OREANDA-NEWS. November 17, 2015. Fitch Ratings has affirmed Italian construction group Salini Impregilo S.p.A.'s (Salini) Long-term Issuer Default (IDR) and senior unsecured ratings at 'BB'. The Outlook is Stable.

The rating actions follow Salini's announcement that it is acquiring Lane Industries Inc., a US-based company engaged in infrastructure projects and asphalt paving, for a total consideration of around USD406m - before any closing adjustments. Lane Industries Inc. generated USD1.4bn revenues in 2014. The closing of the deal is expected in January 2016, subject to the approval of Lane Industries shareholders and antitrust.

Fitch already factored a potential M&A activity in the US in the rating action taken on 7 August (see 'Fitch Affirms Salini Impregilo at 'BB'; Outlook Stable' on www.fitchratings.com). The affirmation now reflects Salini increasing scale, diversification and improved access to one of the largest markets for engineering and construction (E&C).

KEY RATING DRIVERS
Improved Geographical Diversification
Fitch positively assesses the increasing presence in the US, which enables the company to mitigate its exposure to emerging markets and to reduce project concentration risk. Adding local presence in the US would allow Salini to bid more effectively for projects in one of the largest E&C markets.

A Sought-After Market
The US non-residential construction and transport infrastructure market presents opportunities for E&C companies, underpinned by projected economic growth of more than 2.5% on average over the next three years. Although less remunerative than developing countries, the North American region has recently attracted the interest of several foreign players looking to de-risk their portfolio.

Complementary Presence
Salini is already present in some US western states - where it recently delivered the Lake Mead Tunnel hydraulic system in Nevada - while Lane Industries Inc. operates mainly in the US east coast. The entity resulting from the acquisition will benefit from an enlarged footprint in the region. Also, as Salini and Lane Industries specialise in different sub-sectors within the construction industry, additional value could be unlocked from synergies and increased magnitude.

Financing Structure
Salini intends to fund the acquisition through a mix of existing cash and new debt in the form of a loan facility provided by leading financial institutions. After the closing of the transaction, the company could tap the capital market to repay such bridge financing. Nonetheless, Fitch expects funds from operations (FFO) adjusted net leverage to remain slightly below 2.5x at end-2016 after completion of the transaction.

Healthy Trading Figures
Results for the nine months to September 2015 were healthy, with a order backlog of EUR33.7bn and revenues up 8.4% on a like-for-like basis from the previous year. Margins remained flat at 10.1% in 9M15 vs. 9.9% in 9M14.

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
- Full consolidation of Lane Industries Inc. from 2016

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action include:
- 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% (2014: 10.4%) 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.