The expected improvement predominantly reflects the last drilling ship that will begin operating in the second quarter, and the LNG vessels that will contribute through the full year. We anticipate some modest improvement in the group's ratio of adjusted FFO to debt in 2013.
In our view, cash flow coverage ratios are still lower than for other 'BB' rated industrial companies. However, we think this is acceptable, thanks to Stena's large exposure to real estate--which, although very capital intense and low yielding, also generates very predictable cash flows--and the benefit from the group's large diversification.
Liquidity
We assess Stena's liquidity as "adequate". The group's debt maturities are relatively spread out, but there is some concentration in January 2013, when the currently drawn $1 billion credit facility is due.
Our assessment of Stena's liquidity profile incorporates our expectation that the group's sources of liquidity, including cash and facilities available, to exceed its uses 1.3x or more over the next three years.
As of March 31, 2012, Stena had available liquidity resources of:
-- About SEK0.3 billion in estimated surplus cash, as we treat SEK1 billion out of SEK1.3 billion in reported unrestricted cash and short-term deposits as tied to operations. The company also had SEK3 billion in reported short-term investments and restricted cash.
-- SEK4.21 billion in reported long-term marketable securities, which provides long-term flexibility.
-- About SEK7.1 billion available under committed credit facilities, of which SEK6.6 billion relates to its key undrawn credit facility maturing 2016. We also expect management will extend the $1 billion facility due 2013.
-- Forecast FFO in the order of SEK5.8 billion-SEK6.4 billion.
As of March 31, 2012, liquidity uses include reported short-term debt of about SEK3 billion, drawn under the revolving credit facility due 2013, and committed capital expenditures for 2012 of about SEK2.5 billion. We understand that more than 90% of planned capital spending already has firm financing in place. Additional investments are likely to be in real estate, Stena Renewal, and other business areas. We expect total capital spending for 2012 of about SEK8 billion-SEK8.5 billion.
Key covenants in Stena's loan agreements require keeping liquid resources of at least $50 million (approximately SEK350 million) and net debt to capitalization of at most 65% (currently below 50%).
Recovery analysis
Stena's senior unsecured debt is rated 'BB' in line with the corporate credit rating. The recovery rating on this debt is '4', indicating our expectations of average (30%-50%) recovery in an event of payment default.
The recovery rating is underpinned by the group's significant asset valuation and by exposure to favorable jurisdictions. The recovery rating is constrained by significant secured financing and bank debt, effective structural subordination of the notes issued at the parent company level, and weak documentary protection.
We think that Stena would retain value as a going concern in an event of default, thanks to the leading market positions of the group's ferry lines and drilling businesses, its portfolio of property assets, and the contract-based nature of its drilling and shipping divisions, which provide short- to medium-term earnings predictability.
Outlook
The stable outlook reflects our view that Stena's adjusted FFO-to-debt ratio on a consolidated level will stay within the 10%-15% range, which we consider commensurate with the current rating.
Our base case projects Stena's FFO-to-debt ratio being at about 10% in 2012, because debt will likely rise further when completion and delivery of the Icemax drilling vessel becomes visible in the accounts. In 2013, we anticipate positive FOCF, thanks to a combination of moderate improvement in cash flow and lower capital spending, which should lead to some improvement in credit ratios, although still with FFO debt in the 10%-15% range. We factor into the rating continued predictability in revenues stemming from the contractual benefits of the major businesses (primarily from real estate, but also from drilling and LNG).
For the current credit ratios, Stena needs to maintain a meaningful share of more stable activities, especially its real estate operations, which typically provide about 15%-20% of EBITDA, as well as the long-term contract structure for the LNG and drilling fleet. A material dilution of the contribution from the group's real estate activities could lead us to revise our financial targets for the 'BB' rating upward. This is because we see the industry risk profile for Stena's stable real estate as "strong investment grade".
The 10%-15% FFO-to-debt ratio guidance for the consolidated group corresponds in our view to measures above that for the restricted activities alone: ferries, drilling, and shipping. For the unrestricted group, we could see much lower ratios, given the highly stable cash flow from domestic residential real estate. We estimate the FFO-to-debt for the restricted and unrestricted group was about 17%-18% and 5%-7%, respectively, in 2011.
We could lower the rating if consolidated adjusted FFO-to-credit ratios dropped below 10% for several quarters, or didn't show an improving profile from 2013 onward, when we assume the current high debt will begin to reduce. The rating therefore has no headroom if Stena were to launch a new wave of substantial investments.
We could raise the rating back to the 'BB+' level if FFO to debt were to improve to 15%-20% and Stena were to demonstrate stronger FOCF potential and commitment to debt reduction.
Related Criteria And Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
Ratings List
Downgraded
To From
Stena AB
Corporate Credit Rating BB/Stable/-- BB+/Negative/--
Senior Unsecured BB BB+
Recovery Rating 4 4
