OREANDA-NEWS. August 10, 2015.  Fitch Ratings has affirmed Italian construction group Salini Impregilo S.p.A.'s Long-term Issuer Default (IDR) and senior unsecured ratings at 'BB'. The Outlook is Stable.

The affirmation reflects Salini Impregilo's solid operating performance and strong order book supporting revenue growth. However, some project concentration risk exists, which is only partially mitigated by geographic diversification.

Fitch adjusts leverage calculation by some cash held in subsidiaries (EUR360m) which we assume is not readily available for debt repayment.

KEY RATING DRIVERS

Business Plan on Track
In 2014 Salini Impregilo largely met its business plan forecast, achieving solid margins and reducing gross debt levels. For 2015 the company targets to maintain double-digit EBITDA margins and to win additional orders of around EUR6bn. Last month the company was awarded with over EUR1bn orders in Qatar, reinforcing its presence in the prominent Gulf area and bringing it closer to its targets.

Record Backlog
Salini Impregilo received EUR6.5bn of new orders last year, bringing the total backlog to more than EUR32bn at end-2014. The trend continued through 1H15, taking total backlog to EUR33.3bn (of which EUR26.1bn related to construction activity). This is equivalent to yearly revenue coverage of around 6x, at the top of the engineering and construction (E&C) industry. However, some concentration risk exists with the top 10 orders accounting for around 50% of the total backlog.

Pure Construction Group
In contrast to other players in the construction industry, Salini Impregilo's core activity is in the construction and engineering of civil works. The company's search for profitability is characterised by delivering large, complex and value-added infrastructure projects with strong engineering competencies.

Effective Risk Management
Risk management policies are in place to identify and assess the risk and reward of pricing contracts. In order to monitor closely and to obtain full control of projects, Salini Impregilo tends to lead consortiums where it is a participant.

Potential M&A Activity
The company is looking to increase its presence in North America, where a mid-size acquisition could occur in the next few months. M&A activity in the region would aid the company's capacity to bid for local projects. Expected cash generation from core construction activity should help fund the North American acquisition, although this may stall de-leveraging.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Salini Impregilo include:

- Top line growth driven by the strong backlog
- Double-digit EBITDA margin for 2015
- Disciplined bidding for new projects
- Moderate M&A in the next two years

RATING SENSITIVITIES

Negative: Future developments that could lead to negative rating action include:
- Funds from operations (FFO) adjusted net leverage above 2.5x (2014; 1.9x) on a sustained basis.
- Weak performance on major contracts with a material impact on profitability with EBITDA margin falling below 8% on a sustained basis.
- Problems in collecting receivables.
- Increased activity in high-risk countries.

Positive: Future developments that could lead to a positive rating action include:
- FFO adjusted net leverage of 1.0x or below on a sustained basis.
- Reduced concentration in the top 10 contracts.

LIQUIDITY AND DEBT STRUCTURE

The company's maturity profile has been extended following the refinancing in 1Q15. Total liquidity at end-June 2015 was EUR1.2bn, comprising reported cash of around EUR1bn and an undrawn credit line totalling EUR200m. The company would comfortably meet the next EUR150m bond maturing in November this year with its current liquidity.