Last year we downgraded our issuer rating on Alstom to BBB+ to reflect the past couple of years’ continued increase in leverage that occurred because of a combination of factors, including debt incurred to finance the Areva acquisition and increased working capital requirements. Since the end of fiscal 2009, total debt has more than tripled to EUR 5.0 billion. As a result, TD/EBITDA has climbed from less than 1.0 times to approximately 2.3 times for the latest 12 months ended Sept. 30.
Alstom’s Business Risk rating reflects strong positioning in its two primary business segments, power generation and rail transportation equipment, which affords the firm a narrow economic moat. However, our rating also takes into account the firm’s comparatively narrow product lines relative to other diversified industrial companies and the significant cyclicality in the business. Potential headwinds include significant exposure (roughly 50% of sales) to a relatively weak European market and potentially slower growth in China, which could affect growth in the rail transportation business. In the power generation business, the company is primarily focused on coal-fired generation, which could suffer as natural gas prices continue to move lower.
In spite of these challenges, liquidity is adequate, with cash of EUR 1.6 billion at the end of September 2012. In addition, the company has access to a EUR 1.35 billion credit facility. The next major debt maturity isn’t until 2014 when a EUR 750 million bond comes due. Looking beyond fiscal 2012, we expect Alstom to generate annual free cash flow in the area of EUR 1.0 billion, which should be more than adequate to cover capital expenditures and dividends.
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