S&P Revises Outlook on Tutor Perini (TPC) to Negative; Ratings Affirmed
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S&P Global Ratings said that it has revised its outlook on Tutor Perini Corp. (NYSE: TPC) to negative from stable and affirmed its 'BB-' corporate credit rating on the company.
At the same time, we assigned our 'BB-' issue-level rating and '3' recovery rating to the company's proposed $500 million senior unsecured notes. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%; lower half of the range) in the event of a payment default.
Additionally, we lowered our issue-level rating on the company's $200 million senior unsecured convertible notes to 'B' from 'BB-' and revised the recovery rating to '6' from '4'. The '6' recovery rating indicates our expectation for negligible recovery (0%-10%) in the event of a payment default.
We intend to withdraw our 'BB-' issue-level rating and '3' recovery rating on the company's existing $300 million senior unsecured notes due 2018 following the completion of the transaction.
"The outlook revision reflects Tutor Perini's weaker-than-expected operating performance over the past year and our view that, while we expect its operating performance to improve over the next 12 months, there is at least a one-in-three chance that we will lower our rating over the next year if its performance does not improve as anticipated," said S&P Global credit analyst Michael Durand. In the second half of 2015, the company suffered a loss on its Tower C concrete placement project at Hudson Yards and faced unanticipated charges from its Five Star Electric business. Tutor's adjusted debt-to-EBITDA metric was 4.4x as of the last 12 months ended June 30, 2016, though we expect that its leverage will improve as its weaker performing quarters in the second half of 2015 roll off. However, we note that there is an inherent uncertainty in the company's business, which can lead it to underperform our expectations.
The negative outlook on Tutor Perini reflects that there is a one-in-three chance that we will lower our rating on the company over the next 12 months if its operating performance does not improve.
We could lower our rating on Tutor Perini over the next 12 months if its operating performance does not improve and we come to expect that its adjusted debt-to-EBITDA metric will remain above 3.5x while its FOCF-to-adjusted-debt ratio remains below 5% on a sustained basis. This could occur if the company experiences project losses or poor cash collection from its customers that lead to high volatility in its earnings and meaningful working capital swings.
We could revise our outlook on Tutor Perini to stable over the next 12 months if the company's operating performance improves, leading it to maintain an adjusted debt-to-EBITDA metric of 3x on a sustained basis. At the same time, we would expect the company to demonstrate financial policies that are in line with the current rating, notably refraining from debt-financed acquisitions or shareholder rewards that would cause its adjusted debt-to-EBITDA metric to remain above 3.5x.
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