CIMIC : upgraded to BBB/A-2 outlook stable CIMIC Group upgraded to BBB/A-2 outlook stable(PDF File 433.1 KB)

11 May 2017‌‌‌‌

ASX Market Announcements Australian Securities Exchange Limited Level 4‌

20 Bridge Street

SYDNEY NSW 2000

Standard & Poor's has raised CIMIC Group's rating to BBB/A-2 from BBB-/A-3. The outlook is stable.

The S&P Global Ratings announcement is appended.

Sincerely,

Australian Engineering And Construction Company CIMIC Group Upgraded To 'BBB/A-2'; Outlook Stable

Craig W Parker, Melbourne (61) 3-9631-2073; craig.parker@spglobal.com

May Zhong, Melbourne (61) 3-9631-2164; may.zhong@spglobal.com

Table Of Contents

Overview Rating Action Rationale Outlook

Ratings Score Snapshot Related Criteria Related Research Ratings List

Australian Engineering And Construction Company CIMIC Group Upgraded To 'BBB/A-2'; Outlook Stable

Overview‌

• We recently assigned 'BBB/A-2' ratings with a stable outlook to CIMIC's immediate Germany-based parent HOCHTIEF AG and its ultimate Spain-based parent ACS, Actividades de Construcción y Servicios S.A.

• We now consider CIMIC to be a core subsidiary, and expect that it will

  continue to contribute the majority of its earnings to Hochtief, which in turn represents the majority of ACS group's operating cash flow.

• As a result, we are raising the long-term and short-term issuer credit

  ratings on CIMIC to 'BBB/A-2' from 'BBB-/A-3', in line with our ratings on Hochtief and ACS.

• The outlook on the CIMIC ratings is stable, reflecting that on ACS. The

stable outlook on ACS reflects our view that over 2017 to 2018, ACS will further consolidate its improved performance in 2015-2016, focusing on cash flow generation and disciplined working capital management.‌

Rating Action

On May 10, 2017, S&P Global Ratings raised its long- and short-term corporate credit ratings on Australian engineering and construction company (E&C) CIMIC Group Ltd. (CIMIC) to 'BBB/A-2' from 'BBB-/A-3'. The outlook is stable.

Rationale‌

We raised the ratings on CIMIC because we now consider the company to be a core member of the ACS group, from its previously insulated subsidiary status.

Our rating on CIMIC's immediate parent Hochtief is in line with the parent's stand-alone credit profile (SACP) of 'bbb' and our 'BBB' long-term corporate credit rating on ACS. CIMIC is 73% owned by Hochtief, which in turn is 72% owned by ACS. In addition, Hochtief constitutes more than half of ACS consolidated group's assets, earnings, and cash flow. Our rating on CIMIC is lower than its SACP of 'bbb+'.

Since 2011, ACS has gradually increased its share of ownership in Hochtief, and at the same time, Hochtief has increased its ownership in CIMIC. Also, ACS has simplified the corporate structure, enhanced group integration, and aligned the strategy and risk management within the consolidated group. Over the past few years, ACS has significantly reduced debt through noncore asset

Research Update: Australian Engineering And Construction Company CIMIC Group Upgraded To 'BBB/A-2';

Outlook Stable

disposals and group streamlining, particularly in those parts of the group that are outside Hochtief's business purview. As a result, the ACS group's leverage metrics have significantly improved.

We no longer view CIMIC as an insulated subsidiary within the ACS group, even though there are significant minority shareholders. In 2010, CIMIC's immediate parent Hochtief adopted a ring-fencing policy to limit cash transfers to ACS. We understand that since 2017, Hochtief has discontinued this ring-fencing policy and is gradually refinancing the outstanding financial debt by issuing new debt instruments with no ring-fencing terms.

In addition, ACS would likely be able to access Hochtief's cash flow if needed, given its current 72% ownership rate if it achieved a domination agreement. Nevertheless, we believe that given the group's structure, the presence of sizable minority shareholders in Hochtief and CIMIC may to some extent constrain cash movement within the group.

Our SACP on CIMIC group reflects the company's solid market position in Australia's infrastructure construction and contract mining sectors. In addition, it has significant business, industry, project, and geographic diversity. However, it is exposed to competitive and cyclical-heavy E&C sectors and to mining contracts that are inherently large and complex.

Under the Thiess and Sedgman brand names, CIMIC is one of the largest contract miners globally with experience in mineral processing. The CIMIC group has a strong franchise in large infrastructure construction in road and rail via the CPB Contractors and the Leighton Asia brand names. CIMIC undertakes private sponsorship of government infrastructure through CIMIC's Pacific Partnership brand that bids on public-private partnerships (PPP). CIMIC's ownership of UGL and its 50% ownership of Ventia Pty Ltd. also provide the company with access to operations and maintenance activities in road and rail infrastructure, oil and gas, water, defence, renewable energy, and telecommunications infrastructure.

Key to CIMIC's earnings growth is its continued success at tendering and securing new work. As of March 31, 2017, CIMIC's work-in-hand (WIH) had expanded to A$34.1 billion from A$29 billion at Sept. 30, 2016, principally from its acquisition of UGL Ltd.

CIMIC's risk management approach and modest financial risk appetite help to counter the moderately high-risk construction industry, which requires a sufficient buffer to offset performance risks. As part of CIMIC's strategic review, one of the key objectives was to strengthen the balance sheet, resulting in asset sales, capital restructuring, and various working capital initiatives.

CIMIC management will manage a net debt level that is consistent with a strong investment-grade rating. As a result, we expect CIMIC group's gearing (net debt plus operating leases) could rise with major acquisition or investment activity, but not exceed 30%. This more-conservative financial stance supports