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

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) and changed the trend to Positive from Stable. The integration of Mission Critical Services (MCS, formerly Avincis Group) is complete and Babcock has delivered solid year-over-year improvement in operating results. The Positive trend recognizes that Babcock is well on its way in restoring its financial risk profile to be compatible with a BBB rating with stronger operating results supporting the higher debt levels resulting from the acquisition of MCS. DBRS would upgrade Babcock’s rating by one notch with further improvement in the key debt coverage ratios.

The Company has reported solid operating results for F2015 (year ending March 31) with contributions from all business segments. The addition of the higher margin business at MCS has also lifted the EBITDA margin (as defined by DBRS) to record levels. Even though internal cash generation was strong, a large cash outlay to fund acquisitions (other than MCS which was funded with an equity issue) and high capital expenditures, particularly at MCS, has limited debt reduction which was less than expected. The adjusted gross debt amount (as defined by DBRS) in F2015 has increased significantly from F2014 as a result of debt and operating leases at MCS. Nevertheless, strong operating results still strengthened all key debt coverage ratios to near the top end of the current rating.

The Company has been successful in winning contracts (new and rebids) totalling GBP 12 billion during F2015 boosting overall order book to GBP 20 billion. Additionally, the growing order of longer term projects with predictable earnings profile have increased earnings visibility and stability. This bodes well for maintaining earnings momentum in the medium term. Moreover, the Company has refinanced the high cost debts assumed from the acquisition of MCS and expects a GBP 35 million reduction in interest cost per year. Longer term, the Company is well positioned to benefit from the outsourcing trend supported by its solid track record in delivering results and strong relationships with its customers, especially in the United Kingdom.

DBRS expects the Company to maintain its earnings momentum supported by a strong order book with excellent revenue visibility (over 80% of anticipated revenue in F2016 and 50% in F2017) and further strengthen all the debt coverage metrics. Higher EBITDA and cash flow from operations would be the key drivers to the improvement rather than debt reduction because of high cash usage to fund capital expenditures in the next few years. DBRS would upgrade the rating by one notch if Babcock could lower the debt/EBITDA (as defined by DBRS) to below 2.6 times. However, the trend would be changed from Positive to Stable if the Company fails to maintain the improvement momentum through F2016.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.