AECOM Technology (ACM) Assigned 'BB' Rating by S&P Following URS Acquisition

Standard & Poor's Ratings Services said that it assigned its 'BB' corporate credit rating to Los Angeles-based engineering and construction (E&C) company AECOM Technology Corp. (NYSE: ACM). The outlook is stable.

At the same time, we assigned our 'BB+' issue rating and '2' recovery rating to the company's senior secured credit facilities. The '2' recovery rating indicates our expectation for substantial recovery (70%-90%) in a payment default scenario. The senior secured credit facilities include a $1.050 billion revolver, a $1.925 billion term loan A, a $500 million performance letter of credit facility, and a $1.1875 billion term loan B.

We also assigned our 'BB-' issue rating and '5' recovery rating to the company's $800 million senior unsecured notes due 2022 and $800 million senior unsecured notes due 2024. The '5' recovery rating indicates our expectation for modest recovery (10%-30%) in a payment default scenario.

The company used the debt proceeds to partly finance its acquisition of URS.

"Our 'BB' corporate credit rating on AECOM reflects the company's participation in the volatile and competitive E&C industry," said Standard & Poor's credit analyst Robyn Shapiro. "We expect pro forma debt leverage of about 4.5x as of the fiscal year ended September 2014."

The company has good scale and diversity--pro forma for the acquisition of URS--as a provider of engineering, construction, professional technical, and management support services for public and private clients globally. Pro forma for the acquisition, the company also has good geographic diversification across North America. But the pro forma revenues are concentrated (at about 76%) in the U.S. and Canada as of June 30, 2014, while Europe, the Middle East, and Africa account for 15% and Asia-Pacific the remaining 9%.

The stable outlook reflects our view that AECOM will successfully integrate the URS acquisition along with our expectations for good near-term operating prospects buoyed by the combined company's large backlog. We believe that these factors will keep leverage well below 5x and allow the company free cash flow to debt of 5% or more.

We could raise the rating during the next 12 months if, as a result of good operating performance and debt reduction from free cash flow, we expect adjusted debt leverage below 4x and free cash flow to debt above 10% on a sustained basis.

Although unexpected, we could lower the rating during the next 12 months if AECOM's operating performance weakens and it appears that debt to EBITDA would rise above 5x on a sustained basis or that FOCF to debt will fall to less than 5%. A downgrade could also occur if, for example, the integration does not proceed as planned or if the company experiences large cost overruns in several of its larger contracts.

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