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(The following statement was released by the rating agency)
Dec 03 -
Summary analysis -- Alstom S.A. ----------------------------------- 03-Dec-2012
CREDIT RATING: BBB/Negative/A-2 Country: France
Primary SIC: Turbines and
Mult. CUSIP6: 021244
Credit Rating History:
Local currency Foreign currency
12-May-2011 BBB/A-2 BBB/A-2
07-May-2008 BBB+/A-2 BBB+/A-2
The ratings on French capital goods firm Alstom S.A. reflect Standard & Poor's Ratings Services' view of the company's satisfactory business risk profile and intermediate financial risk profile. Supportive business risk factors include Alstom's competitive market positions, sound long-term business prospects, substantial order backlog representing over two years of sales, and recently solid order intake. However, we consider that these are partly offset by fairly high operating risk in the engineering and management of large projects, cyclicality of its businesses, moderate profitability in particular in its renewable and transportation business segments, and Alstom's continuing need to streamline its operations through increased geographic diversity.
Alstom's financial risk profile is characterized by good liquidity, which is tempered by higher debt following some cash burn in the year-ended March 31, 2012 (fiscal 2012), partly as a result of adverse working capital swings and one-off items.
S&P base-case operating scenario
In our base-case scenario for fiscal 2013, we expect Alstom to report single-digit growth in revenues. After a two-year deterioration in operating margins, we expect a turnaround in fiscal 2013 as a result of positive revenue growth and completion of the bulk of the company's restructuring efforts. For fiscal 2013, we expect Alstom's consolidated operating margin will rebound slightly above the fiscal 2012 full-year level of 7.1%. Alstom's public guidance includes an 8% consolidated income from operations margin target for 2015 as part of its three-year plan.
For first-half of fiscal 2013, Alstom's revenues grew only by a modest 3.8%, but its consolidated operating margin strengthened to 7.2% compared with 6.7% year on year. The recent improvement in profitability measures came mainly from the thermal power division; earnings from the company's grid and transport divisions were stable, while the operating margin of Alstom's renewable power division dropped to 5.7% with a higher proportion of sales originating from the sluggish wind business. Alstom's book-to-bill ratio (1.09x in fiscal 2012) further strengthened to 1.24x during the first half of fiscal 2012, with order intake continuing unabated during the first part of the fiscal year, except in hydro power, despite the weak macroeconomic environment prevailing in Europe.
S&P base-case cash flow and capital-structure scenario
In our base-case scenario for fiscal 2013, we expect Alstom to generate positive free operating cash flow (FOCF), following two years of cash burn from operations. We note that Alstom generated EUR0.1 billion positive FOCF during the first half of fiscal 2013, after EUR0.34 billion during the second half of fiscal 2012.
On a fully adjusted basis, the ratio of funds from operations (FFO) to debt stood at 20.5% on Sept. 30, 2012, and debt to EBITDA decreased slightly to 3.6x. Standard & Poor's calculates its adjusted ratios on a gross debt basis; Alstom's EUR1.65 billion cash and cash equivalents as reported on Sept. 30, 2012, account for a fraction of the net operating liability position borne by the company on its balance sheet in relation to construction contracts in progress (EUR5.5 billion on the same date).
Our base-case scenario incorporates expectations of a steady improvement in credit ratios to levels fully commensurate with a 'BBB' rating over the next two years, such as adjusted FFO to debt in the middle of the 30%-45% range and debt to EBITDA below 3.0x. We expect this to be achieved on the back of a confirmed rebound in order intake and of stabilized margins with moderate dividends and only small bolt-on acquisitions. We see limited headroom at the current rating level, and any deviation from our trajectory of gradual but steady improvement in credit ratios would likely lead us to downgrade Alstom. Competitive pressures and Alstom's late-cyclical nature leave limited prospects of a very substantial and rapid improvement in credit metrics in the near future.
We assess Alstom's financial policy as moderate because we expect the company's resolve to increase investment in growth areas, notably in emerging countries, to be compensated by moderation with respect to dividend payment and acquisitions. We also note that Alstom is paying renewed attention to working capital management and is monitoring its capital expenditures with discipline.
Alstom's short-term rating is 'A-2'. We view Alstom's liquidity and financial flexibility as "strong," according to our criteria, with liquidity sources expected to exceed funding needs by more than 1.5x for the next 24 months.
On Sept. 30, 2012, the company's liquidity sources consisted of cash and liquid assets totaling EUR1.65 billion and a EUR1.35 billion undrawn and committed revolving credit facility (RCF) maturing in December 2016. This compared favorably with the company's short-term debt of EUR0.6 billion.
The RCF, like Alstom's EUR8.3 billion committed bonding facility agreement, includes two main financial covenants (3x minimum EBITDA net interest coverage and net debt to EBITDA of maximum 3.6x). Alstom meets these covenants with significant headroom, based on 11.5x EBITDA net interest coverage and 1.5x net debt to EBITDA at end-September 2012.
In our view, the company had a substantial EUR11.9 billion available under its total bonding and guarantee facilities of EUR28.1 billion on Sept. 30, 2012.
The negative outlook reflects the possibility that we could lower our ratings on Alstom if operating performance and profitability deteriorate or if the company proves unable to generate positive FOCF in the current fiscal year and again in fiscal 2014. Similarly, worsening market conditions could lead to a downgrade, as could a more aggressive financial policy--including meaningful debt-financed acquisitions, dividend payout well above our base-case assumption of about 30%--or less conservative leverage with any further increase in the absolute amount of debt borne by the company.
Over time, we expect Alstom's credit metrics to gradually return to a level fully consistent with a 'BBB' rating, such as adjusted FFO to debt in the middle of the 30%-45% range and debt to EBITDA below 3.0x. We think that this will result from an improving order intake, sustained efforts to improve the cost structure, and a continued moderate financial policy. We view first-half results of fiscal 2013 as encouraging regarding Alstom's progress on this trajectory. In our base-case scenario, we expect Alstom's credit ratios to fully return to a rating-commensurate level over a two-year period of positive FOCF generation.
A more pronounced and sustained recovery in order intake with a subsequent improvement in earnings and cash flow generation and an effective reduction in the absolute amount of Alstom's gross debt could lead us to return the outlook to stable.
Related Criteria And Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Capital Goods Industry, April 28, 2011