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Rating Action:

Moody's downgrades Tutor Perini's CFR to B1, outlook stable

17 May 2019

Approximately $500 million of debt securities affected

New York, May 17, 2019 -- Moody's Investors Service ("Moody's") downgraded Tutor Perini Corporation's ("Tutor Perini") corporate family rating to B1 from Ba3, its probability of default rating to B1-PD from Ba3-PD, and its senior unsecured notes rating to B2 from B1. At the same time, Moody's affirmed Tutor Perini's Speculative Grade Liquidity Rating of SGL-3. The outlook is stable.

"The downgrade of Tutor Perini's rating reflects the company's challenges in controlling its unbilled receivables and collecting payment on its billed receivables for the construction work it has completed, which has led to relatively weak and inconsistent free cash flow," said Michael Corelli, Moody's Vice President -- Senior Credit Officer and lead analyst for Tutor Perini Corporation.

Downgrades:

..Issuer: Tutor Perini Corporation

.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD

.... Corporate Family Rating, Downgraded to B1 from Ba3

....Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD4) from B1 (LGD4)

Outlook Actions:

..Issuer: Tutor Perini Corporation

....Outlook, Remains Stable

Affirmations:

..Issuer: Tutor Perini Corporation

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

RATINGS RATIONALE

Tutor Perini's B1 corporate family rating is supported by its moderate leverage, ample interest coverage, good market position, meaningful scale and diversity across a number of US non-residential building and civil infrastructure construction markets, and near term revenue visibility due to favorable booking trends and a record project backlog. However, its rating is constrained by its relatively thin margins, low funds from operations as a percentage of its outstanding debt, inconsistent free cash flow generation, high level of unbilled receivables and significant exposure to fixed-price construction contracts. The company is also exposed to contingent risks associated with periodic contract disputes and the possibility of further write-downs as it pursues past due payments.

Tutor Perini's revenues declined for the second consecutive year in 2018 to $4.5 billion from $4.8 billion in 2017 and $5.0 billion in 2016, due to reduced project volumes in its Building and Specialty Contractors segments. Its revenues weakened further in the first quarter of 2019 due to the timing of new projects and adverse weather conditions. However, its operating performance strengthened due to a larger mix of higher margin Civil segment construction projects and the absence of a prior-year pre-tax charge of $17.8 million related to an unexpected arbitration decision. This was tempered by a weak performance in the Building segment due to reduced project activity and the Specialty Contractors segment resulting from unfavorable closeout adjustments of $13.6 million. Tutor Perini's operating performance could improve in 2019 since it has a strong backlog of orders and a good project pipeline. Its backlog rose to a new record high of $11.6 billion as of March 2019, which was 37.5% higher than this time last year. However, its operating performance is likely to remain somewhat volatile depending on the timing of projects in its backlog and the potential for additional adjustments as it focuses on collecting cash from its aged receivables. Therefore, Moody's expects the company to produce adjusted EBITDA in the range of $275 million to $325 million versus $284 million in 2018.

Tutor Perini's free cash flow generation continues to be limited by working capital investments resulting from slow paying customers, client driven delays in billing for out of scope work, and the time lag on recoveries on approved change orders. The company has attributed some of its cash collection issues to the slow process of getting paid by government agencies and the extensive approvals required for change orders with these customers. These issues have resulted in Tutor investing more than $1.6 billion in working capital and caused its unbilled receivables balance to skyrocket to $1.17 billion in March 2019 from $116 million in December 2008. The company produced negative free cash flow of $85 million in 2018 and $142 million in the first quarter of 2019 as it invested $311 million in working capital over the past five quarters. The company could still generate positive free cash flow in 2019 since the first quarter is a weak seasonal cash flow period and cash collections remain a priority, but the magnitude will continue to be influenced by working capital inefficiencies and potential settlements on aged receivables.

The company's inability to consistently generate free cash flow has resulted in its outstanding debt increasing to about $900 million (adjusted debt of $1.3 billion) in March 2019 from $760 million in December 2016. However, its credit metrics have remained relatively stable as Moody's pension adjustment has declined by about $200 million due to lower multiemployer pension plan contributions. Its leverage ratio should remain relatively stable in 2019 at around 4.0x (Debt/EBITDA) and its interest coverage (EBITA/Interest Expense) near 2.8x. These metrics will be supportive of the current rating, but its cash flow metrics may remain weak.

Tutor Perini's SGL-3 liquidity rating reflects its adequate, although somewhat weak near term liquidity based on the risks inherent in the engineering & construction industry. The company had an unrestricted cash balance of $101 million as of March 2019, which included about $64 million of its portion of joint venture cash balances that are only available for joint venture-related uses. The company also had $169 million of availability under its committed bank credit facility, which had $182 million of borrowings outstanding. Therefore, the company's total liquidity (excluding JV cash) was only about $206 million, which is somewhat weak but should improve as the year progresses since the first quarter is a seasonally weak cash flow quarter. However, its liquidity has declined substantially from $445 million in December 2017 due to negative free cash flow of $228 million over the past five quarters.

The stable outlook reflects the expectation that Tutor Perini's operating results will moderately improve and it will produce positive free cash flow over the next 12 to 18 months.

Upward pressure on Tutor's ratings is unlikely in the intermediate term given its track record of inconsistent free cash flow and its exposure to competitive industry dynamics and fixed price contracts. Positive rating pressure could develop if the company materially strengthens its liquidity position, substantially reduces its unbilled receivables, sustains funds from operations at more than 20% of its outstanding debt, its leverage ratio is maintained below 4.0x, and it consistently generates free cash flow.

Tutor Perini could face a downgrade if its consolidated EBITA margin declines below 4.0%, or it sustains funds from operations below 15% of outstanding debt or a leverage ratio above 5.0x. Downward rating pressure could also develop if it fails to generate free cash flow or its liquidity continues to weaken.

Tutor Perini Corporation is headquartered in Sylmar, California and provides general contracting, construction management and design-build services to public and private customers primarily in the United States. Tutor Perini's revenues for the trailing twelve months ended March 31, 2019 was $4.4 billion and its backlog was $11.6 billion. The company reports its results in three segments: Civil (41% of 2018 revenues; 56% of backlog) is engaged in public works construction including the repair, replacement and reconstruction of highways, bridges and mass transit systems; Building (39%; 26%), which handles large projects in the hospitality and gaming, sports and entertainment, education, transportation and healthcare markets; Specialty Contractors (20%; 18%) provides mechanical, electrical, plumbing and heating installation services.

The principal methodology used in these ratings was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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
VP - Senior Credit Officer
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

Brian Oak
MD - Corporate Finance
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.
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