Fitch Ratings has affirmed Tutor Perini Corp.'s (TUT) 'B+' Long-Term Issuer Default Rating.

Fitch also affirmed the company's senior first lien revolver and term loan B at 'BB+'/'RR1' and senior unsecured notes at 'B+'/'RR4'. The Rating Outlook is Stable.

TUT's ratings reflect the company's improving backlog, a high degree of revenue and cash flow visibility on many of the company's projects, and long-term secular tailwinds including an expected increase in infrastructure spending in the U.S. Fitch also believes most of TUT's key contracts are considered essential, and the company will be able to continue executing on backlog near-term as new awards recover. Customer and contract diversification also support the rating. Positive rating momentum could occur if the overall market environment improves and the company replenishes and increases its backlog with new award wins.

Key risks to the rating and Outlook include potential project delays, labor shortages, cyclicality, and key person risk. Working capital fluctuations throughout the year could also exacerbate cash flow seasonality and strain liquidity during a hypothetical downside scenario.

Fitch has withdrawn TUT's ratings for commercial reasons.

Key Rating Drivers

Backlog Set to Improve: Fitch considers the company's backlog to be a positive driver for the company despite being lower than 2019 levels. Backlog stabilized at around $8.2 billion as of December 2021, below the near-record $11.2 billion at YE 2019 as a result of fewer contracts being awarded across the engineering and construction (E&C) sector during the coronavirus pandemic. New awards have bounced back to $4.5 billion in 2021, from $2.4 billion in 2020, but remain below the $6 billion level the company saw before the pandemic.

Fitch anticipates project bidding and new contracts to pick up in 2022 as state and federal governments increase infrastructure spending and the passing of the $1.2 trillion Infrastructure Investment and Jobs Act in late 2021. Margins are expected to be under pressure in 2022 as new contracts awarded in 2021 included large components of lower margin building projects. Fitch expects margin improvement over the longer term as the company wins new civil awards.

Strong Position, Limited Competitors: Following a market shift over the past few years, a limited number of competitors are willing to take on large infrastructure contracts. Fitch believes TUT has separated itself through a reputation for consistent execution over the years. The company has effectively managed project risk and largely avoided large cost overruns that have affected peers. Competition could increase again over time if former competitors reenter the space following the Infrastructure Investment and Jobs Act becoming law in late 2021.

Deleveraging capacity: TUT's nominal debt balance remained elevated at $1.0 billion at YE 2021 with the company's leverage (gross debt/EBITDA) stable at 3.0x. Fitch views the company's willingness to maintain a significant long-term debt balance as a credit negative in the highly cyclical E&C sector. However, the company's leverage could decline in the medium term if TUT prioritizes debt repayment as the company's cash flow generation improves. The company repaid the remaining portion of its unsecured convertible notes in June 2021, and Fitch believes it will have the capacity to repay at least a portion of its term loan balance and outstanding notes ahead of maturity in 2025 and 2027, respectively.

Adequate Liquidity, Flexibility: Fitch considers the company's liquidity to be adequate to cover working capital fluctuations, capex spending, and debt servicing during a moderate temporary downturn. The company had $100 million of readily available cash as of December 2021 plus $148 million in revolver availability. In comparison, the company has $24 million in short-term maturities and the company does not have any significant maturities until 2025. We forecast the company will generate positive annual FCF on average over the rating horizon as it executes on its current backlog, resolves outstanding legal and project disputes, and is positioned well to win new awards.

Scale and Market Position: TUT's rating is supported by the firm's scale and domestic market position. The company maintains operations that are predominantly located in the U.S. and serve a diverse set of customers and a wide range of end markets. This geographic and end-market diversity, coupled with its extensive longstanding customer relationships, allow its segments to be highly competitive on projects of all sizes, while maintaining limited exposure to a single region, industry or customer. The company's markets and capabilities include mass-transit systems, bridges, tunnels, highways, commercial and industrial buildings, condominiums, hospitality and gaming, aviation, education, sports facilities and health care.

Diversified Projects and Customers: Fitch considers TUT to be relatively diversified by contract and moderately diversified by end-market. The company features a balanced split between private and public customers, with approximately 64% of revenue generated from federal, state and local government agencies over the past three years, and the remaining 36% originating from private project owners. The company's December 2021 backlog of approximately $8.2 billion is comprised of 55% higher margin civil projects, 28% building projects and 17% specialty contractor projects. Individual customer concentration is limited, but could increase depending on the size of potential contract wins.

Key Person Risk: The CEO and Chairman of the Board has a long tenure with the company, and his experience and knowledge would not easily be replaced by one single person. However, several experienced executives are in place who would be able to manage the company when an eventual transition occurs. Fitch views this transition as a risk due to the potential reputational impact, although we expect the company will continue to address a potential succession plan over the intermediate term.

Derivation Summary

TUT's rating reflects the company's strong reputation, product and end-market diversification compared with peers and meaningful growth prospects. The rating is constrained by the company's financial structure and profitability. Fitch considers the company's profitability to be comparable with other companies within the E&C industry but is vulnerable to the risk of intensifying competition and potential execution challenges.

Key Assumptions

Revenue to be flattish in 2022, followed by mid-single-digit growth in 2023 and 2024, driven by execution on outstanding backlog and new award bookings beginning in early 2022;

EBITDA margins remain around 7% over the rating horizon due to the improved contract mix and forecasted improvement in the specialty contractors portion of the business; the building segment operating margins remain in low single digits, civil segment generates in the mid-teens and specialty contractors fluctuates in the low- to mid-single-digits;

Annual capex between $50 million and $80 million through 2025;

The company effectively manages liquidity and working capital; and

No material acquisitions, dividends or share repurchases.

Key Recovery Rating Assumptions

The recovery analysis assumes TUT would be reorganized as a going concern in bankruptcy rather than liquidated;

A 10% administrative claim;

Going Concern Approach

Fitch assumes a distressed scenario in which the company loses several major customers/projects in conjunction with a large negative legal claim. We also incorporated the current weak bidding environment, which carries risk that contracts in its current backlog could theoretically not be replaced by new work;

The going concern EBITDA estimate of $175 million reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the enterprise valuation. The going concern EBITDA reflects the company's limited profitability and uneven cash flows, but also its strong backlog and long-term secular tailwinds;

An enterprise value multiple of 5.0x is applied to the going concern EBITDA to calculate a post-reorganization enterprise value. In determining the multiple, we considered the company's high exposure to cyclicality, and its diversification and strong reputation. We also considered the low trading multiple in the sector compared with other E&C and industrial companies;

Fitch notes that in this scenario, when comparing with a liquidation approach, we utilized a 25% accounts receivable recovery rate for the liquidation value analysis due to the assumption that much of the company's current project receivables would not be available to pre-petition creditors as a result of project disputes/litigation. It is customary within the industry for major disputes with project owners to drag on for years, even post-bankruptcy, and in any case would likely be settled for a significant discount.

The allocation of value in the liability waterfall results in recovery corresponding to 'RR1' recovery for the senior secured revolver and term loan and a recovery corresponding to 'RR4' for the senior unsecured notes.

RATING SENSITIVITIES

Ratings sensitivities are no longer applicable given the ratings withdrawal.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: Fitch considers the company's liquidity to be adequate to cover working capital fluctuations, capex and debt servicing during a temporary moderate downturn. We calculated the company's total available liquidity at greater than $300 million as of YE 2021, comprising approximately $100 million of readily available cash as of December 2021 plus $148 million in revolver availability.

The company also had an additional $102.7 million of cash related to Variable Interest Entities, which Fitch considers restricted, and $9.2 million of restricted cash on the balance sheet. The company's capital structure is comprised of a senior first lien revolver maturing in 2025 and term loan maturing in 2027, and senior unsecured notes due in 2025.

Issuer Profile

Tutor Perini is a large engineering and construction firm that operates primarily across the United States. The company competes via three main segments: Civil, Building and Specialty Contractors.

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