Infrabuild (B3/B, Both Outlooks on Review for Downgrade)
IAM Capital Markets View
Infrabuild is falling further and further into junk territory with both Moody’s and Fitch taking the knife through the credit. We maintain that it would be prudent for investors to look to exit their position after having a good run on the bonds up to now. Bonds still offer good value at 8%, however we see more downside risk (and limited upside) from this point onwards.
Downgrade by Moody’s to B3 (from B2) and Fitch to B (from BB-)
During the week, Infrabuild was downgraded by Moody’s to B3 (from B2) and Fitch to B (from BB-), with the outlooks placed on review for downgrade. The downgrade and further review reflect the increasing refinancing risk surrounding the maturity of its AUD250m asset-based lending facility (ABL) due October 2022.
If a refinancing does not occur prior to the facility coming due, and the company uses its cash flow and cash balances to repay the facility, Moody’s expects overall liquidity to be unsustainable to support general operations.
Without a refinancing of the ABL, total liquidity would drop to AUD130-140m in October 2022, which is very thin compared to Infrabuild’s working capital needs. In addition, if the company cannot refinance the ABL facility, then question marks will remain around the USD325m senior secured bonds due in October 2024. Moody’s will complete the review within the next 60 days.
As a result of the Greensill Capital collapse, Infrabuild is also dealing with issues facing its ultimate parent, GFG Alliance. After the collapse of Greensill Capital, Infrabuild’s access to traditional banks has been reduced and probably the reason why the company is unable to refinance the ABL facility.
A further concern is that Infrabuild has increased its related-party transactions. Infrabuild reduced its payable days and provided prepayments to Liberty Primary Metals Australia Pty Ltd (LPMA), another GFG Alliance entity that operates Whyalla Steelworks — in exchange for market-based price discounts. However, cash outflows on these related parties may increase further and reduced the overall liquidity buffer.
We maintain that it would be prudent for investors to look to exit their position after having a good run on the bonds up to now. Bonds still offer good value at 8%, however we see more downside risk (and limited upside) from this point onwards.
Chart 1. Relative Value