DBRS Confirms Babcock International Group PLC at BBB with Stable Trends

DBRS Ratings Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Babcock International Group PLC (Babcock or the Company) at BBB. The trends are Stable. Following the new debt issuance in September 2019, whose main purpose is to refinance/prefund upcoming debt maturities over the next year and a half, DBRS expects that the Company’s key financial metrics will weaken in F2020 (year ending 31 March 2020) but will quickly recover and improve from F2021 onwards. These expected improvements, coupled with Babcock’s sound business profile, support DBRS’s view that the ratings should remain stable over the next few years.

DBRS notes that Babcock’s business risk profile is comfortably within the BBB rating category. 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, with an above 90% success rate in rebids and 40% in new bids; and (3) good revenue visibility because of its large order backlog, almost four times its revenue in F2019 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. DBRS expects Brexit to have no or very little effect on Babcock’s revenues or operations because most of the activities it undertakes for clients are of a critical rather than discretionary nature. 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.

DBRS notes that Babcock’s financial risk profile is also comfortably within the BBB rating category. In F2019, the Company reported a softer operating performance, with a decrease in revenue (excluding joint ventures (JVs) and associates) and operating profit (excluding JVs and associates and before amortisation of acquired intangibles and exceptional items) but stable operating margin thanks to an improved business mix. Excluding the expected step down in the Queen Elizabeth Class (QEC) aircraft carrier, the weaker results were due to the Company’s programme of exits and disposals, translation impact from exchange rates, lower activity in the rail and South African businesses, and lower levels of equipment pass-through procurement spend in land defence. However, as per DBRS adjustments, the Company’s EBITDA and cash flow generation continued to remain strong and debt was decreased. As a result, key credit metrics showed a marginal improvement. DBRS notes that Babcock is likely to continue to use operating leases to acquire equipment to execute contracts which will likely lead to higher adjusted debt and slow down any significant improvement in key credit metrics.

Based on the current and forecast performance, Babcock’s ratings are expected to remain stable over the next three years. However, DBRS would consider a rating upgrade if the Company’s business risk profile strengthens and financial results improve, on a sustained basis, to the “A” rating category. On the other hand, any unexpected weakening in the business risk profile and any material reduction in the operating results and/or a large increase in debt levels that result in a sharp deterioration in key credit metrics to the “BB” range could lead to negative rating actions.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal applicable methodology is: “Rating Companies in the Services Industry”. This can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for these ratings include the Company’s annual report, management presentation, financial projections and budget. DBRS considers the information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a 12-month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Giuseppe Fresta, Vice President, Global Corporates
Rating Committee Chair: Charles Halam-Andres, Managing Director, Industrials & Natural Resources
Initial Rating Date: 7 February 2011
Last Rating Date: 14 September 2018

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