Frankfurt am Main, November 24, 2014 -- Moody's Investors Service today affirmed Abengoa S.A.'s B2 corporate family rating (CFR), B2-PD probability of default rating (PDR), as well as B2 senior unsecured debt ratings of Abengoa and its guaranteed subsidiaries. The outlook on the ratings is stable. At the same time, Moody's believes that the positioning of Abengoa in the B2 rating category has weakened considerably.
RATINGS RATIONALE
This weakening relates to a substantial rise in the amount of Abengoa's non-recourse debt in process (NRDP), which has increased from EUR600 million as of December 2013 to around EUR1.6 billion as of September 2014. Under NRDP Abengoa reports debt instruments (green bonds and various bridge loans) that serve as bridge financing for concession projects until all conditions precedent have been met to obtain long-term project financing. Using the rationale that the purpose of such debt instruments is to pre-finance concessions, Abengoa has so far not included this type of debt in its corporate leverage calculation, treating it as a non-recourse in its books.
Moody's however cautions that NRDP is backed by a guarantee provided by Abengoa S.A., which exposes Abengoa directly to a number of operational and regulatory risks until the long-term project financing is concluded. Thus, we will include NRDP in our corporate leverage metrics going forward, also considering its increased materiality and the rating agency's expectation that NRDP will not decrease to the levels that could be considered immaterial for our analysis.
These factors are somewhat mitigated by Abengoa's robust track record of converting such bridge financing into long-term funding. Such a qualitative record of the company's abilities allows Moody's to tolerate higher corporate leverage than it would otherwise expect for the rating category. However, such tolerance is subject to Abengoa's ongoing ability to manage the size of the bridging exposure and the associated risks.
Abengoa's gross corporate leverage, including total outstanding NRDP, leads to a ratio of around 7.6x on a gross basis as of September 2014 and around 3.6x on a net basis, pro forma for the recent asset sales to Abengoa Yield, as of the same date. This positions Abengoa very weakly in the B2 rating category. While Moody's does not explicitly take into account amounts related to "confirming without recourse" in its leverage calculation, the rating agency notes that this amount has increased significantly in the current financial year, as indicated by the EUR 1 billion in cash that Abengoa holds linked to suppliers as of September 2014 (total amount of "confirming without recourse" accounted for EUR 469 million as of December 2013 and cash linked to suppliers under this scheme accounted for EUR 369 million as of December 2013).
RATIONALE FOR STABLE OUTLOOK
The B2 rating with a stable outlook remains supported by Abengoa's liquidity profile, which Moody's considers as adequate at this stage. While the company reported corporate cash of around EUR3.7 billion as of September 2014, only around EUR2.7 billion of this is unrestricted and freely available cash sitting at a diversified pool of financial institutions with high credit ratings, according to the company. The remainder is linked to supplier payments (confirming with recourse).
Abengoa's debt maturity profile through 2015 appears manageable in relation to the available cash buffer. However, given the pronounced intra-year seasonality of Abengoa's net working capital, Abengoa needs to maintain a high amount of operating cash, which Abengoa estimates to be around EUR 1 billion at high peak.
The rating agency also notes the step-change increase in the size of the NRDP and the risk that this amount may rise further if Abengoa continues to add new projects to its pipeline that require this kind of pre-financing. However, these concerns are mitigated to an extent by management's plans to limit NRDP exposure. Under these plans, NRDP will cover no more than 25% of cost on a per-project basis and long-term financing will be in place within a maximum of 1-2 years of the start of each project.
Moody's also expects that Abengoa will start generate positive FCF at corporate level on the back of lower equity contributions to concessions, which we expect to be matched with the profit contribution from its Engineering and Construction division, although with typical intra-year working capital swings. In addition, Abengoa owns a 64% stake in listed Abengoa Yield Plc, which owns several concession assets already in operation. The sale of Abengoa Yield shares could provide Abengoa will an additional liquidity cushion, if required.
While Abengoa Yield could potentially improve Abengoa's corporate leverage through the acquisition of Abengoa's concession assets, Moody's cautions that this would likely require the sale of Abengoa's best-performing concession assets. However, if Abengoa Yield were to finance such purchases by issuing debt, they would have no effect on Abengoa's consolidated leverage given its majority-ownership of Abengoa Yield (although the Abengoa Yield debt would be non-recourse to Abengoa). At present, it remains to be seen whether Abengoa will use proceeds from the sale of concession assets to Abengoa Yield to reduce leverage at a corporate level to ratios that would be more commensurate with the current rating category.
WHAT COULD CHANGE THE RATING UP/DOWN
Negative pressure could be exerted on Abengoa's ratings if the company fails to reduce its leverage both on a corporate and consolidated basis to, for example, a Moody's adjusted net consolidated debt/EBITDA ratio of around 8.0x (9.3x for last-12-months to June 2014) or a gross corporate debt/EBITDA ratio of below 7.0x in the next 12-18 months (7.6x per September 2014 including NRDP).
In the event that Abengoa fails to achieve these metrics, Moody's will take into account the company's liquidity position, its ability to generate sustainably positive FCF at corporate level, the quality of Abengoa's investments, its financial strategy and the maturity of its concession portfolio. The ratings could also be downgraded if Abengoa fails to maintain NRDP exposure at a manageable level.
Moody's could upgrade the ratings if Abengoa further improves the transparency of the information. An upgrade would also require building a further track record of successful concession asset rotation through Abengoa Yield, leading to sustainable positive FCF at corporate level and deleveraging, both at corporate and consolidated level, for instance with a Moody's-adjusted net consolidated debt/EBITDA ratio moving comfortably below 7.0x. In addition, upward rating pressure would require maintenance of a solid liquidity profile.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Construction Methodology published in November 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
With this rating action, Moody's has also changed the application of the industrial methodology, which previously was the Heavy Manufacturing Methodology. Recently, Moody's has merged its Heavy Manufacturing Methodology into its newly updated Manufacturing Methodology. In addition, with the sale of Befesa at end-2013, Moody's believes that the Construction Methodology would now be more applicable to Abengoa's business model.
Abengoa S.A. is a vertically integrated environment and energy group whose activities range from engineering and construction, and the utility-type operation (via concessions) of solar energy plants, electricity transmission networks and water treatment plants to industrial production activities such as biofuels. Headquartered in Seville, Spain, Abengoa generated EUR7.4 billion in revenues in 2013 on a consolidated basis.
