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Research Update: Ventia Services Group Ltd. Upgraded To 'BBB-' Following IPO And Deleveraging, Off CreditWatch; Outlook Stable

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Research Update: Ventia Services Group Ltd. Upgraded To 'BBB-' Following IPO And Deleveraging, Off CreditWatch; Outlook Stable

Rating Action Overview

  • Australia-based infrastructure service provider Ventia Services Group Ltd. (Ventia) has completed an IPO and used proceeds along with its existing cash and a new syndicated term loan to repay outstanding first-lien term loans.
  • Post-IPO, we no longer modify the rating on Ventia as we view the company to be a stand-alone entity rather than a subsidiary of CIMIC Group Ltd. (CIMIC). Neither do we view it as a financial sponsor-owned company.
  • On Nov. 24, 2021, S&P Global Ratings raised its long-term issuer credit rating to 'BBB-' from 'BB'. At the same time, we removed the rating from CreditWatch, where we had placed it with positive implications on Oct. 26, 2021, on the announcement of the IPO and plans to deleverage.
  • The stable outlook reflects our expectation that following Ventia's IPO, the company will effectively execute its growth strategy over the next two years across its business segments. We also expect the company to maintain headroom in its financial risk profile such that its debt-to-EBITDA ratio is sustained at about 2x or below.

Rating Action Rationale

We raised our issuer credit rating on Ventia to 'BBB-' from 'BB' post-IPO to reflect the company's more conservative capital structure and its commitment to a prudent financial policy. Ventia used about A$351 million of cash proceeds from the IPO along with existing cash and new syndicated term loan facilities of about A$750 million to repay its outstanding A$1,385 million first-lien term loans. The debt paydown will reduce S&P Global Ratings-adjusted debt-to-EBITDA ratio to about 2.0x from above 4.0x. We also expect Ventia to manage its debt to EBITDA at or below 2x going forward.

Ventia's solid work-in-hand, low capital intensity, debt reduction, and the resultant lower interest expense position the company for strong free operating cash flow over the next two years. The company's revenue and EBITDA will likely grow solidly over the next two years on the back of growing work-in-hand balances (A$15.5 billion as at July 2021), low capital intensity, and operational improvement initiatives. We expect high cash flow conversion from its service-oriented, capital-light business model with annual capital expenditure (capex) of about A$70 million (in line with the five-year average of 1.5% of revenue). These attributes and significant interest cost savings from lower debt underpin our expectation that free cash flow will materially increase and adjusted debt-to-EBITDA ratio can be sustained below 2.0x over the next two years.

Ventia's exposure to the telecommunications sector in Australia and New Zealand and solid position in the outsourced operations and maintenance (O&M) market underpin its business risk profile. We consider that Ventia has a solid position in the outsourced O&M market, covering a broad range of services. These include motorway and tunnel services, road networks, environmental remediation, water utilities, electricity distribution networks, and social infrastructure. Services provided to the government sector, representing about 70% of Ventia's annual revenue, support revenue certainty. Furthermore, we believe Ventia has minimal exposure to fixed-price contracts and minimal exposure to the construction sector. The diversity of Ventia's contract base should also help to mitigate the impact of strong competition on individual contract extensions and pricing.

Ventia is now considered as an independent, stand-alone company following the IPO. The company's two major shareholders, CIMIC and Apollo Global Management (Apollo), have sold down their shareholdings to about 32.8% each. Our base case assumes a further sell-down in shareholdings once the escrow period expires upon the presentation of Ventia's fiscal 2022 results. In our view, while the major shareholders may continue to influence the company, neither is able to independently exert control over Ventia.

Moreover, half the members of the board are independent directors. This means we believe Ventia will implement its own board policies and ensure all shareholders' interests are protected. As a result of the ownership changes and implementation of an independent board structure, the rating no longer benefits from a one notch uplift due to any potential support from CIMIC. Nor do we moderate the financial policy because of the impact of Apollo as a financial sponsor.

Outlook

The stable outlook reflects our expectation that following its public listing, Ventia will effectively execute its growth strategy over the next two years across the telecommunications, transport, infrastructure services, defense, and government sectors. In our view, Ventia's scale and contract diversity should underpin the group's operating cash flow and sustain its adjusted debt-to-EBITDA ratio at or below 2.0x over the next 12 months.

Downside scenario

We could lower the rating if we expect Ventia's adjusted debt-to-EBITDA ratio to be sustained above 2.25x over the next 12-18 months. This could result from:

  • Material contract losses across its key market segments that erode earnings and cash flow; or
  • Shareholder-friendly actions or debt-funded growth investments that are outside the company's stated financial policy tolerances.

We could also lower the rating if we believe that there has been a material weakening of the company's business risk profile. This may become evident from materially declining market shares, significant contract losses, or a material increase in unprofitable contracts that erodes operating margins and cash flow.

Upside scenario

We consider an upgrade to be unlikely in the next two years. Nevertheless, we could raise the rating if there is a marked and sustainable improvement in the company's scale and earnings diversity.

Company Description

Ventia provides long-term operation, maintenance, and management of critical public and private assets and infrastructure across the telecommunications, transport, local government, water, power generation, electricity, gas, healthcare, education, resource, and defense industries. The company also provides O&M contract services for telecommunications infrastructure in Australia and New Zealand. It reported revenue of A$4.6 billion and EBITDA of A$355 million in calendar year 2020.

Our Base-Case Scenario

  • Australia's real GDP growth of 4.2% in 2021, 3.3% in 2022, and 2.8% in 2023. New Zealand's real GDP growth of 5.4% in 2021, 2.7% in 2022, and 2.8% in 2023.
  • Minimal COVID-19 end-market disruptions compared with the broader economy.
  • Ventia's single-digit revenue growth over 2021-2023 will be primarily driven by incremental contract renewals and new contract wins across the outsourced O&M industry. Growth will be partially offset by lower revenue from National Broadband Network projects.
  • Adjusted group EBITDA margin of 8%-9% over the next two years, supported by cost savings but partially offset by higher labor expense and industry insurance costs.
  • Work-in-hand of about A$15.5 billion as of July 31, 2021.
  • Capex at about 1.5% of revenue.
  • Tax rate at 30%.
  • No material debt-financed acquisitions.
  • Dividend payout ratio at 60%-80% of net profit after tax, adjusted for amortization.

Liquidity

We assess Ventia's liquidity as strong. We expect the company's sources of liquidity, including cash and an undrawn facility of A$400 million, to exceed its uses by 1.5x or more over the next 12 months and above 1.0x over the subsequent 12 months. We expect liquidity sources to exceed uses, even if EBITDA were to decline by 30% under stress conditions. Our liquidity assessment incorporates the company's ability to manage capex and asset disposals to maintain appropriate cash flow.

We expect the group to have the following sources and uses of liquidity over the next 12 months:

Principal liquidity sources:

  • Cash and cash equivalents of A$150 million;
  • Adjusted cash funds from operations of above A$270 million; and
  • Undrawn revolving credit facilities of A$400 million maturing in 2025.

Principal liquidity uses:

  • Capex of A$60 million-A$70 million;
  • Dividend payout ratio of 60%-80% of net profit after tax and adjusting for amortization.

Ratings Score Snapshot

Issuer Credit Rating

BBB-/Stable/--

Business risk: Fair

  • Country risk: Very low risk
  • Industry risk: Moderately high risk
  • Competitive position: Fair

Financial risk: Modest

  • Cash flow/leverage: Modest

Anchor: bbb-

Modifiers

  • Diversification/portfolio effect: Neutral (no impact)
  • Capital structure: Neutral (no impact)
  • Financial policy: Neutral (no impact)
  • Liquidity: Strong (no impact)
  • Management and governance: Satisfactory (no impact)
  • Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile: bbb-

Related Criteria

Ratings List

Not Rated Action; CreditWatch/Outlook Action
To From

Ventia Services Group Ltd.

Senior Secured NR BB/Watch Pos

Ventia Finco Pty Ltd.

Senior Secured NR BB/Watch Pos
Upgraded; CreditWatch/Outlook Action
To From

Ventia Services Group Ltd.

Issuer Credit Rating BBB-/Stable/-- BB/Watch Pos/--
Not Rated Action; CreditWatch/Outlook Action
To From

Ventia Services Group Ltd.

Senior Secured
AUD232.85 mil fltg rate Revolving Credit Facility bank ln due 05/21/2024 NR BB /Watch Pos
Recovery Rating NR 4(40%)
AUD593.6 mil fltg rate Term Loan B bank ln due 05/21/2026 NR BB /Watch Pos
Recovery Rating NR 4(40%)
US$590.5 mil Term Loan B bank ln due 05/21/2026 NR BB /Watch Pos
Recovery Rating NR 4(40%)

Ventia Deco LLC

Senior Secured
AUD232.85 mil fltg rate Revolving Credit Facility bank ln due 05/21/2024 NR BB /Watch Pos
Recovery Rating NR 4(40%)
AUD593.6 mil fltg rate Term Loan B bank ln due 05/21/2026 NR BB /Watch Pos
Recovery Rating NR 4(40%)
US$590.5 mil Term Loan B bank ln due 05/21/2026 NR BB /Watch Pos
Recovery Rating NR 4(40%)

Ventia Finco Pty Ltd.

Senior Secured
AUD232.85 mil fltg rate Revolving Credit Facility bank ln due 05/21/2024 NR BB /Watch Pos
Recovery Rating NR 4(40%)
AUD593.6 mil fltg rate Term Loan B bank ln due 05/21/2026 NR BB /Watch Pos
Recovery Rating NR 4(40%)
US$590.5 mil Term Loan B bank ln due 05/21/2026 NR BB /Watch Pos
Recovery Rating NR 4(40%)

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Richard P Creed, Melbourne + 61 3 9631 2045;
richard.creed@spglobal.com
Secondary Contact:Puchen Wang, Melbourne (61) 3-9631-2099;
puchen.wang@spglobal.com

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