S&P: EMCOR Group Inc.'s Liquidity Improves After Refinancing; 'BBB-' Rating Affirmed, Outlook Remains Stable
The affirmation follows EMCOR's recent refinancing, which replaced a $1.1 bank loan facility with a $1.3 billion facility and extended the maturity until 2021. The company used the proceeds of the new $400 million term loan to repay amounts drawn under its revolver in connection with its recent acquisition of Ardent Services LLC and Rabalais Constructors LLC. Accordingly, we now view EMCOR's liquidity profile as stronger, reflecting our view that its liquidity sources will exceed its uses over the next 24 months with ample cushion and minimal refinancing risk over the same timeframe. As a result, we have revised the liquidity assessment to strong from adequate. This revision has no impact on our corporate credit rating on the company.
Our ratings reflect the company's position as a contractor in the building services and industrial services markets. The electrical and mechanical sectors are highly cyclical, since they rely on new industrial and commercial construction. These broader sectors also offer low barriers to entry for competitors. As a result, there are intense pricing pressures during periods of economic weakness. This is partially offset by the company's large scope of operations, since EMCOR is one of only a handful of specialty contractors with a national footprint. The company employs risk-management practices and derives a substantial portion of its electrical and mechanical construction revenues from projects worth less than $10 million, which provides some diversity.
Our ratings also reflect our view of EMCOR's maintainable cash flow and leverage ratios despite potential volatility. We also believe EMCOR is likely to maintain cash on its balance sheet, even though the company will likely continue making bolt-on acquisitions to further diversify its service offerings. While EMCOR's credit ratios are supportive of a minimal financial risk profile, we assess the financial risk profile as modest based on our volatility adjustment, as cash flow/leverage ratios could move one or two categories worse during periods of stress.
Our financial risk assessment also reflects our view of EMCOR's good cash flow conversion. We believe the nonresidential construction market should see improvement through 2017 and the company's domestic construction and U. S. building services segments will continue to exhibit positive growth. This should permit EMCOR to maintain surplus cash balances over time, even after acquisitions. We treat a significant portion of EMCOR's balance sheet cash as surplus and net it against debt.
The stable outlook reflects our view that relatively low debt balances, along with growth in EMCOR's domestic construction and U. S. building services segments, should allow the company to preserve its debt leverage ratios, while allowing for dividend distributions, share repurchases, bolt-on acquisitions, and maintained cash balances.
An upgrade is unlikely during the next 12-24 months, but could occur if, for example, acquisitions and organic growth provide a more diverse earnings stream or our assessment of the company's business risk profile improves due to sustained margin improvement.
A downgrade also appears unlikely during the next 12-24 months. However, one could occur if operating performance unexpectedly deteriorates or if acquisitions or more aggressive shareholder policies increase debt to EBITDA to more than 2x over a prolonged period.