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) and senior unsecured debt rating to 'C' from 'CC'. The downgrade reflects the announcement of a prospective debt exchange that Fitch views as a Distressed Debt Exchange (DDE) event. Fitch expects part of senior unsecured debt will be converted into subordinated instruments.

Based on the application of Fitch's DDE criteria, the downgrade of the ratings to 'C' reflects the announcement of an exchange or tender offer that the rating agency views as being distressed. If the debt exchange goes ahead, Fitch would be likely to downgrade Isolux's ratings to Restricted Default ('RD').

KEY RATING DRIVERS

Restructuring Plan Released

The proposed restructuring is intended to improve the liquidity, adjust the capital structure by converting senior unsecured debt into subordinated or equity linked instruments, and dispose of assets in better market conditions. Existing senior unsecured bank debt and senior unsecured bonds currently rank pari passu, but new funding provided in 1H16 (including emergency factoring and emergency financing together with new money to be injected in July) will be super senior (Facility A) to existing debt.

Close to EUR2.0bn of debt (including senior notes and senior loans, confirming and other liabilities) is likely to be exchanged into a mix of Facility B (EUR550m, senior unsecured debt) and Facility C (profit participation loan instrument, an equivalent of a debt to equity swap). Close to EUR800m of contingent liabilities may later increase the size of Facility B and C.

Current shareholders will have their stake reduced to 5%-10% ownership of the company. Fitch expects the board of directors also to be amended with seven new independent board members joining two executive directors.

Stress Impacts Operations

Limited liquidity and access to bonding lines are forcing Isolux to slow its operations down, which is affecting its cash flow. Both revenues and EBITDA were impacted at 1Q16 (EPC EBITDA decreased to EUR13m from EUR44m at 1Q15). Commercial activity is also hit as new orders had halved at 1Q16 and this partially explains the large decrease in backlog. Nonetheless, working capital outflow was smaller than a year ago, stabilising the large outflow in 4Q15. Operational risks bringing the prospect of increased performance claims under bonding lines could further increase liabilities.

RATING SENSITIVITIES

Negative: Future developments that could lead to a downgrade include:

- Imminent or inevitable default

- Completion of the restructuring

Positive: Future developments that could lead to positive rating action:

We do not expect the ratings to be upgraded

FULL LIST OF RATING ACTIONS

Grupo Isolux Corsan, S. A.

--Long-term IDR downgraded to 'C' from 'CC'

--Senior unsecured debt rating downgraded to 'C'/'RR5' from 'CC'/'RR4'

--Short-term IDR affirmed at 'C'

Grupo Isolux Corsan Finance, B. V.

--Senior unsecured debt rating downgraded to 'C'/'RR5'; from 'CC'/'RR4'