OREANDA-NEWS. December 22, 2015. Fitch Ratings says the sector outlook for EMEA engineering and construction issuers remains stable for 2016.

The outlook for 2016 reflects a contrasting picture, with lower rated issuers focused on divestments to ease the debt burden and improve liquidity. Meanwhile, companies in the 'BB' category and above will be looking to further improve their business profile relying on an already solid balance sheet structure.

Fitch's analysis shows a reverse correlation between margins and ratings. The higher the margins, the lower the rating. With some exceptions, higher margins are more than offset by an increase in execution risk and more volatile working capital. The latter historically created the need for financing, which is detrimental for the ratings of highly speculative issuers.

Several lower rated entities have struggled in 2H15. Fitch downgraded Abengoa to 'RD' and the company is now seeking protection under Article 5 bis of the Spanish Insolvency Law (Ley Concursal). We revised Aldesa's Outlook to Negative as a consequence of a deterioration in margins, which also affected Isolux (downgraded and placed on Rating Watch Negative). For issuers such as Isolux and Abengoa, the success of their assets disposal plan is key to maintaining the existing ratings or to keep the going concern.

Higher rated companies closed 2015 positively, setting new revenues and backlog records, and we see potential for further growth in 2016. Some issuers are already carrying out transactions with potential to be deployed in the next year. Ferrovial is reiterating its interest towards more stable activities (services) with the offer made to the Australian-based company Broadspectrum and Salini is completing an acquisition in the US, where lower margins are mitigated by good cash flow visibility.

With southern Europe slowly recovering and northern America still appealing, the challenging market in 2016 could be Latin America. Infrastructure projects there could attract the interest of EMEA construction companies, but possible payment delays and diverging economic trends in the area remain an issue.