Fitch Downgrades Spain's Abengoa to 'B'; Outlook Stable
The downgrade reflects an increase in Abengoa's Fitch-adjusted net leverage for 2014 to 5.1x compared with our previous expectations of 4.0x, breaching Fitch's negative trigger for a downgrade of 4.0x. This rating action also considers the company's improved disclosure related to cash linked to supplier payments. The main driver for the net leverage increase was a higher amount of cash (around EUR1.2bn) linked to confirming (supplier payments funding), compared with our previous expectations of EUR367m disclosed in 2013 audited annual accounts, which related only to confirming used in group transactions. Abengoa's 2014 annual accounts disclosed cash linked to supplier payments of around EUR1.2bn as of end-December 2013, which related to the total amount of confirming. Taking into account the latter, readjusted net leverage for 2013 is around 4.7x (compared with our previous 4.3x) which is not commensurate with a 'B+' rating level.
Fitch acknowledges that Abengoa has been able to reduce gross recourse debt to EUR5.7bn (including Abengoa Greenfield bond) compared with our previous expectations of EUR6.4bn as of December 2014. However, Fitch also notes that Abengoa's Q4 has been very weak in terms of working capital recovery, which has negatively impacted the amount of cash at the end of the year.
The Stable Outlook reflects Fitch's expectation of adjusted recourse leverage decreasing to 4.3x in 2017 from a peak of 5.1x in 2014, mainly as a result of lower capex needs. Nevertheless, we will closely monitor the risk of Abengoa's market access weakening and increased dependence on working capital facilities to support the company's working capital position. As of end-December 2014, Abengoa's negative working capital position (payables greater than receivables) narrowed to around EUR3.8bn, from EUR4.2bn in 2013.
Fitch adjusts leverage calculations for Abengoa to reflect the non-recourse nature of concessions by excluding related EBITDA and non-recourse debt but including sustainable dividends. Fitch-calculated recourse leverage differs from Abengoa's corporate leverage definition. We add off-balance sheet receivables factoring (non-recourse) and assume that around EUR1.8bn of cash is not readily available for debt repayment as it is needed for day-to-day operational activities (seasonal working capital). The EUR1.8bn includes cash linked (EUR1.2bn at FYE14) to its confirming lines as a source of trade payable financing. Full details of Fitch's adjustments can be found in the attached report (click on link above).
KEY RATING DRIVERS
Cash Linked to Confirming
Fitch highlights that Abengoa's financial information disclosure to the market since November 2014 has improved. Cash linked to confirming is an example. According to 2013 audited annual accounts, cash linked to confirming (funding of supplier payments) was only related to confirming transactions with the group and was around EUR367m and according to Abengoa's 20-F report, was around EUR1bn (representing the whole amount of the confirming transactions). Disclosure in 2014's audited annual accounts is clearer and indicates that around EUR1.2bn of cash is linked to confirming lines as of end-December 2014 and around EUR1.3bn as of end-December 2013. Further improvements on financial disclosure would be credit-positive.
Large Working Capital Outflow
Abengoa posted a significant working capital outflow (EUR563m) in 2014 compared with previous years where working capital had remained fairly stable. Working capital dynamics in 4Q14 have remained abnormally stable as usually the last quarter of the year is positive in terms of cash inflows. According to management, this situation was linked to the market turmoil suffered in November 2014 and 1Q15 has been unusually positive in terms of working capital. Potential unwinding of working capital remains a key risk.
Unbilled Receivables Growing
Unbilled receivables grew significantly to EUR913m in 2014 from EUR489m in 2013. Abengoa's unbilled receivables to revenues ratio was 20% in 2014 compared with its historical 10% since 2010 (when it reached 29%).
Transactions Expected to Reduce Debt
Recent equity transactions (including EIG transaction) are positive as they should reduce the capital intensity of Abengoa's model and should help generating neutral free cash flow (FCF) in 2016 and positive FCF in 2017 (compared with negative FCF in the past years). According to Abengoa's management, these transactions should help to strengthen the company's liquidity profile and reduce recourse debt, which would be credit-positive but given that the effectiveness of these transactions remains to be proved, Fitch only partially factors in such benefits in its projections.
Bridge Loans Factored in Analysis
Abengoa has bridge loans, which may not be able to convert into project finance (non-recourse). However, this risk is largely mitigated by the company's positive historical track record of having successfully converted all bridge loans into non-recourse facilities. Nevertheless, Fitch also identifies the risk of these loans being called should Abengoa enter into a liquidation phase as some of these loans have a parent guarantee or a cross-default clause in place. Therefore, we have included these bridge loans and the associated adjusted equity value of the concessions in our recovery analysis for the unsecured bonds.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Annual recourse EBITDA around EUR900m-EUR940m in 2015-2017
- Upstream dividends from Abengoa Yield between EUR20m-EUR25m on an annual basis
- EUR1.8bn cash adjustment comprising EUR1.2bn of cash linked to confirming plus EUR600m of seasonal working capital
- EUR940m of asset disposals in 2015
- EUR200m and EUR100m working capital outflows in 2015 and 2016 respectively
- Use of non-recourse factoring lines around EUR250m on an annual basis
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
-Fitch-adjusted recourse net leverage below 4.0x (or 5.0x on a gross adjusted basis) and recourse EBITDA net interest cover above 2.0x (FY14: 1.8x) on a sustained basis
-Significant cash reduction linked to confirming lines without a negative impact on Abengoa's working capital position
-Ability to generate meaningful positive Fitch-defined FCF at the recourse level without working capital inflows
- Reduction in recourse gross debt and use of favourable working capital instruments to fund the business model
- Improved track record in financial disclosure
Negative: Future developments that could lead to a downgrade include:
-Fitch-adjusted recourse net leverage above 5.0x (or 6.0x on a gross adjusted basis) and recourse EBITDA net interest cover below 1.5x
-A significant decrease in Abengoa's E&C order book and/or inability to manage working capital resulting in material cash outflows
-Negative recourse working capital (payables higher than receivables) higher than the amount of recourse cash and equivalents
An increase in recourse capex as a result of equity injections leading to negative FCF
LIQUIDITY AND DEBT STRUCTURE
Abengoa's recourse liquidity as of end-December 2014 was around EUR2.9bn, including cash and committed credit facilities, which should be sufficient to cover debt maturities for the next 12-18 months. In addition, Abengoa realised asset disposals in the first months of 2015 of around EUR940m. Fitch estimates that around EUR1.8bn of cash, including cash linked to its confirming lines (trade payables financing), is not readily available for debt repayment as it is required for operational activities.
FULL LIST OF RATING ACTIONS
Abengoa, S.A.
Long-term IDR: downgraded to 'B' from 'B+'; Outlook Stable
Senior unsecured rating: downgraded to 'B'/'RR4' from 'B+'/'RR4'
Abengoa Finance, S.A.U.
Senior unsecured rating: downgraded to 'B'/'RR4' from 'B+'/'RR4'
Abengoa Greenfield, S.A.U.
Senior unsecured rating: downgraded to 'B'/'RR4' from 'B+'/'RR4'
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