OREANDA-NEWS. Fitch Ratings has affirmed the Spanish construction, services and concessions operator Ferrovial S. A.'s Long-Term Issuer Default Rating (IDR) at 'BBB' and Short-Term IDR at 'F3'. The Outlook on the Long-term IDR is Stable. Fitch has also affirmed Ferrovial Emisiones S. A.'s 'BBB' senior unsecured rating.

The affirmation reflects the positive business mix between construction and services, reinforced through the recent acquisition of Australian services provider, Broadspectrum. Stable dividends flow from Ferrovial's main assets is also credit positive.

Fitch focuses its analysis on the recourse perimeter, adjusting leverage calculations to reflect the ring-fenced nature of the concession business by excluding related funds from operations (FFO) and non-recourse debt but including sustainable dividends from the non-recourse concessions.

KEY RATING DRIVERS

Solid Construction and Services Operations

Ferrovial is protected from risks that could arise in emerging markets, notably its cash collection, by its significant presence in developed countries (mainly Spain, US, UK, Canada, Poland and Australia). The rating is supported by a strong backlog of over EUR30bn at end-1Q16 mainly in low-risk countries, notwithstanding the termination of some highly profitable projects in the US (construction) and budget cuts that could constrain the profitability of its services division in the short term.

Resilient Dividends from Concessions

Toll roads and airports operations are healthy, with the two main assets (ETR 407 and Heathrow) delivering traffic and passengers records in 2015. Fitch expects the toll roads assets to continue to deliver solid yearly dividends (around EUR250m on average over the rating horizon) while returns from the airports will benefit from the increasing contribution of AGS. Fitch does not expect any additional capital needs by Heathrow, if expansion is approved, to have an effect on Ferrovial's ratings.

Consolidation of the Services Business

The acquisition of Broadspectrum earlier this year is in line with Ferrovial's strategy to increase its services business, which already accounts for around 30% of consolidated FYE2015 EBITDA. Fitch considers the integration risk limited, given Ferrovial's proven track record of successful acquisitions and the lack of significant overlap in the markets served.

Strong Geographical Diversification

Fitch expects improved geographic diversification to be supportive to the rating. Overseas markets will provide greater contribution to the business in future. The international expansion that started a few years ago marked another important step with the acquisition of Broadspectrum. Ferrovial will potentially use the Australia-based services operator as a platform to grow in the US, Canada and Chile where Broadspectrum has already a small presence.

Sterling Depreciation Impact Hedged

Ferrovial is exposed to the UK market mainly through its subsidiary Amey (services) and through its investments in Heathrow (25% shares owned). The combined FY15 operating profit of the UK services and construction divisions, plus the dividends from Heathrow and AGS, contributed for around 20% of the group's recourse EBITDA + dividends. However, Fitch acknowledges that currency risk is fully hedged for the next three years. Sterling weakness following the UK's vote to leave the EU is therefore unlikely to have an impact on leverage metrics.

Fitch expects possible cuts in public expenditure and uncertainty in the UK market following the vote to leave the EU to have a greater impact on the overall profitability of Amey. In its rating case, Fitch factored a light decline in contracted revenue which on its own would not be detrimental to the current ratings.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Slight decline in construction revenues and margins

- Consolidation of Broadspectrum from 3Q16, margins in services under pressure in the UK

- Stable dividends flow from the toll roads divisions, and partially increasing dividends from the airports with the contribution of AGS

- Potential acquisition of small-to-mid-sized local players

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to positive rating action include:

- Material improvement in the operating risk profile of Ferrovial's construction and services segment

- Increase in diversification and quality of its dividend streams

- Positive free cash flow on a sustained basis

- Fitch-adjusted gross funds from operations (FFO) leverage below 1.5x (FYE15: 1.6x) on a sustained basis

Future developments that may, individually or collectively, 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

LIQUIDITY

Healthy Liquidity

Ferrovial has a very strong liquidity profile, comprising EUR3.2bn as reported cash and EUR1.5bn of undrawn committed lines as at end of March 2016. This compares with short-term, recourse, debt maturities of EUR44m in the next two years. Fitch treats around EUR1bn of cash as restricted, including cash held at local subsidiaries or required potentially to cover adverse working-capital shock. However, the company has a track record of maintaining strong working capital.