Fitch Ratings has affirmed UAE-based Essar Projects Ltd’s (EPL) long-term and short-term foreign currency issuer default ratings at ‘B’. The outlook on the long-term rating is ftable. The agency has also affirmed EPL’s $100million working capital loans at ‘B’ and assigned it a recovery rating of ‘RR4’.
The affirmation reflects EPL’s sound financial performance in the financial year ended March 2011 (FY11). The company’s revenue grew by 71% yoy in FY11 along with comfortable credit metrics with financial leverage (total debt/EBITDA) of 1.9x and interest coverage (EBITDA/gross interest) of 3.7x. The ratings also derive comfort from EPL’s strong order book position of $6billion at end-March 2011 (March 2010: $4.3billion). Fitch notes that there is high order book diversity across project segments. Further, the proportion of non-Essar group projects in EPL’s order book increased to 31% in FY11 (FY10: 22%, FY09: 5%).
The ratings continue to be constrained by Essar Global’s (EG) credit profile which is highly leveraged. In FY10, leverage was 12.6x versus an estimated 8x. Fitch expected the leverage to peak in FY10 and the company to delever thereafter, as its 5mtpa steel plant expansion became operational in FY11 and the 6mtpa refinery expansion was commissioned in FY12. However, both these projects have been delayed and are expected to be commissioned in September 2011.
The ratings also continue to be constrained by the volatility in cash flows and profitability which affects construction companies. Further, many construction companies suffer from temporary cash flow mismatches and high working capital requirements due to their high receivable days and the fact that cash flow receipts are linked to milestone completions. Fitch notes that while EPL’s exposure to the Essar group has been reducing, it still remains a significant proportion of its order book and will be a major contributor of revenues in future.
Negative rating guideline include a worsening of EG’s credit profile and/or a deterioration in EPL’s credit metrics with its financial leverage of above 5x and interest coverage of below 1.2x on a sustained basis. No positive rating action is envisaged over the next 18-24 months given the likely delay in EG’s deleveraging, as discussed above.