DBRS Upgrades Babcock International Group PLC to BBB with Stable Trends

DBRS Limited (DBRS) upgraded the Issuer Rating and the Senior Unsecured Debt rating of Babcock International Group PLC (Babcock or the Company) to BBB from BBB (low) and changed the trends to Stable from Positive. The upgrade reflects the fact that both Babcock’s business profile and financial profile are compatible with the BBB rating. Further, DBRS expects the Company’s operating results to continue to improve, which will strengthen its key credit metrics, albeit modestly. The expected continued improvement in Babcock’s financial profile and sound business profile supports DBRS’s view that the ratings should remain stable over the next few years.

DBRS notes that the Company’s business risk profile has historically been and is currently comfortably within the BBB rating. This determination is supported by: (1) Babcock’s strong market position in all its business segments, particularly in the United Kingdom; (2) a good track record in winning contracts, over 90% success rate in rebids and 40% in new bids; (3) good revenue visibility because of its large order backlog, over four times its revenue in F2017 (year ended March 31, 2017), and because the majority of its contracts are of long duration. Further, Babcock, with its record of strong performance, is well positioned to benefit from the increasing trend of both public and private sector entities to outsource service work. Finally, the Company is making progress in expanding its non-U.K. business thereby reducing its reliance on business from the U.K. government and adding to its growth potential.

In DBRS’s September 20, 2016, press release, DBRS indicated that Babcock’s ratings could be upgraded if its adjusted debt-to-EBITDA (as defined by DBRS) was below 2.6 times. While this ratio is currently marginally higher than that identified, DBRS is comfortable upgrading the ratings based on the fact that the Company has consistently reported stronger operating results and actively paid down debt over the last few years, and that Babcock’s financial profile, as represented by its key credit metrics in aggregate, is now within the BBB rating range. However, DBRS notes that Babcock is likely to continue to use operating leases to acquire equipment to execute contracts that will likely lead to higher adjusted debt and limit any significant improvement in key credit metrics.

DBRS has incorporated continued improvement in the Company’s operating performance in the rating upgrade and, hence, further positive rating action over the next few years is unlikely. However, any unexpected meaningful decline in the operating results and/or a large increase in debt levels that results in a sharp deterioration in key credit metrics could lead to negative rating actions.

Notes:
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 principal methodology is Rating Companies in the Services Industry, which can be found on our website under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.