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Rating Action:

Moody's assigns Baa3 rating to AECOM's term loan B

05 Apr 2021

New York, April 05, 2021 -- Moody's Investors Service ("Moody's") assigned a Baa3 rating to AECOM's proposed senior secured term loan B. The company plans to use the term loan proceeds to redeem a portion of its 5.875% senior notes due 2024 and to pay premiums and expenses. AECOM's Ba2 corporate family rating, Ba2-PD probability of default rating, Baa3 rating on its existing secured credit facilities, Ba3 rating on its unsecured notes, its stable ratings outlook and its Speculative Grade Liquidity Rating of SGL-2 remain unchanged.

Assignments:

..Issuer: AECOM

....Senior Secured Term Loan B, Assigned Baa3 (LGD2)

RATINGS RATIONALE

AECOM's Ba2 corporate family rating reflects its large scale and solid position across diverse end markets as one of the largest and most diversified engineering, design, planning and construction management companies in North America. The company's rating is also supported by its moderate leverage, consistent free cash flow and strong project backlog with moderate fixed price project exposure that is mostly concentrated in its design business after the sale of its fixed price civil construction, power and certain oil & gas businesses. AECOM's rating also reflects its relatively low level of funds from operations as a percent of outstanding debt and its plan to use all of its free cash flow to repurchase stock.

AECOM generated Moody's adjusted EBITDA of about $1.0 billion in the fiscal year ended September 2020 as reduced costs resulting from restructuring activities more than offset the negative impact on revenues from the coronavirus pandemic and lower oil and gas prices. The company expects to produce a moderate increase in its operating results in fiscal 2021 since it will benefit from a strong project backlog and continued cost cutting initiatives. AECOM added $18.2 billion of work to its backlog last fiscal year, which resulted in a book-to-burn ratio of 1.3x. The backlog did weaken in the first quarter of fiscal 2021, but remains robust at $39.7 billion, while its contracted backlog is at $19.9 billion and provides good visibility. The company is projecting continued margin expansion reflecting the benefits from restructuring actions taken in fiscal 2020 that are expected to contribute to improved margins in both the Americas and International segments in fiscal 2021.

AECOM expects to convert 75% of its EBITDA to unlevered attributable free cash flow on a normalized basis. However, its free cash flow was only $154 million on a Moody's adjusted basis in fiscal 2020 due to cash restructuring costs, executive transition costs, and stranded costs related to the Management Services business that was sold in January 2020. The unwind of the Management Services sold accounts receivables, net of cash flow from new receivable sales also reduced free cash flow. The company's Moody's adjusted free cash should rise to at least $400 million in fiscal 2021 if it achieves its target cash flow ratio. The company plans to use all of its free cash to repurchase stock and to maintain a leverage ratio below 3.0x based on its covenant calculation. Its leverage ratio was 2.3x based on the covenant calculation and 3.1x on a Moody's adjusted basis as of December 2020 and is expected to remain around that level and is supportive of its Ba2 corporate family rating.

AECOM's speculative grade liquidity rating of SGL-2 reflects its good liquidity profile. The company had $941 million of cash (excluding JV cash) and $1.329 billion of availability on its $1.35 billion revolving credit facility as of December 31, 2020. The revolver had no borrowings outstanding and $20.6 million of letters of credit issued. AECOM also had $104 million of cash in consolidated joint ventures, but that cash is not readily accessible and is earmarked to support specific projects. AECOM amended its credit agreement in February 2021 and extended the maturity of the revolver and term loans to February 2026. In addition, it reduced the size of the revolving credit facility to $1.15 billion. The company's cash balance declined by $659 million in the first quarter of fiscal 2021 since it typically consumes cash seasonally and it repurchased $469 million of shares. Nevertheless, we still expect the company to maintain a sizeable cash balance and a good liquidity profile.

AECOM's stable outlook presumes the company's operating results will moderately improve over the next 12 to 18 months and it will use all of its free cash flow to repurchase stock.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

A ratings upgrade is possible if the company uses a portion of its free cash flow to pay down debt and sustains a leverage ratio below 3.5x.

Negative rating pressure could develop if deteriorating operating results, weaker than expected cash flow or debt financed acquisitions or share repurchases result in the leverage ratio rising above 5.0x or funds from operations (CF from operations before working capital changes) declining below 15% of outstanding debt. A significant reduction in borrowing availability or liquidity could also result in a downgrade.

Headquartered in Los Angeles, CA, AECOM is a fully integrated professional and technical services firm providing engineering & design, planning and construction management to the infrastructure, transportation, industrial, environmental, water, government and oil and gas sectors. The company operates under three business segments: Americas (77% of fiscal 2020 revenue), International (23%) and AECOM Capital (less than 1%). AECOM generated about $13.3 billion of revenue during the LTM period ended December 2020 and had a backlog of $39.7 billion as of December 31, 2020.

The principal methodology used in this rating was Construction Industry published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael Corelli, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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