MOODY'S INVESTORS SERVICE CREDIT OPINION UPDATE...2020/06/29 · Moody's Forecasts (f) or...

29 June 2020

ASX Market Announcements Australian Securities Exchange Limited Level 4 20 Bridge Street SYDNEY NSW 2000

MOODY'S INVESTORS SERVICE CREDIT OPINION UPDATE

Moody's Investors Service (Moody's) has released a credit opinion update on CIMIC Group.

This affirms CIMIC Group’s strong investment grade credit rating of Baa2, with a stable outlook.

The Moody's credit opinion update is appended.

Sincerely,

CIMIC GROUP LIMITED T +61 2 9925 6666 F +61 2 9925 6000

CORPORATES

CREDIT OPINION29 June 2020

Update

RATINGS

CIMIC Group LimitedDomicile New South Wales,

Australia

Long Term Rating Baa2

Type LT Issuer Rating - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Saranga Ranasinghe +61.2.9270.8167VP-Senior [email protected]

David Xu, CFA +61.2.9270.8104Associate [email protected]

Patrick Winsbury +61.2.9270.8183Associate Managing [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

CIMIC Group LimitedCredit opinion update

SummaryCIMIC Group Limited’s (Baa2 stable) credit profile benefits from: (1) its strong marketposition in the Australian construction, services and mining industries; (2) income diversityacross business lines; and (3) a solid financial and liquidity profile.

Conversely, CIMIC’s credit profile is constrained by: (1) business risks around complexprojects; and (2) linkage to its parent entities Hochtief AG and Actividades des Construcciony Servicios SA (ACS), both of which we consider to have weaker credit profiles.

The impact of the coronavirus outbreak has so far been relatively moderate for CIMIC, withthe company’s key construction and mining service operations in Australia deemed essentialby the government and remained in operations even during the height of social distancingrestrictions in the country.

Despite the expected weakening, we consider CIMIC’s financial profile to be adequate forthe rating. While the Middle East exit will lead to a considerable one-off cash outlay, thisis manageable in light of the company’s solid liquidity position. Gross cash stood aroundAUD4.5 billion as of 31-March-2020, after payments relating to BICC of AUD1.45 billiongross of tax, and there are less than AUD200 million of debt maturing over the next 12months.

Exhibit 1

We expect financial leverage to rise, but remain within our tolerance threshold

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2015 2016 2017 2018 2019 12-18 monthforecast

Adj. Debt/EBITDA Tolerance threshold for Baa2 rating

All figures and ratios are calculated using Moody’s estimates and standard adjustments. Moody's forecasts are Moody's opinionand do not represent the views of the issuer.Source: Moody's Investors Service estimates, Moody's Financial Metrics

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MOODY'S INVESTORS SERVICE CORPORATES

Credit strengths

» Well-established position as the largest construction and mining contractor in Australia

» Income diversity across business segments, geography and contract type

Credit challenges

» Business risks around complex projects, although risks should lessen as CIMIC shifts towards lower risk alliance-style contract types

» Control by parent entities with weaker credit profiles

» Increased drawn debt will weaken credit metrics, but improves cash position

Rating outlookThe stable outlook reflects Moody’s expectation that CIMIC’s credit profile will remain within the financial parameters set for the rating,and that the level of any problem contracts will remain manageable and within earnings guidance.

Factors that could lead to an upgradeUpward pressure on the rating would arise only if Hochtief and ACS, excluding CIMIC, demonstrate materially stronger financialprofiles. Moody’s would also look to CIMIC maintaining adjusted debt/EBITDA below 2.0x, on a sustained basis.

Factors that could lead to a downgradeThe ratings could be downgraded if financial leverage and liquidity deteriorate, such that adjusted debt/EBITDA exceeds 3.0x on asustained basis. The ratings could also come under pressure if liquidity (cash and undrawn facilities) fell below a level sufficient to meetthe company’s debt maturities over the next 12-18 months, or in the case of a material disruption to cashflow from one or more majorcontracts.

The incurrence of material losses on projects due to cost overruns may also place negative pressure on the rating; such a developmentmay be evidenced by EBITA margins falling below 5% on a sustained basis. A material weakening in the credit quality and/or liquidityposition of Hochtief on a standalone basis could also lead to a rating downgrade.

Key indicators

Exhibit 2

Key IndicatorsCIMIC Group Limited

AUD million 2015 2016 2017 2018 2019 12-18 month forecast

Total Revenue 13,273 10,847 13,430 14,670 14,701 15,000-16,000

EBITA 1,052 770 1,180 1,200 1,210 1,120-1,200

EBITA / Interest Expense 4.9x 5.6x 9.0x 7.5x 9.6x 5.5x-7x

Debt / EBITDA 1.5x 2.2x 1.5x 2.3x 2.5x 2.6x-2.9x

FFO / Debt 42.0% 47.6% 60.0% 41.1% 31.2% 26%-31%

[1] All figures and ratios are calculated using Moody’s estimates and standard adjustments. Moody's Forecasts (f) or Projections (proj.) are Moody's opinion and do not represent the viewsof the issuer.[2] In 2015, John Holland was divested, while CIMIC reduced its stake in Ventia with the entity becoming a joint venture and de-consolidated from CIMIC's balance sheet.Source: Moody's Investors Service estimates, Moody's Financial Metrics

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 29 June 2020 CIMIC Group Limited: Credit opinion update


ProfileHeadquartered in Sydney, Australia, CIMIC Group Limited (CIMIC) is the largest construction and mining contractor in Australia. CIMICoperates across construction, mining and mineral processing, operation and maintenance services, public private partnerships andengineering. The Company operates in more than 20 countries throughout the Asia Pacific, the Middle East, North and South Americaand Sub-Saharan Africa.

Exhibit 3

EBIT contribution by segment (FYE 2019)

Construction39%

Mining & Mineral Processing48%

Services13%

Note: Corporate segment excludedSource: Company reports

Detailed rating considerationsCoronavirus outbreak has had relatively moderate impact on CIMIC so farWhile the coronavirus outbreak has caused unprecedented shocks to many industries and issuers, the impact has so far been relativelymoderate for CIMIC. The company’s key construction and mining service operations in Australia were permitted by the government tooperate with some social distancing rules in place even during the peak of the outbreak as these activities were deemed “essential”.

Where CIMIC experienced disruption was in New Zealand where during the country’s level-4 lockdown from late March to late April,construction activity was halted. Although some of CIMIC's projects will experience delays as a result of the pandemic, we understandthat CIMIC's contracts commonly include clauses that protect against delays due to imposition of restrictions. As such, we are notexpecting material liquidated damages to arise from the current crisis.

We understand that some of Thiess’ offshore mining service operations were also shut due to the pandemic, but these operations aresmall relative to the segment’s larger operations in Australia. The mining segment is also somewhat exposed to the weakening of somecommodity markets, notably thermal and metallurgical coal, which are key commodities for the mining segment.

In response to the pandemic, we understand that CIMIC is reviewing its costs as it looks to curtail non-essential expenditure. BothAustralia and New Zealand has since made strong progress in containing the outbreak, with social distancing restrictions now beingloosened and economic activity gradually returning to normal. Both countries are also expected to increase fiscal spending, includingon infrastructure, to stimulate the post-crisis recovery. This will continue to support the construction and engineering sector.

BICC exit results in sizable one-off cash outlay; but is credit positive over the longer termIn January 2020, CIMIC announced that it will exit the Middle East and placed its 45% stake in BIC Contracting (BICC) for sale,following a strategic review.

As a result, CIMIC recognised a one-off post-tax write-down of around AUD1.8 billion in its 2019 results. CIMIC indicates that the writedown will represent all of its exposure to BICC. The writedown primarily reflects an impairment of CIMIC’s shareholder loan to BICC,and its obligation to honour financial guarantees extended to BICC, which is expected to materialise.

Despite the large one-off write-down, we consider the announcement as credit positive because BICC has been a troubled businessthat has produced consistent losses over 2015-17. From 2018, CIMIC's equity investment has been held at nil value due to the impact



of applying AASB 15, and as such, the accounting standards do not require CIMIC to book further losses for BICC. We understand thatBICC is experiencing difficult market conditions because of regional macro and geopolitical factors.

Moreover, a decision to exit BICC will avert the need for CIMIC to provide ongoing financial support (see Exhibit) and enable CIMIC tofocus its resources on core markets and geographies. CIMIC has historically had to support BICC with shareholder loans and financialguarantees, which have increased year on year (adjusting for the AASB 9 writedown in FY18), as a result of the pressures on BICC'sbusiness.

Exhibit 4

CIMIC has provided financial support to BICC and an exit will end the need for continued support

Written down due to the adoption of

AASB 9

0

200

400

600

800

1,000

1,200

1,400

FY14 FY15 FY16 FY17 FY18 LTM Jun-19

AU

D m

illio

n

Financial guarantees extended to BICC Shareholder loan to BICC - reported

In FY18, CIMIC adopted AASB 9. The change to recognition of expected credit losses for impairment of financial assets under AASB 9, from incurred losses, led to negative accountingadjustment that reduced the shareholder loan by AUD487.4 million.Source: Company reports, Moody's Investors Service

Nevertheless, the expected AUD700 million post-tax cash outlay required to settle the financial guarantees is manageable in light ofCIMIC’s strong liquidity position. The decision to suspend a final dividend for 2019 also supported CIMIC's liquidity. We expect the BICCwritedown to have limited impact on our calculation of adjusted debt/EBITDA as we had already incorporated the financial guaranteesextended to BICC as debt in prior periods. We have treated the write-down as a non-recurring profit-and-loss item given its one-offnature.

Well-established market positionCIMIC holds a pre-eminent position in the Australian mining and construction industries. The depth and breadth of CIMIC's technicaland management capabilities provide a high level of assurance that the company will be short-listed for most major infrastructureprojects and mining contracts that involve both scale and complexity.

CIMIC has significant diversification across the civil, mining and building/construction sectors. In a normal business cycle, thisdiversification, combined with an extensive forward work book and good cash reserves, provides a sound buffer against problems beingencountered in several jobs concurrently and slowdowns in any one sector or market.

CIMIC's market position provides it with the ability to win more contracts, particularly government-sponsored work. It also allows thecompany to market itself as a specialty provider of services in key areas such as infrastructure, tunneling and mining contracting. Thespread, size and number of contracts at any point in time in the company's portfolio provide the company with a strong inherent riskmanagement tool, reducing exposure to any one subsector or counterparty. Additionally, CIMIC regularly delivers large infrastructureprojects in joint venture, which helps to mitigate risk.

Solid overall performance in recent periods supported by miningCIMIC has delivered solid operating performance in recent periods, with reported EBITDA (on a last twelve month basis to March2020) rising 8.6% year on year to around AUD2.2 billion. This performance was driven by the mining & mineral processing segmentwhich has delivered strong earnings growth in recent periods, with 2019 segment EBIT increasing by 38% over the year. The strongearnings growth benefited from contract extensions, increased production levels and efficiency gains. Given macro headwinds and the



weakening of thermal and coking coal markets, to which CIMIC has sizable exposure to, we expect earnings growth for the segment tomoderate considerably, with overall segment earnings to remain broadly flat over the next 12-18 months.

Exhibit 5

Strong performance in mining drove recent performanceEBIT from 2015 - 2019

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

$800

Construction Mining & minerals processing Services Corporate

AU

D m

illio

n

2015 2016 2017 2018 2019

Note: Corporate includes PPPs, engineering, commercial and residential and BICC segmentsSource: Company reports

EBIT from the construction segment declined by 19% in 2019, primarily reflecting decline of activities in Hong Kong, as well as lowermargins as the company shift towards a lower risk project mix (alliance-style projects) in delivery. EBIT from the services segment hasremained largely flat over the past three years, reflecting its stability.

In terms of cash conversion, CIMIC has performed well in recent periods. As of March 2020, LTM operating cash flow conversion pre-factoring was 76% of EBITDA (80% for fiscal 2019). At the same time, we note that supply chain finance declined to AUD598 millionas of March 2020 (vs AUD851 million at December 2019, and AUD561 million at December 2018), with the program being placedunder management review. Factoring also declined AUD203 million year on year.

CIMIC has a substantial order book totaling AUD36 billion as of March 2020. This contractual work represents revenue for more thantwo years, which we consider to be good. While the order book provides support for future profitability, a track record of projectdelivery, on time and within budget, remains a key driver for the rating.

Increased drawn debt will weaken credit metrics, but supports cash positionCIMIC has drawn down a considerable amount of its debt facilities to increase its cash holdings, primarily to fund its large one-offcash payments relating to the BICC exit as well as to increase its cash position in response to the coronavirus outbreak. Over theMarch quarter, reported debt increased by around AUD4.5 billion on a gross basis and around AUD1.8 billion on a net basis. Whilethis increase in debt will weaken credit metrics such as financial leverage and interest cover, we see the improvement in cash as animportant supporting factor in an uncertain macro environment. As the environment gradually normalises, we expect CIMIC will repayits drawn debt and reduce cash holdings to be more in line with historical levels over the next few months.

Business risks around complex projects constrain ratingCIMIC's exposure to large, complex engineering projects pose an inherent constraint to its rating, which is reflected in credit metricsthat are materially stronger than those at the same rating level for other industries.

While CIMIC has had a number of issues relating to troublesome contracts at the beginning of the last decade, it now has a lower risktolerance than in the past. The potential for material write-downs is also lower than in the past. Furthermore, a re-balanced portfolioof business activity, as well as a greater emphasis on partnering larger contracts, has lowered its overall risk profile. Improved risk-management practices and stricter oversight of contractual opportunities have strengthened contract execution and financial delivery.



ESG considerationsMoody’s regards the coronavirus outbreak as a social risk under Moody’s ESG framework, given the substantial implications for publichealth and safety.

With respect to governance considerations, we consider CIMIC’s ownership by Hochtief AG and ACS to weigh on CIMIC’s credit profile.CIMIC is currently around 77% owned by Hochtief, which is turn 50.4% owned by ACS. As a result, Hochtief and ACS has significantinfluence on CIMIC’s decision making. On a standalone basis, excluding CIMIC, both entities have financial profiles that are weaker thanthat of CIMIC. As such, there remains a risk that Hochtief or ACS may upstream cash from CIMIC by raising dividends.

That said, we note that since Hochtief gained control of CIMIC in 2014, it has not attempted to extract cash through raising dividendsat CIMIC. CIMIC’s balance sheet has continued to improve with the company consistently holding a high level of cash in the AUD1.2-AUD2 billion range. In addition, Australia’s Corporations Act of 2001 provides some protection against the risk of cash upstreaming,through (1) requiring shareholder approval to provide a financial benefit to a related party (with related party not entitled to vote); (2)fiduciary duties imposed on directors act in good faith in the best interests of CIMIC (and not of its parent or subsidiary companies);and (3) rules around payment of dividends and repayment of capital to shareholders.

Liquidity analysisCIMIC’s liquidity profile is strong. Sources of liquidity include (1) gross cash and equivalent liquidity assets of AUD4.45 billion as at endof March 2020 (after payments for Middle East exit of AUD1.45 billion gross of tax); and (2) expected operating cash flow of aroundAUD1 billion.

Expected liquidity uses over the next 12 months include: (1) capex of AUD700-800 million; (2) dividends of AUD200-300 million; and(3) debt maturities of no more than AUD200 million. These expected liquidity uses are well covered by liquidity sources.

Rating methodology and Scorecard factorsCIMIC maps to a Baa3 rating during the forecast period under the construction industry methodology. This is one notch below CIMIC'sassigned rating of Baa2. The difference in the actual rating and scorecard indicated rating reflects CIMIC's well established position inAustralia's construction and mining industries.

Exhibit 6

Rating FactorsCIMIC Group Limited

Construction Industry Scorecard [1][2]

Factor 1 : Scale (25%) Measure Score Measure Score

a) Total Revenue (USD Billion) $10.2 Baa $10 - $10.5 Baa

b) EBITA (USD Billion) $0.8 Baa $0.8 Baa

Factor 2 : Business Profile (25%)

a) Diversity Baa Baa Baa Baa

b) Expected Revenue & Margin Stability Baa Baa Baa Baa

Factor 3 : Leverage and Coverage (30%)

a) EBITA / Interest Expense 9.6x Baa 5.5x - 7x Baa

b) Debt / EBITDA 2.5x Baa 2.6x - 2.9x Ba

c) FFO / Debt 31.2% Ba 26% - 31% Ba

Factor 4 : Financial Policy (20%)

a) Financial Policy Baa Baa Baa Baa

Rating:

a) Scorecard-Indicated Outcome Baa2 Baa3

b) Actual Rating Assigned Baa2

Current

FY 12/31/2019

Moody's 12-18 Month Forward View

As of 6/15/2020 [3]

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] As of 12/31/2019[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestituresSource: Moody's Investors Service estimates, Moody's Financial Metrics



Ratings

Exhibit 7

Category Moody's RatingCIMIC GROUP LIMITED

Outlook StableIssuer Rating Baa2

CIMIC FINANCE (USA) PTY LTD

Outlook StableBkd Senior Unsecured Baa2

Source: Moody's Investors Service

Appendix

Exhibit 8

Peer ComparisonCIMIC Group Limited

(in US millions)

FYE

Dec-17

FYE

Dec-18

FYE

Dec-19

FYE

Dec-17

FYE

Dec-18

LTM

Sep-19

FYE

Dec-17

FYE

Dec-18

FYE

Dec-19

Revenue $10,296 $10,968 $10,224 $19,521 $19,167 $17,842 $21,029 $25,815 $29,759

EBITA $898 $897 $842 $412 $413 -$412 $1,023 $1,470 $1,489

Total Debt $1,926 $3,009 $3,704 $3,094 $2,278 $2,272 $7,211 $7,932 $9,984

Cash & Cash Equiv. $1,183 $1,099 $901 $1,804 $1,765 $1,805 $8,226 $7,844 $9,353

EBITA Margin 8.7% 8.2% 8.2% 2.1% 2.2% -2.3% 4.9% 5.7% 5.0%

EBITA / Int. Exp. 9.6x 7.5x 9.6x 4.5x 4.4x -6.0x 2.9x 3.6x 2.8x

Debt / EBITDA 1.2x 2.3x 2.5x 4.1x 3.3x -14.1x 5.7x 4.8x 5.6x

FFO / Debt 73.4% 41.1% 31.2% 23.7% 24.5% -14.1% 8.6% 8.8% 7.8%

RCF / Net Debt 148.5% 47.5% 28.3% 44.2% 73.0% -105.9% -47.5% 617.0% 101.9%

Baa2 Stable Ba1 RUR-DNG Baa2 Stable

CIMIC Group Limited Fluor Corporation Shanghai Construction Group Co., Ltd.

All figures & ratios calculated using Moody’s estimates & standard adjustments. FYE = Financial Year-End. LTM = Last Twelve Months. RUR* = Ratings under Review, where UPG = forupgrade and DNG = for downgrade.Source: Moody’s Financial Metrics™

Exhibit 9

Moody's-Adjusted Debt BreakdownCIMIC Group Limited

(in AU$ Millions)FYE

Dec-14

FYE

Dec-15

FYE

Dec-16

FYE

Dec-17

FYE

Dec-18

FYE

Dec-19

As Reported Debt 2995 1056 1167 903 1432 3308

Operating Leases 1107 1055 1163 1141 0 0

Securitizations 0 0 0 0 1953 1960

Non-Standard Adjustments 361 356 333 418 889 0

Moody's-Adjusted Debt 4464 2467 2663 2462 4274 5269

All figures are calculated using Moody’s estimates and standard adjustments.Source: Moody’s Financial Metrics™



Exhibit 10

Moody's-Adjusted EBITDA BreakdownCIMIC Group Limited

(in AU$ Millions)FYE

Dec-14

FYE

Dec-15

FYE

Dec-16

FYE

Dec-17

FYE

Dec-18

FYE

Dec-19

As Reported EBITDA 688 1436 1158 1569 1913 -577

Operating Leases 369 352 388 380 0 0

Interest Expense – Discounting 0 0 0 -8 0 -7

Securitizations 0 0 0 0 49 23

Unusual 633 -12 -189 -16 -17 2711

Non-Standard Adjustments -17 15 44 50 -59 -67

Moody's-Adjusted EBITDA 1673 1791 1400 1974 1886 2084

All figures are calculated using Moody’s estimates and standard adjustments.Source: Moody’s Financial Metrics™



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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and servicesrendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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MOODY'S INVESTORS SERVICE CREDIT OPINION UPDATE...2020/06/29 · Moody's Forecasts (f) or...

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