Fitch Downgrades Isolux to 'B-'; Maintains Rating Watch Negative
OREANDA-NEWS. Fitch Ratings has downgraded Spanish engineering and construction (E&C) group Grupo Isolux Corsan, S.A.'s (Isolux) Long-term Issuer Default Rating (IDR) to 'B-' from 'B' and its senior unsecured debt rating to 'B-'/'RR4' from 'B'/'RR4'. Fitch maintains Isolux's IDR and senior unsecured debt ratings, including that on Grupo Isolux Corsan Finance B.V.'s EUR850m guaranteed bond, on Rating Watch Negative (RWN).
The rating actions reflect delays in receiving disposal proceeds (no announcement of completion of disposals yet), a tightening in liquidity as the group operates through 1Q and 2Q, which historically have been periods of working-capital outflow, and the likely rating of the remaining E&C-weighted group after planned debt reduction. We expect to resolve the RWN when the group's liquidity profile becomes more robust.
KEY RATING DRIVERS
No Material Progress on Disposals
The company has not announced any final agreement on the disposal of T-Solar or the transmission line concessions in Brazil. However, Isolux refinanced the debt at the T-Solar level, which could make a disposal easier. Nonetheless, we previously assumed Isolux would have made some meaningful progress on the disposal by early 1Q16.
Liquidity Still a Concern
Isolux now enters the least favourable part of its working-capital cycle (1Q and 2Q) without having sold assets. It has experienced working-capital outflows close to EUR150m during 1H in previous years. We also note the recent Brazilian subsidiaries' scheme of arrangement and are concerned by the impact it may have on perceptions of the company. The potential impact of a peer, Abengoa, and its recent court protection and ongoing debt restructuring hangs over the wider Spanish E&C sector.
Proceeds' Likely Destination Is Bank Debt
Fitch understands that the proceeds from an asset sale are likely to be used to repay bank debt. A successful sale of the concession assets, although positive from an IDR perspective, could negatively affect recovery expectations for 2021 bondholders due to the group's resulting reduced asset base.
Fitch expects the group to announce its 2015 results in March this year.
Isolux will sell relevant assets by end-2Q16 to repay bank debt.
Other bank, factoring and confirming funding facilities will be rolled over as required.
Creditors will waive the end-December 2015 bank covenant (leverage of 3.75x) if it is breached.
The E&C activity will not experience disruptive working-capital payment terms.
Positive: 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.
Negative: 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.
- Breach of financial covenants.
- Failure to deliver on the asset disposal programme.
- Reputational damage affecting the sustainability of the E&C business.
Liquidity appears tight and is entering a period of working-capital cash outflows. Fitch expects disposal of assets to support debt reduction plans.
FULL LIST OF RATING ACTIONS
Grupo Isolux Corsan, S.A.
--Long-term IDR downgraded to 'B-' from 'B'; on RWN
--Senior unsecured debt rating downgraded to 'B-'/'RR4' from 'B'/'RR4'; on RWN
--Short-term IDR affirmed at 'B'
Grupo Isolux Corsan Finance, B.V.
--Senior unsecured debt rating downgraded to 'B-'/'RR4'; from 'B'/'RR4'; on RWN