CIMIC Group Ltd. #BBB-/A-3# Ratings Outlook Remains Stable

Stocks and Financial Services Press Releases Thursday June 30, 2016 15:35
MELBOURNE--30 Jun--S&P Global Ratings

MELBOURNE (S&P Global Ratings) June 30, 2016--S&P Global Ratings said today that it had affirmed its 'BBB-/A-3' ratings on CIMIC Group Ltd. (CIMIC) and the company's related debt issues. The outlook remains stable.

"The rating affirmation is based on our view that the group benefits from its leading market position in Australia's infrastructure construction and contract mining sectors. In addition, the group has significant business, industry, project, and geographic diversity," said S&P Global Ratings credit analyst Craig Parker.

However, it has an inherent exposure to the competitive and cyclical-heavy engineering and construction (E&C) sectors. The company's financial stance is supportive of a modest financial risk profile and serves as a buffer to more volatile cash flows that are contingent upon the successful delivery of profitable projects.

The stand-alone credit profile (SACP) of CIMIC is 'bbb'. This is in line with our credit estimate on CIMIC's German-based parent Hochtief AG (Hochtief) of 'bbb', which reflects CIMIC's significant contribution to Hochtief's revenues, earnings, and assets. We continue to be mindful of the potential influence that the ultimate Spanish parent, Actividades de Construccion y Servicios SA (Grupo ACS) could have on CIMIC, particularly in the event of significant financial stress at the ultimate parent. Our assessment of the credit quality of Grupo ACS will continue to be an important driver of our view on CIMIC's creditworthiness. To this end, the weaker credit quality of the parentage is a constraint on our overall rating assessment of CIMIC.

Our assessment of CIMIC's modest financial risk appetite helps offset the performance risks related to mining contracts and large, complex E&C projects. Our 'bbb' SACP is based on our expectation that CIMIC's group's gearing (net debt plus operating leases) will not exceed 35% (as measured by CIMIC, 2.9% at March 31, 2016). In fiscal 2015, CIMIC's adjusted funds from operations (FFO)-to-debt ratio was 298%, which is well above our expectation of an average of about 45%. We also expect CIMIC to maintain its adjusted FFO-to-debt ratio well above 45% in the next two years, in the absence of any major investment or acquisition. In our view, a conservative capital structure provides CIMIC with an advantage over its more highly geared competitors when tendering for new projects, especially if sizable construction work is involved.

We continue to view the group credit profile (GCP) as 'bb+' (based on our credit estimate from public information), reflecting the creditworthiness of its ultimate parent, Spanish firm Grupo ACS. We can accommodate a limited separation from the weaker ultimate parent due to our view that CIMIC's German-based parent, Hochtief, is an insulated subsidiary from Grupo ACS. We view Hochtief and CIMIC to be partially insulated from Grupo ACS, which allows Hochtief and CIMIC to be rated one notch above the GCP. Our credit estimate on Hochtief takes into account the debt ring-fencing arrangements that have been implemented and remain in force, which underpins our assessment of the limited separation of Hochtief and CIMIC's credit quality from Grupo ACS. Both Hochtief and CIMIC benefit from a similar level of credit quality on a stand-alone basis.

We have revised our assessment of CIMIC's liquidity to strong from adequate.

Mr. Parker added: "The stable outlook reflects our expectation that CIMIC will operate at higher debt levels in the future. However, we believe that there is substantial financial flexibility to enable the group to grow its business and successfully execute on its current strategy."

We expect that the company's FFO-to-debt will be maintained at more than 45% through the economic cycle. In the near term, we also expect that there will be no change to the group status between CIMIC and its parents.

We could lower the rating if:

We considered that Hochtief and CIMIC were no longer separate from the ultimate parent's credit quality. This would be evidenced by unexpected control by Grupo ACS over Hochtief that weakened the current protection provided to Hochtief creditors. In turn, this may lead us to treat Hochtief and CIMIC as having less insulation from Grupo ACS; The group credit profile were to weaken from 'bb+'; orThe stand-alone credit quality of CIMIC were to weaken below 'bbb-', although we consider this scenario less likely.Given the lower credit quality of CIMIC's ultimate parentage, we believe that upward rating movement would most likely rely on an upgrade of the GCP.

The most likely reasons to reassess our credit estimate on Grupo ACS would occur if there was a material and sustainable improvement in its financial risk profile or if we have more clarity on the parent's operating strategy.


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