DBRS Confirms Babcock International Group PLC at BBB (low), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Babcock International Group PLC (Babcock or the Company) at BBB (low) with Stable trends. The confirmation reflects that the Company’s risk profile is solidly within the current rating range. Moreover, Babcock has continued to deliver solid operating results and has made good progress in integrating the Avincis Group (Avincis).

DBRS downgraded the Company’s rating to BBB (low) from BBB following the acquisition of Avincis (see press release dated June 4, 2014) mainly because of the increase in balance sheet leverage from assuming Avincis debt. In addition, the riskier and more capital intensive nature of Avincis’ businesses has also contributed to the downgrade.

The Company has performed above expectation since the last rating action. Babcock has reported solid H1 F2015 (year ending March 31) results, higher revenue and EBITDA margins as well as cash flow from operations. The integration of and the operations at Avincis are in line with expectations. Babcock has been successful in winning new orders (a 40% success rate in new bids and 89% in rebids) notable wins included the GBP 2 billion Maritime Support Delivery Framework contract, the acquisition of the Defence Support Group from the U.K. government and the associated contracts to provide maintenance and spares support to the Army, etc. The Company has built up a solid and growing order book (GBP 18.5 billion at September 30, 2014, increasing to GBP 20.0 billion in Q4 F2015). The growing order book of longer-term projects with predictable earnings profile and partnering agreements have meaningfully increased earnings visibility and stability. In addition, Babcock plans to reduce Avincis’ capital needs by increasing the use of matching operating leases, which would further lessen its financial risks. DBRS notes that these positive developments and a modest increase in business diversity (geographical, business lines and customers) from the Avincis acquisition strengthen the Company’s business profile.

Despite stronger operating results and cash flow through H1 F2015, the Company’s debt coverage ratios are still weaker than prior to the acquisition as a result of the high debt level from assuming all Avincis debt. Nevertheless, Babcock’s financial profile is well within the current rating range. Going forward, DBRS expects Babcock’s performance to maintain the improving trend. DBRS would take positive rating actions if the Company could restore or show strong momentum in returning all debt coverage ratios to the F2012 levels. Conversely, DBRS would take negative rating actions if the debt coverage metrics suffered a significant deterioration as a result of extremely poor operating results or a sharp increase in debt, although DBRS does not anticipate such a scenario at this time.

Notes:
All figures are in Great Britain pounds unless otherwise noted.

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.

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

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

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.

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