years) offers a recurring revenue profile similar to the service segment.
Negative: Future developments that could lead to negative rating action include:
- Liquidity below 1.1x-1.2x on a sustained basis.
- FFO net leverage above 2.0x.
- Poor performance on major contracts with a material impact on profitability.
- Further evidence of increased cost-overruns or escalation in the dispute surrounding the Panama Canal project.
Positive: Future developments that could lead to removal of the RWN and affirmation include:
- Liquidity to remain comfortably above 1.25x on a sustained basis.
- FFO net leverage to improve to 1.0x or below on a sustained basis.
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