This article is from the Australian Property Journal archive
STANDARD & Poor's Ratings Services has removed Leighton Holdings from CreditWatch with negative implications and affirmed its 'BBB-/A-3' ratings.
Leighton was placed CreditWatch on March 11, 2014 after concerns about the credit quality of its parent company.
“The ratings affirmation partly reflects our assessment that there has been no change in the underlying credit quality of Leighton or its parent’s (Hochtief AG) ultimate controlling shareholder, Spanish firm Actividades de Construccion y Servicios SA (Grupo ACS),” Standard & Poor’s credit analyst May Zhong said.
“Our credit estimate on the unrated German-based Hochtief AG takes into account the debt ring-fencing arrangements that have been implemented and remain in force, which justify a limited separation of Hochtief and Leighton’s credit quality from Grupo ACS.
“In addition, we have assessed the group credit profile (GCP) on the Grupo ACS group as being ‘bb+’, based on our credit estimate. We view Hochtief and Leighton to be partially insulated from Grupo ACS, which allows Hochtief and Leighton to be rated one notch above the GCP. We also assessed the stand-alone credit profile (SACP) of Leighton as being ‘bbb’. This is line with our credit estimate on Hochtief of ‘bbb’, which reflects Leighton’s significant contribution to Hochtief’s revenues, earnings and assets, and their similar financial risk profiles,” she added.
Zhong said the agency continues to be mindful of the potential influence that Grupo ACS could have on Leighton, particularly in the event of significant financial stress at the ultimate parent.
“Our assessment of the weaker credit quality of Grupo ACS will continue to be an important driver of our view on Leighton’s creditworthiness. The weaker credit quality of the parentage is an important factor and a constraint on our overall rating assessment of Leighton,” she continued.
“The stable outlook reflects our expectation that Leighton will adhere to its conservative financial policy and that this will not limit the group’s ability to grow its business and successfully execute on its current strategy. We expect that the company’s FFO-to-debt will be maintained at more than 45% through the economic cycle. Although the group credit profile is ‘bb+’, we can accommodate a limited separation from the weaker ultimate parent due to our view that Hochtief is an insulated subsidiary from Grupo ACS. Hochtief and Leighton benefit from a similar credit quality on a stand-alone basis.
“We could lower the rating if we considered that Hochtief was no longer an insulated subsidiary from Grupo ACS. This would be evidenced by unexpected control by Grupo ACS over Hochtief that weakened the current protection provided to Hochtief creditors. In turn, this would lead us to treat Hochtief and Leighton as integrated subsidiaries of the Grupo ACS group. The ratings on Leighton could also be lowered if the group credit profile were to weaken from ‘bb+’.
“While we consider it less likely, the rating could come under pressure if the stand-alone credit quality of Leighton were to weaken to below ‘BBB-‘.
“Given the lower credit quality of Leighton’s ultimate parentage, we believe that upward rating movement is unlikely in the near term. Upward rating pressure could however occur if there was an upgrade of the GCP, which would most likely occur from a material and sustainable improvement in the financial risk profile of Grupo ACS,” Zhong concluded.
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