OREANDA-NEWS. S&P Global Ratings said today that it affirmed its long-term corporate credit rating on Belgium-based Sarens Bestuur N. V. (Sarens) at 'BB-'.

At the same time, we affirmed our 'BB-' issue rating on the group's €125 million senior unsecured notes and proposed €125 million tap, issued by Sarens Finance Co. N. V. (Sarfin NV). The recovery rating on this debt instrument is unchanged at '3', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default.

Sarens is tapping its existing €125 million subordinated notes for an additional €125 million, which should result in a total quantum of these notes of €250 million. The proceeds will be used to repay the company's €45.7 million subordinated de groof bond, maturing December 2016, and also to repay some current drawings under the company's global leasing facilities and bilateral lines, including its RCF. The net effect on Saren's adjusted debt is therefore minimal, but the transaction should offer the company greater headroom and flexibility under its global debt facilities going forward. This should in turn support the build out of the sizable contract with Chevron ("The TCO contract"), which will ramp up through 2017.

In July 2016, TCO formally approved the US$36 billion project to increase the well pressures and production capacity of the existing Tengiz refinery, with the new plant being built on a modular basis incorporating pre-assembled units (PAUs), mainly fabricated in Korea, and pre-assembled racks (PARs), fabricated within the Caspian. Under the scope of the agreement, Sarens is contracted to develop and operate two Trans-Shipment Bases (TSBs), one in Northern Europe with the location to be confirmed, and one in Bulgaria, where cargo will be offloaded from ocean-going vessels and reloaded onto smaller Russian Inland Waterway System (RIWS) vessels for onward delivery into the Caspian. At the Kazakhstan building site, Sarens is contracted to off-load, store, stack, and transport the modules to their installation points.

On the other hand, Sarens continues to experience challenging trading conditions and project delays in some of its end markets, specifically the oil and gas and commodity industries. This has led to increased pricing pressure in other industries in which Sarens and its direct competitors are active.

Our base case for fiscal 2016 assumes: Revenue contraction of about 4% to more than €560 million. EBITDA margin of about 24%-25%.Based on these assumptions, we arrive at the following credit measures: S&P Global Ratings-adjusted debt to EBITDA of about 4.6x at fiscal year-end 2016, improving toward 4x at fiscal year-end 2017; andFFO to debt of about 15% and trending toward 18%, respectively, over the same period. We consider Sarens' operating cash flow to be sufficient to cover debt service, working capital requirements, and capital spending for maintenance. Historically, the company has invested heavily to expand its global fleet and meet growing demand, resulting in negative free operating cash flow (FOCF). This trend has reversed in the past 12-18 months and we consider management's ability to pare back capital expenditure (capex) rapidly when demand slows as an important factor for the rating. We note that the average useful economic life of Sarens' crane fleet is 7.6 years.

In terms of its capital structure, Sarens has a well-balanced and relatively long-dated debt maturity profile. We assess Sarens' risk-management policies as adequate. The company generates a large portion of its revenues in foreign currencies, and hedges its cash flows to protect against foreign exchange risk. The company's financial obligations are mainly euro-denominated. As a majority family-owned company, we consider Sarens' access to equity markets to be restricted.

Sarens' exhibits adequate liquidity, reflecting our expectation that liquidity sources will exceed uses by 1.2x in the next 12 months.

Over the next 12 months, we expect principal liquidity sources to be:About €59 million available under a €99 million revolving credit facility, maturing November 2019;Cash on balance sheet of about €57 million as of June 30, 2016; FFO of about €90 million; andProceeds of €125 million from the notes tap. Over the same period, we expect the following principal liquidity uses:

Up to €50 million of capex;Working capital outflows up to €20 million;Net repayment of the company's global leasing facility and bilateral lines over our rating horizon, which Sarens draws from and repays throughout the fiscal year as it acquires and disposes of cranes for its fleet; andThe company's capital structure includes a €45.7 million subordinated loan (The "de Groof bond") that matures in December 2016, to be repaid with proceeds from the proposed notes tap. We expect Sarens to exhibit sufficient covenant headroom for the next 12 months. As part of the proposed notes tap transaction, Sarens has agreed with its lenders that its interest coverage ratio will be changed to 3.5x, from 4x, resulting in greater covenant headroom going forward.

The stable outlook reflects our view that Sarens will comfortably maintain credit metrics commensurate with an aggressive financial risk profile, and that these metrics will gradually improve as end markets recover. To maintain a 'BB-' rating, we expect Sarens to exhibit debt to EBITDA trending toward 4x and FFO to debt trending toward 20%.

We could lower the ratings on Sarens if its debt to EBITDA and FFO to debt were to weaken toward the lower end of its aggressive financial risk profile, specifically toward 5x and 12%, respectively. This could happen if market conditions, specifically in oil and gas and commodities, are weaker than we expect for the next 12 months. We could also lower the ratings if Sarens' liquidity were to weaken beyond our base case, specifically if we anticipated that headroom under covenants were to fall to below 15%.

We could raise the ratings if Sarens' credit metrics recover to a level commensurate with a significant financial risk profile, specifically if the company were to sustain FFO to debt of more than 20% and debt to EBITDA of less than 4x, and if we believe that near-to-mid-term macroeconomic and industry conditions support those improved levels.