S&P: Support Services Provider Spie Outlook Revised To Negative On Expected Slower Deleveraging; 'BB' Rating Affirmed

S&P Global Ratings today revised its outlook to negative from stable on France-based multi-technical services provider Spie SA. At the same time, we affirmed our 'BB' long-term issuer credit rating on Spie.

We also affirmed our 'BB' issue ratings on Spie's €1.125 billion senior unsecured term loan, €600 million senior unsecured notes, and €400 million revolving credit facility (RCF). The recovery rating of '4' on the facilities reflects our expectation of average recovery (30%-50%; rounded estimate: 30%) in the event of a payment default.

At the same time, we assigned an issue rating of 'BB' and a recovery rating of '4' to the proposed €1.2 billion senior unsecured term loan and €600 million RCF. Our recovery expectation for these facilities is also about 30%.

The outlook revision reflects our expectation of slower deleveraging than we previously forecast. Although Spie's underlying performance in 2017 was broadly in line with our expectations, we expect exceptional costs related to streamlining of the business, and soft market conditions, to continue to weigh on the group's operating performance in 2018. We view 2017 as a transitional year, given the sizable acquisition of SAG in the second quarter and the exceptional costs associated with its integration, which resulted in adjusted debt to EBITDA of above 5.0x.

In 2018, we forecast revenue growth of 8%-10%, owing to the full-year consolidation of SAG, alongside further bolt-on acquisitions, and organic growth in the group's French and German operations. However, we expect that continued soft pricing in the French commercial sector, weaker demand in the U. K., and a degree of margin dilution from acquisitions made in 2017 will constrain growth and underlying EBITDA generation. In addition, while we expect lower exceptional costs in 2018, we forecast that restructuring costs in France, alongside acquisition-related costs, will result in elevated leverage metrics, including adjusted debt to EBITDA of 4.5x-4.8x and funds from operations (FFO) to debt of 13%-17%. We view such ratios as inconsistent with the current rating. However, we expect to see further margin improvement in 2019 as the group benefits from increased density in the German market, alongside lower restructuring costs, such that debt to EBITDA falls below 4.5x and FFO to debt rises above 15%.

Our 'BB' issue ratings and '4' recovery ratings on the group's proposed €1.2 billion senior unsecured term loan and €600 million RCF reflect our expectation that the group will use the new facilities to refinance the existing banking lines. We note that the proposed facilities will no longer benefit from upstream guarantees provided by the group's operating subsidiaries, which we expect to result in the removal of the guarantee package under the group's €600 million notes. However, we assess that this won't be detrimental to the recovery prospects for bond investors, as they would continue to rank pari passu with the group's banking facilities. That said, the recovery rating of '4' is constrained by the existence of material liabilities, which we would consider would rank prior to the senior unsecured facilities in the event of a payment default.

The negative outlook reflects our assessment that there is a one-in-three chance that continued soft pricing in the group's core French market, weakness in the U. K. and oil and gas segments, and continued high restructuring costs will constrain Spie's revenue and EBITDA growth.

We could lower the rating if the group's operating performance in 2018 does not signal an improving leverage trend, such that we do not expect debt to EBITDA to fall below 4.5x or FFO to debt to increase above 15% in 2019.

We could consider revising the outlook to stable if Spie focuses on reducing its leverage while improving operating performance, such that debt to EBITDA improves to below 4.5x and FFO to debt increases to above 15%.

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