Rating On Broadspectrum Ltd. Raised To #BBB-# On Greater Integration With Parent Outlook Stable

Stocks and Financial Services Press Releases Tuesday May 30, 2017 17:11
MELBOURNE--30 May--S&P Global Ratings

MELBOURNE (S&P Global Ratings) May 30, 2017--S&P Global Ratings said today that it had raised its long-term corporate credit rating on Australian business services company Broadspectrum Ltd. to 'BBB-' from 'BB+'. The outlook on the long-term rating remains stable.

We raised the ratings because we consider Broadspectrum to be a highly strategic subsidiary to its sole parent Ferrovial S.A. (BBB/Stable/A-2), a Spanish services and construction company. We expect Ferrovial to maintain its 100% ownership of Broadspectrum over the next two to three years. Therefore, we have rated Broadspectrum one notch below the rating on Ferrovial, and no longer assign a stand-alone credit profile on Broadspectrum and a recovery rating on its debt.

In our view, Australia and New Zealand are key markets for Ferrovial because of the growth potential in business service activities and infrastructure development in these markets. These markets also add new capabilities to Ferrovial in sectors such as oil, gas, and telecommunications.

Since the acquisition in May 2016, Broadspectrum has been successfully integrated with Ferrovial's operations. Broadspectrum's operational integration within Ferrovial is solid, and in line with other acquisitions within business services that the Ferrovial group has pursued over the past several years.

As part of the strategic and operational reorganization following the acquisition, Broadspectrum's U.S., Canadian, and Chilean operations have been transferred to another management unit in charge of American services. In addition, Ferrovial has appointed Broadspectrum's new CEO.

However, we believe Broadspectrum's contribution to Ferrovial's earnings will be limited over the next few years, because of its declining earnings as a result of the completion of the contracts with the Australian Department of Immigration and Border Protection in October 2017. We understand Broadspectrum will not bid for the renewal of these services. We note that these contracts accounted for a significant proportion of Broadspectrum's earnings over the past two years. We believe Broadspectrum will leverage Ferrovial's experience in asset management to grow its earnings from other segments to mitigate the earnings decline.

The 'BBB' rating on Ferrovial reflects its internationally diversified revenue base, strong competitive position in its core services and construction businesses, and long-term contractual cash flows in Ferrovial's services business. Tempering these strengths is its exposure to the cyclical construction industry, which increases potential earnings volatility over economic cycles.

Ferrovial had a net cash position (after S&P Global Ratings' adjustments) from 2012 through 2015. In 2016, it had a net debt position after buying Broadspectrum. However, with its weighted-average, adjusted funds from operations (FFO) to debt comfortably above 60% in 2017-2019, the current ratings have a wide buffer under our base case. In our opinion, Ferrovial's modest financial risk profile reflects the group's flexibility to invest in new infrastructure projects and to acquire businesses, as well as to support existing projects where appropriate.

The stable outlook on Broadspectrum reflects the outlook on Ferrovial. The stable outlook on the parent reflects our view that Ferrovial will maintain an adjusted FFO to debt comfortably in excess of 30% over the next two years, despite likely continued investment in organic growth and opportunistic acquisitions.

The rating incorporates material headroom for acquisitions. We also think it likely that the company will maintain its good competitive position in the services and construction businesses in the U.K., Spain, and Australia.

A downgrade on Broadspectrum could occur if we lowered our rating on Ferrovial, or evidence emerges that shows Broadspectrum's importance in the Ferrovial group is diminishing.

We could lower the rating on Ferrovial if its adjusted FFO to debt declined below 30%. This could result from significant acquisitions, which we see as the key risk for the rating. We could also take a negative rating action if the company communicated more-aggressive financial policies than the unadjusted net debt to EBITDA of 2x that we currently incorporate into our rating; such a change would likely translate into adjusted FFO to debt below 30%.

A downgrade due to operational underperformance alone is remote, given substantial headroom in the ratings. However, ongoing lengthy operating pressure could lead to a downgrade.

An upgrade of Broadspectrum woul require   an upgrade of Ferrovial. We could consider taking a positive rating action if Ferrovial's business risk profile improves. This could happen, for example, if Ferrovial's services division grew materially beyond our base-case scenario, while maintaining its current competitive position.

We could also take a positive rating action if we believed that Ferrovial was committed to less-aggressive financial policies than we currently understand it has, and if the company maintained FFO to debt above 45%. We presently expect Ferrovial to operate with unadjusted net debt to EBITDA of up to 2x.


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