LONDON & WARSAW, Poland--(BUSINESS WIRE)--Fitch Ratings has downgraded Veolia Environnement's (Veolia) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'BBB' from 'BBB+'. The rating for its undated deeply subordinated reset rate notes was downgraded to 'BB+' from 'BBB-'. The Outlook is now Stable.
Fulfilling previous rating guidance for a downgrade, today's rating action reflects continued negative free cash flow (FCF) and our weaker forecast credit metrics compared with previous expectations. Despite increased cost savings expected by the company by 2015, sharply lower capital spending and signs of stabilisation in waste earnings, FCF remains substantially negative. With Veolia taking full ownership of Proactiva & Dalkia International we expect the business mix to shift towards cash-hungry energy services, rising to 21% of revenues in 2013 from 16% and EBITDA outside France to 77% from 62%. Fitch highlighted last year that a focus on high growth, less developed markets could increase business risk. The slower-than-expected sale of Transdev, where timing remains uncertain, delays debt reduction.
Funds from operations (FFO) net adjusted leverage and FFO fixed charge coverage were weak for the previous rating level. Changes to the consolidation scope and a soft economic environment are expected to contribute to an increase in Fitch-expected FFO net adjusted leverage to around 5.5x in 2014. However, we expect leverage gradually to decrease thereafter, supporting the Stable Outlook.
KEY RATING DRIVERS
Weak Credit Metrics
For 2012, pre IFRS 10-11, FFO net adjusted leverage and FFO fixed charge coverage were at 5.4x and 2.3x respectively, weak compared with negative triggers previously set above 4.7x and towards 3.0x respectively. Reconsolidating Proactiva and Dalkia International, we expect FFO net adjusted leverage to increase further in 2013 before falling back to around 2012 levels in 2014-2015. We also expect FFO fixed charge coverage to weaken in 2013, but improve to around 2.5x thereafter. These forecast levels are reflected in the current rating.
Capital Expenditure Cuts Likely to End
Veolia's capex fell in the first nine months of 2013 to 6.1% of revenue from 11.1% in 2012. Veolia has cut maintenance capex, especially in water to 1.8% of revenues in 2012 from 6.4% in 2005, compared with its closest peer, Suez Environnement, at 5%. Veolia has also cut waste capex over the same period to 5.1% from 7.9% of revenues. Fitch does not believe these trends are sustainable and are likely to be reversed. The forthcoming consolidation of Dalkia International, which has capex of nearly EUR400m, could contribute to an increase in Veolia's capex. Fitch consolidates Dalkia International and Proactiva in its projections, with a slight negative credit impact, while Dalkia France, Transdev and Chinese Water joint ventures are deconsolidated.
Cost Reduction, Stabilisation in Waste
Veolia raised its cost savings target in May 2013 to EUR750m by 2015 from EUR470m, supporting expected earnings and cash flow recovery. Of this figure, 80% is expected to benefit EBIT excluding associates, due to the accounting treatment of joint ventures. As of 3Q13, Veolia achieved net savings of EUR109m and is on track to reach the full year target of EUR170m. However, in a slow growth economic environment, Fitch does not expect Veolia to retain the full benefit; part of the savings are likely to be passed on in prices. With high fixed costs, waste earnings and cash flow momentum are supported by some signs of cyclical stabilisation. Underlying waste revenues rose 1% yoy in 3Q13 compared with -1.4% in 2Q13 and -4.6% in 1Q13, reflecting an improvement in treatment and collection volumes in France, Australia and the UK, and in hazardous waste. However, recovery is patchy, visibility is low and in a potential structural industry shift, there is some evidence of lower volume correlation with industrial production than in previous cycles.
Asset Sale Programme Almost Complete
With the exception of Transdev, Veolia's EUR6bn asset sale programme is almost complete. Veolia has recently started to acquire, notably the outstanding stakes of Proactiva & Dalkia International. Both fit Veolia's target of raising revenue from growth markets outside western Europe to 50% of the group in the medium term from 33% at present. It remains to be seen if Veolia becomes more acquisitive in future, particularly in the fragmented waste business. At Transdev, a planned capital increase of EUR800m, debt pay down and a long-term exit have been delayed by SNCM (Corsica Ferries, 66% owned by Transdev). Veolia is looking to resume negotiations both for the sale of Transdev, without SNCM, to CDC and for the refinancing of shareholder loans to Transdev in March 2014. However, with no clear timetable, Fitch has not factored potential Transdev disposal proceeds in its projections.
RATING SENSITIVITIES
The current Rating Outlook is Stable. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade or a downgrade. Future developments that may nonetheless lead to a positive rating action include:
-Additional cost cutting, stronger cyclical recovery and sale of Transdev, with FFO net adjusted leverage falling to below 4.7x, improvement in FFO fixed charge cover ratio towards 3.0x and positive FCF, on a sustained basis.
Future developments that may nonetheless lead to a negative rating action include:
- More aggressive debt funded acquisition strategy or operational underperformance, with FFO net adjusted leverage above 5.5x, a fall in FFO fixed charge cover ratio towards 2.0x and negative FCF on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
As at 30 June 2013, Veolia had group net liquidity of EUR4.1bn. This includes cash and cash equivalents of EUR3.1bn at Veolia Environnement and EUR0.5bn at Veolia's subsidiaries. Its gross liquidity position of EUR7.9bn includes undrawn committed bank facilities of EUR4.2bn. Debt is 78% fixed rate and 59% denominated in EUR. Fitch believes that Veolia has adequate liquidity to meet debt maturities and operating requirements at least until the end of 2016. FCF at 3Q13 was negative EUR328m, before taking account of proceeds from disposals and movements in working capital, which are expected to partly reverse by year end.
Additional information is available on www.fitchratings.com
Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.
Applicable criteria, 'Corporate Rating Methodology', dated 5 August 2013, are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=807916
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