OREANDA-NEWS. Fitch Ratings has revised Spanish engineering and construction group Grupo Isolux Corsan, S.A.'s (Isolux) Outlook to Negative from Stable. Its Long-term Issuer Default Rating (IDR) and its senior unsecured rating have been affirmed at 'B+' respectively. A full list of rating actions is provided below.

The Negative Outlook reflects Isolux's worse-than-expected operating performance in 2014 and subdued expectations for 2015 mainly as a result of the company's exposure to Brazilian depressed economy. Fitch also highlights Isolux's limited covenant headroom in its syndicated facility as of December 2014 (with net debt to EBITDA at 3.45x as defined in the documentation compared with a maximum of 3.5x). This is a result of a lower 2014 EBITDA of EUR252m (compared with our previous expectations of around EUR300m) and a significant working capital outflow of around EUR102m. Fitch's adjusted net leverage ratio stood at 5.9x in 2014 compared with a negative trigger of 4.5x on a sustained basis.

Fitch adjusts leverage calculations for Isolux, including EUR183m of off-balance sheet factoring receivables (non-recourse) in 2014. In addition, we assume that around EUR50m of total cash in 2014 was not readily available for debt repayment as part of it was parked in joint ventures and in different currencies.

KEY RATING DRIVERS

WETT Transaction Temporarily Positive
Isolux recently announced the agreement with PSP to sell its 50% stake in WETT, the US- based transmission line, for USD220m. Isolux has already collected an advanced payment of USD105m while the remaining amount will be disbursed upon closure of the transaction. Fitch views this transaction as positive, which has helped Isolux avoid a rating downgrade in the short term in light of the covenant pressures and weak operating performance in 2014. However, this transaction itself may not be enough to protect the company's credit profile; we therefore expect further protective measures to be taken before the end of the year.

Reduced Covenant Pressure
As of end-December 2014, Isolux had very limited covenant headroom in its syndicated facility with a net debt-to-EBITDA (as defined in the loan documentation) of around 3.45x compared with a maximum 3.5x. In addition, this covenant will be reduced to 3.2x in the next covenant test (June 2015), although this should be offset by sale proceeds from the recently announced WETT disposal. Fitch also understands from management that negotiations between the banks and the company are taking place to adapt some of the current terms and conditions of the loan. We will closely monitor this process as a negative outcome of the negotiations could lead to a rating downgrade.

Exposure to Brazil
LATAM is Isolux's main market with around 50% of the revenue in 2014 and 53% of the total backlog order (EUR7.1bn) as of end-December 2014. Isolux remains quite exposed to the depressed Brazilian economy (with 11% of total revenues in 2014 and 17% of total backlog as of end-December 2014) ,with continued economic underperformance, increased macroeconomic imbalances and deterioration of fiscal imbalances. The Brazilian economy grew by a mere 0.1% in 2014 and is forecasted to contract by 1% in 2015. Fitch revised Brazil's rating Outlook to Negative and affirmed its IDR at 'BBB' on 9 April 2015.

Diversified Concession Portfolio
Isolux's concession portfolio remains above-average compared with other Fitch-rated E&C peers that have invested in concessions. The equity value of the concessions is sizeable and is approximately equivalent to the company's EUR1.5bn of reported gross corporate debt. The portfolio is mainly in emerging markets with a focus on Brazil, Mexico and India. Assets mainly include transmission lines with availability payment mechanisms with no demand risk, and toll roads. Execution risk is low with assets largely operational (around 69% of the total) and with long-term finance in place.

Working Capital Drains Cash
Isolux suffered a working capital outflow of around EUR102m in 2014 compared with an annual EBITDA of around EUR252m. Working capital swings remain volatile given that the company is experiencing delays in the collection of receivables in certain jurisdictions such as Brazil. Despite Isolux's efforts, the company is not always in a strong negotiation position to delay payments to its suppliers.

Isolux is facing problems in one of its projects in Brazil (Metro SP) with delays in the works and payments. The project has two phases and we understand from management that Isolux has agreed with the Brazilian authorities to hold off the second phase (EUR170m) with no expected penalties. This will help stem Isolux's working capital outflows but also shows that diversification into certain jurisdictions can prove more difficult than expected. This is in common with the expansion trend of Fitch's E&C non-investment grade companies, where emerging markets such as LATAM and the Middle East are proving to be tougher than expected with a significant and negative impact on working capital.

High Value Engineering
Isolux's cash flows are mainly driven by engineering activity with a focus on the design and build of power generation and transmission lines. Isolux's backlog as of end-December 2014 included 84% of projects with third parties, which in our view provide further diversification to the company's business profile compared with some of its peers with significantly a lower share of external projects. In addition, the company has also reduced its exposure to Spain (to 13% of total backlog in 2014 from 24% in 2013).

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
-Annual EBITDA around EUR245m-EUR271m in 2015-2018
-No upstream dividends from concessions in 2015. Total dividend receipts estimated at between EUR23m-EUR34m on an annual basis in 2016-2018
-EUR100m cash adjustment comprising EUR50m of cash located in various joint ventures plus EUR50m of seasonal working capital
-EUR180m of asset disposals in 2015
-Working capital outflows of around EUR42m and EUR46m in 2015 and 2016, respectively
-Use of factoring lines of around EUR100m annually

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating action, including the revision of the Outlook to Stable, are:

-Material increase in covenant headroom at next covenant test as of June 2015 and onwards
-Fitch-adjusted net leverage below 4.5x and FFO fixed charge cover above 2.0x (2014: 1.1x) on a sustained basis
-Improved liquidity position with lower dependence on short term lines

Negative: Future developments that could lead to a negative rating action include:
-Inability to renegotiate current covenants and/or a breach of financial covenants in the next test
-Fitch-adjusted net leverage above 4.5x and FFO fixed charge cover below 2.0x on a sustained basis
-Material equity injections from restricted group cash flow to the concession business
-Deterioration in Isolux's liquidity as a result of working capital outflows or material project losses

LIQUIDITY AND DEBT STRUCTURE

Isolux's liquidity as of end-December 2014 was around EUR517m, including cash and committed credit facilities, which should be sufficient to cover debt maturities for the next 12-24 months (EUR367m). In addition, Isolux disposed of a non-recourse asset in March 2015 (USD220m) and has already received an initial payment of USD105m. Fitch estimates that around EUR100m of cash, including cash located in joint ventures, is not readily available for debt repayment as it is also required for operational activities (working capital seasonality).

FULL LIST OF RATING ACTIONS

Grupo Isolux Corsan, S.A. (Isolux)
--Long-term IDR affirmed at 'B+'; Outlook revised to Negative from Stable
--Senior unsecured affirmed at 'B+'/RR4
--Short term IDR affirmed at 'B'

Grupo Isolux Corsan Finance, B.V.
--Senior unsecured debt affirmed at 'B+'/'RR4'