OREANDA-NEWS. S&P Global Ratings today said it has affirmed its 'BB' long-term corporate credit rating on French multi-technical services provider SPIE SA (SPIE). The outlook is positive.

We also affirmed our 'BB' issue ratings on the €400 million revolving credit facility (RCF) and €1,125 million senior unsecured term loan A.

The affirmation primarily reflects SPIE's first-half results for 2016, including a decline in revenues with an EBITDA margin increase of 24 basis points. Additionally, our expectation is that SPIE's credit metrics will improve from 2016 given our inclusion of surplus cash in our net debt calculation now that its private equity owners hold a smaller stake in the company.

SPIE's improving margins reflect management's clear execution strategy, despite a tougher-than-expected economic environment in some key markets, such as France and the oil and gas segment. We continue to view SPIE's meaningful market shares in its main markets such as France, Belgium, the Netherlands, and Germany, as well as the diversity of services offered, as beneficial.

Given the gradual exit of the private equity sponsors, we expect SPIE's financial policy framework to become more supportive for improved credit metrics. We anticipate shareholders' returns will be reasonable and, given the acquisitive nature of SPIE, we expect acquisitions to remain in line with the stated financial policies. We anticipate SPIE's adjusted debt to EBITDA ratio to remain below 4x after December 2016 and S&P Global Ratings-adjusted funds from operations (FFO)-to-debt to reach levels near 20%.

We believe that the corporate credit rating on SPIE is still constrained by its geographic concentration in European markets, especially in France; exposure to the volatile oil and gas sector; relatively lower margins compared with other facilities services providers; and still relatively high leverage.

Our base case assumes: Group revenue growth of 2%-3% in 2016, 2017, and 2018, improving compared with 1.2% in 2015. Revenues will be driven by solid growth from Germany and central Europe due to the consolidation of recent acquisitions, and partially mitigated by declines in revenues from France and from the oil and gas and nuclear segments;Weaker macroeconomic environment and consumer confidence in the U. K. and the rest of Europe following the Brexit vote, moderately affecting SPIE's operations;Slightly improving adjusted EBITDA margins of close to 6% from 5% in 2015, through margin improvements in all segments and particularly lower exceptional costs;About €75 million spent on bolt-on acquisitions per year, relatively in line with previous years; Stable capital expenditures (capex) at about 1% of total revenue; andFirst dividends to be paid by the company in 2016 with the adoption of an initial dividend pay-out ratio of about 40% of adjusted net profit. Based on these assumptions, we arrive at the following credit measures for the next one-to-two years: Adjusted debt to EBITDA of about 3x-4x; andAdjusted FFO to debt of close to 20%.

The positive outlook reflects our view that adjusted credit metrics will improve, despite SPIE's mixed operating performance, such that even after accounting for significant working capital swings we could still take a positive rating action. We expect that generated cash flow will be in line with an aggressive financial risk profile for 2016, but show signs of improvement in 2017. For 2016, this includes adjusted FFO to debt of just below 20% and adjusted debt to EBITDA of less than 4.0x, while we forecast adjusted FFO to debt in the low 20% range with adjusted debt to EBITDA nearing 3.5x in 2017. We anticipate that SPIE will continue to generate significant positive free operating cash flows.

We could consider raising the rating if SPIE's adjusted FFO to debt moves sustainably into the 20%-30% range and adjusted debt to EBITDA moves below 3.5x--a level that would require further deleveraging or an improvement in margin levels. Additionally, establishing a track record for maintaining conservative financial leverage levels could result in an upgrade.

We could consider lowering the rating if unexpected adverse operating developments--such as sudden contract losses with established clients--resulted in a sizable shortfall in sales and margin levels. Adjusted FFO to debt sustained below 20% and debt to EBITDA above 4x could lead to a downgrade.