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July 7 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded Ferrovial’s Long-term Issuer Default (IDR) and senior unsecured ratings to ‘BBB’ from ‘BBB-'. The senior unsecured rating for subsidiary Ferrovial Emisiones S.A has been upgraded to ‘BBB’ from ‘BBB-'. The Short-term IDR was affirmed at ‘F3’. The Rating Outlook is Stable.
The upgrade reflects a combination of an improved operating risk profile, enhanced debt structure and continued internalisation of the business. The business mix is shifting towards the more stable services segment and away from construction, while growth from international markets has more than offset the group’s declining exposure to Spain, expected to be less than 20% of funds from operations (FFO) over the next three years.
FFO is complemented by sizeable dividend income from its valuable minority stakes in prime infrastructure assets, namely Heathrow Airport and the ETR407 Canadian toll road. Ferrovial is now largely funded with bonds following its EUR1bn of issuance in 2013, leaving its newly refinanced revolving credit facility (RCF) undrawn. FFO gross leverage is expected to comfortably remain under 2.5x with sizeable cash balances currently providing a net cash position.
Fitch expects a moderate increase in capex or bolt-on acquisitions into 2014 and 2015. FFO should remain fairly flat, as single-digit growth from its services and construction division is likely to offset lower dividend income, particularly from Heathrow.
Fitch adjusts leverage calculations to reflect the ring-fenced nature of the infrastructure asset business by excluding related FFO and non-recourse debt but including sustainable dividends.
Improving Business Mix
FFO (including dividends) of EUR1,073m for FY13 was generated from construction, services and dividend split broadly at 30%, 30% and 40% respectively. The weaker business risk profile exhibited by construction is offset by the services activity, which has shown greater resilience through the cycle. Following the acquisition of the UK-based services company Enterprise in 2013 and organic growth the future business mix is likely to improve. The construction segment increasingly benefits from synergies with the group’s infrastructure business, as it tenders for large-scale infrastructure projects as contractor and operator. Unlike other Fitch-rated construction peers Ferrovial has not expanded rapidly into high-risk - albeit fast growing - emerging markets. Instead the focus is on developed countries where Ferrovial can also tender for concessions.
Solid Geographic Diversification
Ferrovial’s construction and services operations are broadly diversified across the UK, US, and Spain. Ferrovial has continued reducing its exposure to Spain through offsetting declining sales in this market with international growth. Spanish contribution to FFO decreased to 22% in 2013 from 41% in 2012. Further de-linkage with Spain comes from a funding structure that is no longer reliant on Spanish banks.
Healthy Order Book
The combined construction and services order backlog amounted to EUR25.6bn for FY13, representing around 3.14x annual revenue. This was an increase of 12% yoy, partly due to the recent bolt-on acquisitions of the UK service division, although like-for-like growth would have been 16%. The revenue visibility is now more skewed towards medium term service contracts accounting for 70% of the order book. The construction order backlog is primarily composed of overseas contracts representing around 70%.
Investment Cycle Reversal
Fitch expects that 2014 will mark the reversal of Ferrovial’s investment cycle. Following recent years of minority stake divestments of its transport infrastructure portfolio, the group can now use its balance sheet strength for bolt-on acquisitions in the services segment or investment in brownfield infrastructure assets. Fitch expects management to retain its minority stakes in Heathrow and ETR407.
Investment Holding Company
Ferrovial shares the characteristics of an investment holding company, having invested for many years in concessions. Its balance sheet at book value has over EUR11bn of assets in toll roads and airports. The portfolio is largely skewed towards Heathrow and ETR407 although fairly well diversified with around 16 operational concessions.
Dividend flow has outperformed our previous forecasts although we now expect dividends from Heathrow to decline due to a less favourable regulatory tariff increase review. Unsecured bond investors are subordinated to these assets and dividend streams, given the high level of prior-ranking project finance. However, this is offset by the fairly low level of unsecured debt at the corporate level (yearly dividends can repay this debt in around 3.5 years) and benefits from cash flow generation from the construction and services business.
Improved Debt Structure
During 2013 Ferrovial issued two EUR500m five- and eight-year bonds to repay bank debt and extend debt maturities. This debt structure transformation was completed in 1Q14 when a new EUR750m RCF was completed. The facility is currently undrawn and is expected to remain a backup line. The facilities were mainly entered into with international banks.
At FYE13 cash and cash equivalents were EUR2.8bn which, together with the undrawn RCF, provide ample headroom. Fitch estimates around EUR500m of cash is required for operational working capital swings during the year, and a further EUR850m of cash is generated from favourable working capital due to the advance payment nature of the construction business. Ferrovial has a solid track record of maintaining this working capital advantage, which has been factored into our base case.
Positive: Future developments that could lead to positive rating actions include:
- Material improvement in the operating risk profile of its construction and services segment
- Increase in diversification and quality of its dividend streams
- Positive free cash flow on a sustained basis
- Fitch-adjusted gross FFO leverage below 1.5x (FYE13: 1.7x) on a sustained basis
Negative: Future developments that could lead to negative rating action include:
-Significant decrease in order backlog or loss of cash flow visibility
-Evidence that the recourse group is providing material financial support or guarantees to under-performing non-recourse projects
-Fitch-adjusted gross FFO leverage above 3.0x on a sustained basis