Astaldi : Walking a tightrope

Following our report of 17 November, we have had the opportunity to talk with the company which has clarified certain information, notably regarding liquidity, first1epriority debt and its exposure to Venezuela and Turkey. All in all, new information provided by management goes in the right direction but our fundamental view is unchanged as we highlight the persistently low liquidity position, excessive debt burden and weak underlying cash generation. On balance, these factors reinforce our scepticism about the company's ability to avoid not only a default but also a sizeable haircut in the event of a restructuring. - >As its liquidity remains stretched, Astaldi has made little progress towards the planned capital increase - Liquidity is not an immediate concern but remains tenuous. We estimate the liquidity gap at € 250m, € 100m lower than our former estimate as we limit cash needs to the next twelve months. We continue to underline a number of risks that could put further pressure on the group such as the non-renewal of short-term lines, which seems to have already started in Q3, tighter delays from suppliers, currently very high, and availability of bonding lines. The planned € 200m capital increase remains elusive. Its timing remains uncertain and we continue to harbour misgivings about the Astaldi family's financial capacity as well as the company's own ability to raise this money from investors. Separately, Astaldi provided us with more details about Venezuela and Turkey: in Venezuela, it has left in its backlog one single contract, an accounting choice that seems more conservative than Salini. In Turkey, the recent granting of new works for the Third Bosporus Bridge project at the price of a substantial working capital outflow continue to puzzle us. Notably, we wonder whether it will not further extend the disposal process.We remain pessimistic about recovery prospects given initial net leverage and weak cash generation - We believe that Astaldi's overwhelming issue is its excessive debt load. We calculate an adjusted net leverage of 7.5x, up from 7x in our previous report as we have adopted a more realistic stance on leases. Conversely, factoring is actually lower than previously anticipated. The net leverage ratio would also be higher if a discount is applied to EBITDA to factor in the intrinsically low cash conversion rate. On the plus side, Astaldi has confirmed to us that most credit lines are unsecured, while our reading of financial statements led us to think that secured debt could be very high. We have made various changes to our recovery scenario, which result in a recovery ratio of 62% (on a comparable basis, i.e. based on a net leverage of 4x plus 1x for the concession value) instead of 55% in our previous report. However, to model the path to a default (i.e. a further working capital drain and a reduction in credit lines to deplete cash resources), we have stressed our assumptions further and arrived at a recovery rate of 53%.In addition to our initial approach based on a maximum net leverage ratio, we also endeavoured to ascertain the cash flow that Astaldi could generate with various levels of reinstated debt. All told, cash flow remains limited and fails to cover concession investments and capitalised interests. This leads us to think that the recovery rate could be fairly low at 20%, possibly below, as only a limited leverage ratio would mark for positive cash flow generation.