(News Bulletin 247) – The agency has gone from “stable” to “negative” the outlook for the rating of the railway equipment manufacturer, which however constitutes a lesser evil for the group which recently stunned investors by warning that it would burn cash in its current financial year.

This was the market’s great fear after Alstom’s heavy warning: a downgrading of the railway equipment manufacturer’s credit rating by the Moody’s agency.

As a reminder, the company led by Henri Poupart-Lafarge warned last week that it had burned more than a billion euros in cash flow in the first half (from April 1 to the end of September) of its 2023-2024 financial year. . This forced it to cut its cash flow forecast for its entire fiscal year, with the group anticipating a disbursement of between 500 million euros and 750 million euros, while cash generation was initially expected to be ” significantly” positive.

This announcement obviously cast doubt on the company’s deleveraging trajectory, and led investors to dump Alstom shares, which had lost nearly 38% the same day.

Moody’s, however, grants the company a reprieve. The rating agency maintained the railway equipment manufacturer’s rating at “Baa3” on Thursday evening, the last notch in the “investment” category (investment as opposed to “junk”, the speculative category). Alstom has also made maintaining its rating in this “investment” category an absolute priority.

The agency nevertheless lowered the outlook for this rating from “stable” to “negative”, meaning that it could downgrade Alstom’s rating in the medium term.

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Cash to improve as quickly as possible

“The negative outlook reflects the increased risk that Alstom’s key credit indicators remain outside the ‘Baa3’ rating range over the next twelve months. The negative outlook also reflects continued uncertainties over the capacity of the company to sustainably improve its generation of free cash flow and its profitability with an Ebita (adjusted operating profit) margin greater than 5%”, develops the agency.

“Moody’s expects that the company, which is committed to maintaining an investment grade rating, will take steps to strengthen its balance sheet and liquidity in the near term,” it adds.

Moody’s explains that it could lower the rating if Alstom’s adjusted debt level does not return over the next twelve months to a “trend towards a multiple of 3.75 (the ratio of net debt to gross profit adjusted operating income, Editor’s note)” against 4.9 for the last published financial year, according to the agency’s calculations. Ditto if the adjusted operating margin remains below 5% or if the adjusted cash flow remains negative “on a sustainable basis,” she warns.

In the details of its assessment, the agency estimates that Alstom’s cash generation should certainly improve soon.

“However, given the continued underperformance of planned recovery plans over the past three years, the timing and extent of improvement remains uncertain,” Moody’s explains. “Alstom has a relatively limited track record when it comes to generating strong cash flow, while the increase in profitability since the acquisition of Bombardier Transportation (completed in January 2021, editor’s note) has been slower than expected “The company must therefore still demonstrate its ability to improve them significantly,” she considers.

Debt reduction to be accelerated

Concerning debt, Moody’s judges that the pace of deleveraging “would remain uncertain” if the company does not “complement organic deleveraging with additional inorganic measures to support the restoration of its credit parameters to a level consistent with an ‘investment grade’ rating over the next twelve months.

“Inorganic measures” to reduce debt can take the form of a capital increase or asset sales. Last week, Alstom’s financial director, Bernard Delpit, ruled out the first possibility but opened the door to the second, in an interview with Bloomberg.

“Alstom believes that the change in outlook will not have an impact on its ability to access short-term financing and the execution of contracts. The group thus reaffirms its commitment to an investment grade rating.” , the company reacted Thursday in a press release to Moody’s announcement.

A lesser evil

After the agency’s verdict on Thursday, Alstom shares fell this Friday on the Paris Stock Exchange without collapsing. The stock lost 2.2% around 11 a.m. to 13 euros.

“After last week’s announcements, the market had taken into account a potential downgrade. Moody’s could either lower the group’s rating or the prospect of this rating. Ultimately, the less bad of the two possibilities occurred, which removes uncertainty and can almost constitute a relief in a certain way,” judges a financial intermediary.

“Moody’s view is that Alstom can always improve its capital structure to maintain its rating. It’s like tennis: the ball was in their court, they threw it back to Alstom who now has to do it pass over the net. To do this they will need to generate positive cash flow in the second half of 2023-2024, as they have indicated, this is the first step”, continues this intermediary.

Alstom’s cash flow forecast for the entire 2023-2024 financial year (i.e. between -750 and -550 million euros) implies, in fact, that cash generation in the second half will be positive at from 400 to 600 million euros.