Salini Impregilo SpA 'BB-' Ratings Placed On CreditWatch Negative On Disappointing Operating Cash Flow

  • Italian construction company Salini Impregilo recently published its 2019 annual results, and posted operating cash flows that were weaker than our expectations.
  • The COVID-19 epidemic increases uncertainty on projects' operations and working capital performance in 2020.
  • We are therefore putting our 'BB-' ratings on Salini Impregilo on CreditWatch with negative implications.
  • We aim to resolve the CreditWatch in the coming months, once we have more visibility on Salini Impregilo's working capital path--including the company's ability to collect delayed payments--and on COVID-19's effect on the company's operations.
PARIS (S&P Global Ratings) March 24, 2020--
S&P Global Ratings today took the rating actions listed above.
Salini Impregilo reported negative free operating cash flow (FOCF) in 2019, after considering extraordinary cash-outs related mainly to Panama advances reimbursement and tax items.   Most of Salini Impregilo's cash absorption stems from adverse working capital development, which affected cash flow by about €195 million. That is weaker than our previous expectation of limited cash outflow for 2019. Working capital has been affected by delays in cash-in from Italian operations amounting to €237 million. We understand that Salini Impregilo has not yet received those payments, and that timing is uncertain. In our view, this reflects the company's low visibility and control of its cash collection. Although a full financial statement for 2019 is yet to be published, we anticipate Salini Impregilo's funds from operations (FFO) to debt will be 14%-16%, which is lower than our previous expectation of slightly below 20%.
The negative FOCF absorbed part of the €600 million capital increase from November 2019.  Salini Impregilo's reported net financial indebtedness improved by only €318 million in 2019, through a combination of gross debt reduction and higher cash and other financial assets--although the company recently raised €600 million of equity. The negative FOCF of Salini Impregilo mainly explains the difference during the year. However, Salini Impregilo still has to fund the 65% stake in Astaldi S.p.A. for €225 million in 2020. We believe that the financial indebtedness could increase in 2020 due to the Astaldi acquisition, unless Salini Impregilo can successfully cash in important payments from projects. Mitigating the risks, we understand that Astaldi should be integrated with an important positive net cash position as per the composition plan.
The COVID-19 outbreak adds uncertainty to Salini Impregilo's activity in 2020.   The company has said that most of its projects are operating normally at the moment. However, we cannot rule out project suspensions or disruptions in some countries, such as Italy or the U.S. In our view, the coronavirus outbreak could have a negative impact on Salini Impregilo's credit metrics in 2020, mainly due to reduced activity and additional working capital cash absorption. Compared with our ratings on other construction companies in Europe, Middle East, and Africa (EMEA), our ratings on Salini Impregilo have less headroom in the event of COVID-19 operating disruption, because of the company's lower-than-expected cash collections in 2019.
Liquidity remains adequate for now, but the company has important disbursements in the second half of 2020 and in 2021.  Our uses-over-sources ratio is at 1.5x starting Jan. 1, 2020, thanks to the recent extension of credit lines and the subsequent €550 million of undrawn revolving credit facility (RCF). Besides, short-term debt reduced to €300 million from €660 million following the capital increase. However, Salini Impregilo is still facing debt maturities in excess of €500 million in 2021. We see a low probability of Salini Impregilo refinancing the remaining €475 million notes due 2021 in the coming months, because of the volatile debt market environment amid COVID-19. Besides, Salini Impregilo will also need to fund the Astaldi acquisition in the second half of 2020. We believe that liquidity could deteriorate in the coming quarters if Salini Impregilo fails to collect project payments. Mitigating the risks, we acknowledge the company's solid relationships with its banks.
The integration of Astaldi remains our base case.  The holders of Astaldi's €140 million equity-linked notes recently voted in favor of the composition plan, while the holders of the €750 million senior notes voted against. In our view, a positive outcome remains likely, since the majority of Astaldi's creditors are Progetto Italia stakeholders. Besides, we understand there is no alternative proposal for the rescue of Astaldi.
We aim to resolve the CreditWatch in the coming months once we have more visibility on Salini Impregilo's working capital path--including the company's ability to collect delayed payments--and on COVID-19's effect on the company's operations.
We could affirm the ratings if Salini Impregilo's operations and performance are not materially affected by the COVID-19 epidemic, and if the company's working capital path is supportive of significantly improved credit metrics in 2020 compared with 2019, while its liquidity profile remains adequate.
We could lower the ratings if we anticipate that FOCF is much weaker than our expectations in 2020, notably due to slow collection of project payments, thus hampering a significant improvement of FFO to debt. Difficulties in integrating the acquired businesses, particularly Astaldi, disruption arising from COVID-19, and weakened liquidity could also trigger a downgrade.
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