DBRS Downgrades Babcock International Group PLC to BBB (low), Trend Stable

DBRS has today downgraded the Issuer Rating and Senior Unsecured Debt rating of Babcock International Group PLC (Babcock or the Company) from BBB to BBB (low), following the Company’s completion of acquiring Avincis Group (Avincis). The trend is Stable. The downgrade reflects that, post-acquisition, the Company’s financial profile is weaker than the BBB rating (see press release dated March 31, 2014, for details). With this rating action, the Company is removed from its Under Review with Negative Implications placement of March 31, 2014.

The Company completed the acquisition of Avincis for GBP 920 million on May 16, 2014. The acquisition was funded through fully underwritten rights issues representing approximately GBP 1.1 billion. However, Babcock also assumed Avincis’s net debt of GBP 705 million. Even though the Company has reported modestly better than expected results for the full year ended March 31, 2014, the increased debt level post-acquisition has materially weakened the Company’s pro forma financial profile, which is no longer compatible with the BBB rating range.

In addition, DBRS notes that the addition of Avincis is modestly negative to the business profile of Babcock. The operating environment of Avincis is riskier, as is evident by recent accidents experienced by both Avincis and its major competitors. Furthermore, Avincis is a capital-intensive business, having to invest and maintain a large fleet of helicopters, not to mention ongoing investments needed to support growth.

Babcock has a strong track record in acquisitions, and DBRS does not expect any major integrating issues as Babcock assimilates Avincis operations. Furthermore, DBRS expects Babcock’s existing businesses to continue to maintain their improving trends. Babcock has indicated that Avincis has performed in line with its expectations to date in 2014 and achieved a contract win rate of 85%, with notable wins in Australia and France. This bodes well for the Company’s expectation that Avincis will be earnings-accretive in Babcock’s first full year following the acquisition.

DBRS expects the current rating to remain stable in the medium term. Despite the higher debt levels, the Company’s financial profile still has sufficient cushion to absorb any short-term unexpected deterioration in operating performance and to remain compatible with the current rating. However, any prolonged deterioration in operating performance as a result of changing market conditions or unforeseen difficulties in integrating Avincis could lead to negative rating actions.

Notes:
All figures are in U.K. pounds sterling unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Services Industry (July 2013), which can be found on our website under Methodologies.