Limited relief for Leighton Holdings, the German-Spanish controlled construction giant which seems to be re-emerging slowly from the management and operational turmoil of the last two to three years.
On Friday ratings group Standard & Poor’s took the company off its credit watch negative list after it had been put there in March in the wake of the boardloom turmoil that saw the chairman and two independent directors quit.
The company released the ratings announcement to the market during trading, but it didn’t help the shares which lost 68c to end at $16.32, a drop of more than 3% on the day.
That fall was probably more due to the overall weakness on the day and the fact that Leighton had lost its place in the ASX/50 index – the group of the 50 biggest companies by market capitalisation and the one that attracts the most interest from big investors, especially the global giants such as Blackrock.
S&P however still has reservations about the corporate structure of Leighton and its shareholders, and the potential for weaknesses in Hochtief or ACS to emerge and threaten Leighton.
It remains more on ‘suspicion’ rather on an actual credit watch negative.
S&P said that its move was partly related to Hochtief saying it would not seek control of Leighton’s board.
Hochtief controls around 54% of Leighton and in turn is controlled by Spanish construction giant, ACS.
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But the ratings group said it was still concerned about those governance issues, and Hochtief’s and ACS’s weaker credit positions adversely affecting Leighton, thus limiting any ratings upgrades.
S&P said in its statement that there has been no change in the underlying credit quality of Leighton or its ultimate parent, but on the controlling shareholder, Spanish firm Actividades de Construccion y Servicios SA (Grupo ACS) the ratings group said.
"Our credit estimate on Grupo ACS is supported by our view that the parent’s "satisfactory" business risk profile is offset by a "significant" financial risk profile".
"We are satisfied that there is no deterioration in the governance arrangements between Leighton and its unrated German-based parent, Hochtief AG.
"However, our concerns about the limited separation between Leighton and its parent remain.
"We note that Hochtief has affirmed its governance arrangements and publicly stated that it will not be seeking to exercise its rights to a majority representation on the Leighton board following the resignation of Leighton’s independent directors.
"We expect that four new independent board members will be appointed to the Leighton board in the short term.
"We continue to be mindful of the potential influence that Hochtief and Grupo ACS could have on Leighton, particularly in the event of significant financial stress at a parent level.
"Our assessment of the weaker credit quality of Hochtief, incorporating the potential influence of Grupo ACS, will continue to be an important driver of our view on Leighton’s creditworthiness," said Standard & Poor’s credit analyst Craig Parker.
"Under the current governance arrangements between Leighton and Hochtief, Leighton operates under an independent board and management. We note that Grupo ACS holds 49.86% of Hochtief shares, but controls 54.28% of the voting rights in the company.
"Due to this ownership, we consider that the credit profile of Hochtief reflects that of Grupo ACS. As a consequence, the weaker credit quality of the parentage is an important factor and a constraint on our overall rating assessment of Leighton."
Mr. Parker added: "The stable outlook reflects our expectation that Leighton will adhere to its more conservative financial policy and that this will not limit the group’s ability to grow its business and successfully execute on its offshore expansion strategy.
"We expect that the company’s funds from operations (FFO)-to-debt will be maintained at above 45% through the economic cycle. Although we believe that the Group ACS’s credit profile is weaker than ‘BBB-‘, we can accommodate a limited separation from the weaker parent due to Hochtief’s public statements that it will adhere to the long-standing governance arrangements.
"We could lower the rating if we felt that unexpected control was being implemented by the parent that caused us to treat Leighton as an integrated subsidiary of the Grupo ACS group.
"The ratings on Leighton could be lowered if: We believe that Leighton’s strategic direction is being driven by Grupo ACS or Hochtief, including any growth ambitions of the parent companies that materially heighten the risk profile of Leighton’s operations; We see evidence of cash flow up-streaming (via dividends, asset transfers, etc.), including to support the funding requirements at Grupo ACS or Hochtief."
Mr Parker said other factors could be if "there are material adverse changes to the governance arrangements that Hochtief or Grupo ACS have put in place and Hochtief’s or Grupo ACS’s credit quality weakens".
