S&P: U. K-Based Amec Foster Wheeler Affirmed At 'BB+' On Debt Reduction Efforts; Outlook Negative
The affirmation mainly reflects the company's intention to materially reduce its debt to EBITDA (leverage) in the coming quarters, mainly from disposals of ?500 million (including its Global Power Group [GPG] business). Once completed, we believe our ratio of adjusted funds from operations (FFO) to debt will be in the upper end of our threshold for the current rating (12%-20%).
We also take into consideration the company's sizable backlog, which represents more than one year of operations and provides some visibility on the company's medium-term performance. We note that the backlog declined in the first half of 2016 to ?6.2 billion at end-June 2016 (from ?6.6 billion at year-end 2015). Excluding the contracts related to GPG that could be sold, the company expects no material changes in the backlog in the rest of the year. Moreover, approximately 70%-80% of the backlog is "cost plus," which should mitigate potential cost overruns. Further major declines in the backlog or an increase in fixed-price contracts in its portfolio could, however, put pressure on the rating.
Our satisfactory assessment of AFW's business risk profile reflects the company's strong geographic and customer diversification as well as its backlog of ?6.2 billion at end-June 2016, mostly comprised of cost-plus contracts.
Our business risk assessment also reflects the company's exposure to mostly volatile end markets. In particular, we foresee that a meaningful share of AFW's clients will likely continue to cancel or postpone their capital expenditure (capex) investments because of low oil prices. We factor into our forecasts a relatively modest margin of 7%-10%, affected by stiffened competition in AFW's major markets, including oil and gas and mining (the company generates about one-half of its revenues in oil and gas).
Our aggressive financial risk assessment reflects our view that AFW's is capable and committed to reducing net debt in future years largely thanks to planned large asset disposals. We think this should help AFW to maintain its credit measures over the next couple of years amid persistent difficult market conditions.
Under our base-case scenario, we expect adjusted EBITDA of close to ?400 million annually on average in 2016-2017 (we anticipate reported EBITDA to be approximately ?300 million-?350 million during the same period).
The rating incorporates a one-notch positive adjustment for AFW's positive discretionary cash flow (DCF; free operating cash flows after capex and dividends) and the large proportion of cost-plus contracts in its backlog compared with peers'. We reflect this adjustment under our comparable ratings analysis modifier.
The negative outlook predominantly reflects the possibility of downside to AFW's profits amid the persistent difficult conditions in most of its end markets. While the backlog and cost-reduction initiatives might protect revenues and margins over the short term, downside could emerge if market conditions remained depressed through 2017 and 2018.
We could downgrade AFW by one notch if credit metrics weakened such that FFO to debt deteriorated to below 12% or if reported DCF was negative for more than a year. This could come from a combination of factors, including:A further decline in the size of the backlog or a deterioration of its quality, reflecting a more pronounced or longer downturn than we currently anticipate. An inability to reduce net debt using the proceeds of asset disposals. We could revise the outlook to stable if AFW's FFO to debt increases to about 20% sustainably while DCF remains positive. This could occur due to a faster recovery of market conditions than we currently anticipate, notably in the oil and gas sector, or better cash flow generation visibility, which could stem from a marked improvement in the backlog of orders with a high proportion of reimbursable contracts.