OREANDA-NEWS. Fitch Ratings has downgraded Spanish engineering and construction (E&C) group Grupo Isolux Corsan, S.A.'s (Isolux) IDR to 'B' from 'B+' and its senior unsecured rating to 'B'/'RR4' from 'B+'/'RR4'. Fitch has also placed the IDR and senior unsecured ratings on Rating Watch Negative (RWN).

The downgrades reflect the high leverage of the company due to pressure on its EBITDA from LATAM operations (Fitch adjusted net debt to last 12 months 3Q15 EBITDA around 11x). The RWN reflects uncertainties around management's ability to improve EBITDA from its low point in 2015 and to sell at planned amounts its concession portfolio given the current environment in Brazil. Receipt of disposal proceeds in early 1Q16 will be key to resolving the RWN. If the disposals occur as planned, we would likely place the 'B' IDR on Negative Outlook to reflect uncertainties regarding the improvement of operations and Isolux's ability to further deleverage. Adjusting for disposal proceeds, leverage of the largely E&C group would be around 5x.

Liquidity at 4Q15 should benefit from a seasonally favourable working capital and factoring of PSP's receivables. Nonetheless liquidity could be put under pressure in 1H 15 because of the seasonality of working capital if assets sale proceeds do not happen as planned.

Agreement with PSP
Isolux recently announced the end of its partnership with PSP (the Canadian pension investment manager that held a 20% stake in Isolux's concessions vehicle), and the split of these concession assets between the two partners. The transaction means Isolux will receive USD197m in cash and simplifies its structure, but the challenging economic situation in Brazil could make it more difficult to sell the assets in the short term, although Fitch understands there is still demand for this type of assets.

Disposal Execution Risk
Fitch notes that the exclusivity period with one investor expired but that other investors have been invited to the process. This highlights the execution risks related to the disposal process and creates uncertainty in terms of timing and pricing. Potential change of control clauses typically included in these concessions' debt, ongoing Brazilian difficulties (FX, the economy) and Abengoa potentially selling similar assets, could adversely affect Isolux's disposal plans. Fitch also notes that some of the proceeds could be further adjusted (most notably a EUR70m for the T-Solar put option).

Moving Towards a Pure E&C business
Following the disposals, Isolux will become a pure E&C business. Fitch notes that the share of Isolux's E&C backlog to third parties is above 80%, suggesting the exit from concessions is unlikely to have a significant impact on its core remaining business. Even with Isolux successfully delivering its disposal plan, Fitch estimates the leverage of the remaining group could be around 5x, which is still very high for a pure E&C operator at the existing rating.

2015 Below Expectations
Management revised its EBITDA guidance for 2015 downwards during the year from around EUR245m to a range of EUR190m to EUR200m. Other key items such as working capital and interest expenses also evolved adversely (including the higher cost of confirming and guarantees). Those changes reflect a tougher environment in Latin America due to margin pressure and a project cancellation.

Some Differences with Abengoa
Isolux's bonds are now trading at a discount following Abengoa's decision to look for the protection of the Spanish insolvency law. While the companies share some characteristics (construction companies with concessions, a large exposure to LATAM, high leverage, an ownership structure that impedes equity issuance) Fitch also notes that Isolux has not suffered working capital outflow of the same magnitude as Abengoa and its E&C activity is less dependent on the concessions investments it is now selling.

- Planned asset disposal receipts in early 2016.
- Unforeseen liquidity calls.

Positive: Future developments that could lead to positive rating action, including the resolution of the RWN, are:
-Disposal of assets and improvement of the underlying profitability of the E&C business.
-Improvement in liquidity.
-Consistent FCF generation showing an ability to deleverage from 5x leverage.

Negative: Future developments that could lead to a negative rating action include:
-Deterioration in Isolux's liquidity as a result of working capital outflows or material project losses.
-Failure to deliver on its asset disposal programme both in terms of timing and pricing.
-Breach (or unwaived) of financial covenants due to be tested at the year-end.
-Material equity injections from the restricted group to the concession business.

In the short term, Fitch notes that Isolux's liquidity should benefit from the positive pattern of working capital normally observed in 4Q. Isolux also announced its intention to use factoring for the USD196m to be received in the PSP transaction. Nonetheless, liquidity could come under pressure in 1H15 because of the seasonality of working capital and if asset sales do not happen as planned.

Grupo Isolux Corsan, S.A.
--Long-term IDR downgraded to 'B' from 'B+'; on RWN
--Senior unsecured downgraded to 'B'/'RR4' from 'B+'/'RR4'; on RWN
--Short term IDR affirmed at 'B'

Grupo Isolux Corsan Finance, B.V.
--Senior unsecured debt downgraded to 'B'/'RR4'; from 'B+'/'RR4'; on RWN