oFerrovial has confirmed its strategy, focused on construction and asset rotation in its infrastructure and concessions portfolio.
oAlthough significantly delayed, the disposal of its services business is under way, notably through the announced sale of Broadspectrum to Ventia, while Ferrovial now targets the disposal of the remaining assets by 2021.
oWe expect the COVID-19 pandemic will affect dividends from airports, toll roads, and construction, but we believe the balance sheet offers material leeway to cope with the pandemic-related difficulties.
oWe are therefore affirming our 'BBB/A-2' ratings on Ferrovial and assigning a stable outlook. We removed the ratings from CreditWatch with developing implications, where we had placed them on April 11, 2019.
oThe stable outlook reflects our view that we expect Ferrovial will maintain adjusted funds from operations (FFO) to debt of at least 45% over the next 18-24 months.
PARIS (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
Even after its intention to dispose of its services division and to focus on developing infrastructure assets, we nevertheless see Ferrovial as a corporate rather than an infrastructure company. We see an unchanged business strategy still focused on asset rotation for infrastructure projects. As part of its asset rotation policy, for example, in 2019 Ferrovial, sold 65% of AUSOL for EUR451 million and 11.75% of Ruta Del Cacao for EUR28.6 million. Ferrovial has also reaffirmed its intention to keep the nonrecourse nature of the debt within the group's project-financed subsidiaries without cross-default clauses. This confirms our approach in assessing the company's adjusted credit ratios by focusing on the group's core construction division, as well as on dividends received from investments. And so we will continue deconsolidating assets and liabilities from self-funded infrastructure projects in which the company is invested. We now have more visibility on how the disposal of the services business will unfold. In December 2019, Ferrovial reached an agreement for the sale of Broadspectrum in Australia and New Zealand to an entity controlled by Ventia Services Group Pty Ltd. Equity value (including shareholder loans) is estimated at EUR303 million and we expect Ferrovial to receive about EUR242 million in 2020 from this transaction. We also note that the Australian Competition and Consumer Commission announced on April 23, 2020, that it would not oppose Ventia's proposed acquisition of Broadspectrum. We anticipate a closing before October 2020. The remaining services assets, mainly in Spain and the U.K., should be disposed next year, and we expect Ferrovial to receive about EUR1.3 billion from these assets in 2021. Our analysis of the group's business risk profile after the Broadspectrum sale and pro forma disposal of remaining services assets is supported by Ferrovial's strong position in the construction industry, its participations in strategic infrastructure assets, including those with high concessional value, and its relative geographic diversification. That being said, the group's business will be less diversified without the services division and will lose scale. In addition, the stand-alone analysis for the construction division indicates its relatively small revenue base and lower profitability because of its concentration in markets with high competitive pressure. Following travel restrictions and lockdowns, we expect traffic to decline by 30%-50% at Heathrow, potentially triggering a dividend lock-up. In February, the airport agreed the payment of its first quarterly dividend to its shareholders, and we do not expect it to make any additional payment this year, which reduces total dividends in 2020 to £100 million from about £480 million in 2019 and 2018. Because we also do not expect AGS airports (Aberdeen, Glasgow, Southampton) to pay dividends this year, Ferrovial will receive less than EUR30 million from airports compared with EUR183 million in 2019. Dividends from airports in 2021 remain uncertain, because we are not expecting traffic to return to 2019 levels before 2023. Toll roads in North America should show relatively better resilience than airports, with the decline in traffic being temporary and back to 2019 levels in 2021. We therefore expect dividends from the ETR 407 and managed lanes this year to be close to the 2019 levels. We expect the construction business to face slowdowns and stoppages in some projects this year due to COVID-19 disruptions. The unfavorable competitive environment and the contract losses expected in three U.S. projects will also weigh on this division's cash flow generation. We expect lower dividends from infrastructure assets and adjusted EBITDA margins of 10%-13% in 2020-2021. However, we expect Ferrovial's exceptional liquidity and its net cash position (after deconsolidating the nonrecourse debt within the group's project-financed subsidiaries), to help cope with the pandemic-related headwinds. Moreover, we view positively the company's commitment to keeping a 'BBB' rating and believe it is likely management would act to keep the credit ratios commensurate with our thresholds for the long-term issuer credit rating. We expect about EUR220 million of capital expenditure (capex) in 2020 versus EUR295 million in 2019. Capex could peak next year (including uncommitted capex) with planned increased investments in toll roads and airports, the relevance of which the company will confirm versus the upcoming market environment. We also include EUR550 million of shareholder remuneration (dividends and share buybacks) in 2020 and 2021 compared with EUR520 million in 2019. We expect Ferrovial has ample capacity to make these distributions. With intense pressures from the current macroeconomic environment and about EUR600 million of cash outflow in total over 2020-2022 related to contract losses in U.S. projects, we expect negative discretionary cash flow in 2020-2021. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The stable outlook reflects our view that Ferrovial will maintain adjusted FFO to debt of at least 45% over the next 18-24 months. We believe there is significant headroom under this threshold for the current rating, although we anticipate this could be eroded due to increased investments in the form of capex and active portfolio management.
A downgrade could stem from higher-than-expected debt-funded investments, with FFO to debt therefore declining to below 45%. This could also result from a downturn in construction, further unexpected provisions under existing contracts that change the company's cash generation profile, or from a sustained decline in contribution from infrastructure assets, potentially requiring equity support to these projects.
An upgrade would require the company's commitment to maintain a stronger balance sheet, such that FFO to debt remains about 60% at all times. We could also consider an upgrade if further business or project diversification materially shifts the infrastructure portfolio strategy, resulting in dividend contribution increasing materially on a recurring basis.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
oGeneral Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
oFerrovial 'BBB/A-2' Ratings On CreditWatch Developing, Pending Disposal Of Services Division, April 11, 2019
S&P Global Ratings is the world's leading provider of independent credit ratings. Our ratings are essential to driving growth, providing transparency and helping educate market participants so they can make decisions with confidence. We have more than 1 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities. We offer an independent view of the market built on a unique combination of broad perspective and local insight. We provide our opinions and research about relative credit risk; market participants gain independent information to help support the growth of transparent, liquid debt markets worldwide.
S&P Global Ratings is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit www.spglobal.com/ratings.
.
S&P GLOBAL, INC. 
