Fitch Ratings has assigned a 'BBB+' to Fluor Corporation's (FLR)
announced EUR500 million senior unsecured notes maturing in 2023.
The issuance is to partially fund the EUR695 million acquisition of
Stork Holding B.V. (Stork) on March 1st 2016. FLR has given notice to
all holders of Stork Technical Services HOLDCO, B.V. 11% Super Senior
Notes due 2017 of the full redemption of the outstanding EUR272.5
million (or approximately $295.6 million) principal amount of Stork
notes on March 17, 2016. The redemption will be funded with additional
borrowings under the company's $1.7 billion credit facility which Fitch
expects to be repaid from cash on hand and the net proceeds from this
offering. Stork Technical Services HOLDCO, B.V. is a subsidiary of Stork.
KEY RATING DRIVERS
Fluor's ratings are supported by the company's well-established position
in global engineering and construction markets, consistently positive
free cash flows, solid backlog, diverse project portfolio, and effective
risk management. Fluor's liquidity and experience in its core
engineering and construction markets mitigate the risk of large project
losses. In addition, its global scale and flexible cost structure
mitigate the impact of cyclicality.
Fluor has been able to maintain a healthy backlog despite significant
demand pressures and cancellations in its Industrial & Infrastructure
segment. The company has maintained stable backlog in its Oil and Gas
segment in 2015 notwithstanding industry wide project delays and
cancellations driven by the pressured crude oil prices beginning in Q4
of 2014. Fluor's ability to continue to win new awards in an adverse
market, its global footprint, adequate financial flexibility and
effective risk management support Fitch's ratings and the Stable
Outlook. Despite stable backlog in its Oil and Gas segment, Fitch is
concerned with the diminishing global demand for oil which may
negatively impact downstream business in late 2016 and 2017, resulting
in potential project delays in FLR's current backlog.
FLR's adjusted debt/EBITDAR was 1.4x as of December 2015, up slightly
from the 1.3x at the same time prior year, driven by a 20% reduction in
EBITDAR. Fitch capitalizes operating leases as part of the company's
adjusted debt figure. FLR's FFO adjusted leverage was approximately 1.7x
as of December 2015, down from 1.9x in December of 2014.
Fitch remains concerned that based upon Fitch's expectations; FLR will
have a reduced margin profile over the medium to long-term. FLR has
historically generated an EBITDA margin well below the 6.6% and 6.3%
figures posted in 2014 and 2015 respectively, and Fitch expects FLR to
have an EBITDA margin in the mid-to-low 5% range for full year 2016,
largely driven by the change in the sales mix. Fitch is concerned that
lower margins combined with the higher debt levels may result in
prolonged elevated leverage.
Other rating concerns include the shifts in FLR's end market
concentrations over recent years. In 2013 FLR's Industrial &
Infrastructure (I & I) sector represented 40% of the company's revenue.
In 2015, mostly driven by declines in mining volume, I & I represented
23% of revenue. In addition, the Power segment has remained flat at 5%
of the company's revenue since 2013, though this share should rise
incrementally in 2016 due to the Westinghouse projects and new gas-fired
power plant awards. Alternatively, FLR's Oil & Gas segment has grown in
share from 43% in 2013 to 55% in 2015. This increased energy
concentration is partly the result of FLR's success in replacing delayed
upstream projects in this segment with downstream and petrochemical
projects in 2014 and 2015.
KEY ASSUMPTIONS
--Capex remaining at roughly 1.3% of revenue annually;
--Soft organic revenue growth over the medium term;
--EBITDA margins in the mid-to-low 5% range over the medium term.
RATING SENSITIVITIES
Negative: Future developments that may individually or collectively
cause Fitch to consider a negative rating action include:
--Sustained Adj. Debt/EBITDAR above 2.25x;
--Sustained FFO adjusted leverage above 2.75x;
--FCF margins consistently below 1%;
--Additional debt issuance to fund shareholder-friendly activity.
A positive rating action is unlikely in the near term given Fitch's
expectation of the higher leverage and the weakness in some of FLR's end
markets. Future developments that may individually or collectively cause
Fitch to consider a positive rating action include:
--Sustained Adj. Debt/EBITDAR below 1.5x;
--Sustained FFO adjusted leverage bellow 2x;
--FCF margins consistently above 1.5%;
--Lack of material project losses.
LIQUIDITY
The company held approximately $2 billion in available cash and
short-term marketable securities, which included $754 million of advance
billings of customers on contracts as of Dec. 31, 2015. FLR does not
currently consider any cash to be permanently reinvested overseas though
non-U.S. cash and equivalents amounted to $1.3 billion as of Dec. 31,
2015, up from $1.1 billion in the previous year. FLR retains adequate
liquidity and financial flexibility aided by the lack of near-term
maturities and stronger recent cash flow generation with a full-year
2015 FCF margin of 2.4%, up markedly from the 0.25% figure in 2014.
Liquidity also includes availability under two revolving credit
facilities totalling $1.75 billion. Both of the company's credit
facilities mature in 2021.
FULL LIST OF RATING ACTIONS
Fitch currently rates FLR as follows:
--Long-term IDR at 'BBB+';
--Senior unsecured bank facility at 'BBB+';
--Senior unsecured notes at 'BBB+'.
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
Date of relevant rating committee: March 3, 2016
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000880
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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