OREANDA-NEWS. IPOs and equity sales in the European engineering and construction sector should offset the impact of deteriorating cash flows, but on their own are unlikely to result in positive rating action, Fitch Ratings says.

In the past few days Abengoa (B+/Negative), Isolux Corsan (B+/Stable) and ACS (not rated) have announced equity transactions whose proceeds may be used to reduce debt or fund future projects.

We believe equity issuance in the sector is becoming increasingly common because some companies are unable to reduce leverage organically. This mainly affects non-investment grade companies in the European periphery and is due to structural working capital outflows, challenging end-markets and high debt costs. These problems have stemmed from the drop in construction activity in many companies' home markets and from contract disputes and delays as they have expanded into emerging markets.

The final impact on credit profiles and ratings will depend on the use of cash proceeds. But generally we see debt reduction in these cases as helping to offset the impact of weaker operating performance and avoiding negative rating action. Continued access to equity markets and the ability to dispose of assets are positive, but are already factored into current ratings. Upgrades would probably require an improvement in cash flows and core business performance.

Among recent transactions, Abengoa has announced the sale of another stake in Abengoa Yield for a total USD285m to reinforce liquidity. Isolux intends to float and use the EUR600m of issued equity primarily to reduce group's indebtedness and improve liquidity. ACS plans to sell up to 51% of Saeta YieldCo, which owns the group's renewable energy concessions, through an IPO as part of its plan to reduce group leverage.

In Q414, Astaldi ('B+'/Stable) announced that a special purpose vehicle would be created to hold some concession assets with the objective of accelerating the disposal process. Earlier this week, OHL Mexico, OHL's ('BB-'/Stable) non-recourse subsidiary, sold 24.99% of Concesionaria Mexiquense to an infrastructure fund for EUR510m to strengthen its balance sheet to fund future concession projects.