Fitch Ratings has today downgraded CRH plc’s (CRH) Long-term Issuer Default Rating (IDR) and senior unsecured notes to ’BBB’ from ’BBB+’. The agency has simultaneously affirmed CRH’s Short-term IDR at ’F2’. Fitch has changed the Outlook on the Long-term IDR to Stable from Negative. The ratings continue to reflect CRH’s position as a major building materials group, with strong geographic and product diversification.
"The Long-term IDR downgrade to ’BBB’ reflects Fitch’s expectation that weak trading conditions and lower operating margins may prevent CRH’s credit metrics from returning to ’BBB+’ levels when the construction cycle begins to improve and where CRH returns to very significant acquisition activity (of up to EUR1.5bn per annum) in the next three to four years" says Jean-Pierre Husband, Director in Fitch’s European Corporate Finance Department. "The downgrade should allow CRH additional financial flexibility within this new rating should shareholders want CRH to make significant acquisitions to improve their returns once the construction cycle begins to turn".
In particular CRH may not be able to return to leverage below 2.0x (on adjusted net debt/EBITDAR basis) on a sustained basis, if the group makes material acquisitions in 2011 and beyond. CRH’s adjusted net debt/EBITDAR in FY08 and FY09 was 2.8x and 3.0x. Fitch expects that acquisition activity of between EUR1.0bn and EUR1.5bn per annum should keep this leverage ratio within or close to that range for the next three years. Given current market conditions, CRH is today being cautious: in H110, only 13 small bolt-on acquisitions for EUR159m were completed.
CRH’s ratings continue to reflect the group’s diversification in terms of product, geography and end-markets. CRH also has a good track record in generating cash flow from operations and integrating acquired businesses. Further restructuring measures in 2010 (costing EUR58m to implement) are expected to result in annualised savings of EUR220m and should give the group additional flexibility when demand improves. Demand in the short term, to end-2010, in most mature markets is likely to remain affected by anaemic economic activity and poor end-markets.
Although CRH operates in over 35 countries, its major businesses are in the US (CRH is the leading integrated building materials company in the US, with a presence in all 50 states), which represented 44% of total consolidated revenue and 34% of EBITDA at H110. In H110, continued weak US end-markets and exceptionally poor weather in the Southern states resulted in group like-for-like sales decreasing 10% from H209, although Q210 revenue was only down 5% from the same period last year. As a result, H1 2010 group EBITDA fell 20.0% to EUR520m due to a combination of lower volumes, lower operating results in European operations, and diseconomies of running at lower volume levels. In the US, H1 2010 "heritage" volumes were particularly weak in aggregates (-8%), asphalt (-9%) and ready mixed concrete (RMC) (-11%) compared to H1 2009, although pricing generally has remained stable.
US infrastructure activity in 2011 may be lower than in 2010 (as some 2011 infrastructure projects may be delayed), although the American Recovery and Re-investment Act (ARRA) will continue to assist the US construction industry (ARRA has USD49bn available for infrastructure projects and over 12,000 transportation projects have been authorised).
Fitch views CRH’s liquidity position as satisfactory for the rating, with unrestricted cash of EUR1.1bn at H210 (EUR1.4bn at FYE09), and EUR1.5bn (EUR1.6bn in FY09) in undrawn committed facilities with an average maturity of 1.9 years. Total liquidity was EUR2.6bn at H110, against EUR0.4bn maturing in 2010. The agency expects that CRH will continue to generate free cash flow (FCF) in 2010. CRH’s debt maturity profile is balanced with only EUR1.1bn of facilities repayable between 2010 and 2012, out of GBP5.1bn of gross debt.
Fitch’s 21 September 2010 special report, entitled "Rating Basic Building Materials Companies", explains the credit factors the agency uses to analyse the building materials corporate sub-sectors. The report follows the earlier publication of another background report on 10 February 2010, entitled "Interpreting the New Sector Credit Factor Reports for Corporates". Both reports are available at www.fitchratings.com.