Fitch Places InfraBuild on Rating Watch Negative

(The following statement was released by the rating agency) Fitch Ratings-Sydney-15 March 2021: Fitch Ratings has placed InfraBuild Australia Pty Ltd.'s Long-Term Issuer Default Rating (IDR) of 'BB-' on Rating Watch Negative (RWN). The agency has also placed the 'BB' rating on Australian steel manufacturing company's USD325 million senior secured notes due October 2024 on RWN. The RWN reflects increasing uncertainty from the funding issues faced by GFG Alliance. GFG Alliance's financing has been affected by the collapse of Greensill Capital, which filed for administration. Problems at GFG Alliance could have a contagion effect on its various companies, including the Whyalla steelworks and InfraBuild, and it may increase pressure on InfraBuild's liquidity and disrupt the timely supply of billets and structural steel. However, Fitch believes that InfraBuild's loan documents and collateral provide adequate protection for creditors within the restricted group. InfraBuild's importance in the Australian construction sector as the sole manufacturer of long-steel products would allow some support from suppliers and customers to operate without detrimental changes to existing contracts. Demand for long-steel product is also robust due to government stimulus, which will support a healthy level of EBITDA for InfraBuild in the financial year ending June 2021 (FY21). Key Rating Drivers Immediate Liquidity Unaffected: InfraBuild's liquidity is not affected immediately by the funding issues reportedly faced by GFG Alliance. Fitch believes that InfraBuild has adequate liquidity of AUD250 million, which consists of cash and committed undrawn balances under a AUD250 million asset-based lending facility as of end-February 2021. The facility matures in October 2022. In addition, InfraBuild does not have any factoring arrangements and credit facilities related to Greensill. Potential Contagion Risk from GFG: Contagion may arise from a number of related-party transactions under various agreements. InfraBuild sources its billet, between 28% and 32% of its requirements, and hot-rolled structural steel from GFG Alliance's Whyalla steel mill in Australia, which we understand was accessing working-capital facilities through Greensill. Disruptions to the supply could dampen InfraBuild's operations, although it began diversifying its suppliers over 12 months ago. In addition, it can procure its own billet and hot-rolled structural steel if the Whyalla steel mill cannot provide these in a timely manner. Limited Risk on Cash Flow Leakage: InfraBuild's loan documents limit any distribution to 50% of consolidated net income, with a one-time AUD35 million restricted payment bucket (now exhausted) allowed without any covenant test. However, there are some related party working capital facilities that do not need to meet the covenant test. The company disclosed this amount in its financial accounts with the company owing GFG Alliance subsidiaries a net amount of around AUD5 million at 31 December 2020. Strong Performance: InfraBuild's revenue increased by 4% in 1HFY21 against 1HFY20 due to government stimulus, especially in the detached housing sector. InfraBuild also benefited from ongoing cost-cutting initiatives and price increases, resulting in reported EBITDA up 23% in 1HFY21 against 1HFY20. Fitch believes that InfraBuild's FY21 performance will be strong, underpinned by the government stimulus and strong housing market conditions. Derivation Summary Fitch assesses InfraBuild's rating is in line with other Fitch-rated 'BB' category electric arc furnace steel producers due to the integrated business model, flexible operating profile and leading market position in Australia. The ratings are constrained by InfraBuild's weak cost position, scale and high leverage. The ratings of InfraBuild are comparable with those of US-based Commercial Metals Company (CMC, BB+/Stable). CMC has better geographical and operational diversification due to its operations in the US and Poland, as well as more operating mills. However, InfraBuild's strong market position and long-term customer relationships offset its weaker diversification. Both companies have vertically integrated business models, receive a premium over the import parity price and have similar site-operating costs in absolute terms. However, Fitch believes CMC's mini mills in the US benefit from strict tariff barriers and access to cheap electricity and scrap, which results in better margins and a lower threat from Asian imports. CMC's leverage metric, as measured by total debt/operating EBITDA, of around 3x is also around one turn lower than that of InfraBuild. These factors underscore the two-notch rating differential between the two entities. Brazil-based Gerdau S.A. (BBB-/Stable) has better diversification, business scale and profit margin as well as lower leverage than InfraBuild, which accounts for the three-notch rating differential between the two entities. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer: - Stable steel volume and prices due to government stimulus; - Fitch adjusted EBITDAR margin improving to around 6.0% due to cost-cutting initiatives, including savings from a continuous improvement programme and cost synergies from planned acquisitions (FY20: 5.4%); - Capex of around 2% of revenue. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - We will resolve the RWN based on the developments and actions of Greensill's administrator and/or successful refinancing conducted by GFG Alliance that may remove any potential contagion risk on InfraBuild. Factors that could, individually or collectively, lead to negative rating action/downgrade: - Material deterioration in operating condition due to disruption with Whyalla; - Deterioration in liquidity position. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Adequate Liquidity: InfraBuild's next significant debt maturity is in October 2022, consisting of a AUD250 million asset-based lending facility. We expect the company to have adequate liquidity from its undrawn asset-based facility and cash on the balance sheet of AUD250 million to meet short-term requirements. We expect InfraBuild to rely on refinancing to address its long-term debt maturities. We believe it should be able to manage its refinancing needs due to its sizeable unencumbered property assets. ESG Consideration Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. InfraBuild Australia Pty Ltd.; Long Term Issuer Default Rating; Rating Watch On; BB-; Rating Watch Negative ----senior secured; Long Term Rating; Rating Watch On; BB; Rating Watch Negative Contacts: Primary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst James Hollamby, Associate Director +61 2 8256 0347 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Additional Disclosures Solicitation Status (https://www.fitchratings.com/site/pr/10155484#solicitation-status) Additional Disclosures For Unsolicited Credit Ratings (https://www.fitchratings.com/site/pr/10155484#unsolicited-credit-ratings-disclosures) Endorsement Status (https://www.fitchratings.com/site/pr/10155484#endorsement-status) Endorsement Policy (https://www.fitchratings.com/site/pr/10155484#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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