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. DBRS expects the Company’s operating results and financial profile to continue to improve, which will strengthen its key credit metrics, albeit modestly. These expected continued 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; (3) good revenue visibility because of its large order backlog, almost four times its revenue in F2018 (year ended 31 March 2018) 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 F2018, the Company reported improved operating performance with increases in revenues, profits and steady margins; the weaker results in the rail, apprentice training and oil and gas helicopter businesses were more than offset by the Company’s solid results in other markets. The Company’s cash flow generation continued to remain strong and total debt modestly decreased. Overall, the key credit metrics continued to improve; however, 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.

DBRS incorporated the continued improvement in the Company’s operating and financial performance in last year’s rating upgrade and so, further positive rating actions in the foreseeable future are unlikely. However, DBRS would consider a rating upgrade if the Company’s financial results improve, on a sustained basis, to the “A” rating category. On the other hand, any unexpected material decline in the operating results and/or a large increase in debt levels that result in a deterioration in key credit metrics, on a sustained basis, to the BB range could lead to negative rating actions.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable to the rating is: Rating Companies in the Services Industry.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

The sources of data and information used for these ratings include an annual report, financial statements and management projections and budget.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

DBRS was not supplied with third-party assessments.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 19 September 2017, when DBRS upgraded the ratings.

The lead analyst responsibilities for this transaction have been transferred to Giuseppe Fresta.

Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.
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: 19 September 2017

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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Rating Companies in the Services Industry

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