Webuild S.P.A

Research Update: Webuild S.p.A. 'BB-' Ratings Affirmed And Taken Off CreditWatch On Expected Credit Metrics Improvement; Outlook Stable

April 27, 2021

Rating Action Overview PRIMARY CREDIT ANALYST

- Webuild S.p.A. (formerly Salini Impregilo S.p.A.) generated material free operating cash flow Pascal Seguier (FOCF) and decreased its net debt in second-half 2020, which mitigated a decline in EBITDA. Paris - The company also progressed on its integration of Italy-based construction company Astaldi + 33 1 40 75 25 89 pascal.seguier S.p.A. and refinanced its bonds due 2021. @spglobal.com

- As construction projects gradually resume, we anticipate funds from operations (FFO) to debt SECONDARY CONTACT

of about 17%-18% in 2021-2022, which we believe is commensurate with the 'BB-' rating. Renato Panichi - We are therefore affirming our 'BB-' long-term issuer credit rating on Webuild S.p.A., and Milan + 39 0272111215 removing it from CreditWatch, where it was placed with negative implications on March 24, renato.panichi 2020. @spglobal.com - The stable outlook reflects our expectations that Webuild will post FFO to debt of about ADDITIONAL CONTACT

17%-18% in 2021-2022, while integrating Astaldi without major hinderance or cost overruns. Industrial Ratings Europe Corporate_Admin_London @spglobal.com Rating Action Rationale

Webuild will finalize the acquisition of Astaldi around mid-year 2021. In November 2020, Webuild successfully completed the acquisition of 66.28% of Astaldi S.p.A. We note that the consolidation of Astaldi brought an about €200 million positive cash contribution, which helped reduce group net debt. By August 2021, Webuild will acquire the remaining Astaldi shares and proceed with the spin-off of the liquidation perimeter, which will not be integrated into the group. We believe this is a key milestone in the company's strategy of consolidating the Italian construction market. Webuild has also initiated a cost-saving and synergies program and aims for €120 million of savings by 2023. At this stage, we see this cost-saving program as ambitious. We will monitor the integration of Astaldi, and particularly any potential setbacks resulting from the merger.

www.spglobal.com/ratingsdirect April 27, 2021 1 Research Update: Webuild S.p.A. 'BB-' Ratings Affirmed And Taken Off CreditWatch On Expected Credit Metrics Improvement; Outlook Stable

We believe that refinancing risks have eased. Between December 2020 and January 2021, Webuild issued €550 million of unsecured notes and a €200 million add-on to reimburse the €600 million bonds due June 2021. Following this refinancing, the company has limited debt maturities until mid-year 2022. The next bond maturity is in 2024. As a result, it extended its debt maturity profile to about four years--or about three years including the drawn revolving credit facility (RCF). We also note that prices for Webuild's bonds in the secondary market have improved and approach par.

Chart 1

We expect Webuild's credit metrics will remain commensurate with the 'BB-' rating. We expect FFO to debt of about 17%-18% in 2021-2022, supported by an improvement in profitability from lows related to the COVID-19 pandemic. We also assume that Webuild will continue to improve its FOCF, particularly in Italy where it should benefit from increased advance payments.

We believe that Webuild's strategy is supportive of the credit rating in the medium-term. Over recent years, Webuild gradually decreased its exposure to high-risk countries and won major projects in North America, Australia, and Western Europe. It also materially decreased its project concentration, with the top 10 projects accounting for about 36% of revenue in 2020 versus 48% in 2018. In our view, this could decrease risk and materiality from adverse project costs overruns or court rulings in the future.

Webuild's growth prospects are solid. Webuild's construction backlog was about €33 billion in 2020 and covers most revenue streams for the next two years. Its plan to enter the road maintenance business in Italy could also add scale and diversification, although we do not consider this in our base case yet because we lack sufficient information, including on the timing.

www.spglobal.com/ratingsdirect April 27, 2021 2 Research Update: Webuild S.p.A. 'BB-' Ratings Affirmed And Taken Off CreditWatch On Expected Credit Metrics Improvement; Outlook Stable

In addition, we believe that Webuild could benefit from the announced recovery funds in Europe and the U.S. In the U.S., the $2 trillion plan under President Biden's administration could boost investments into the country's infrastructure, particularly roads and bridges. In Italy, some key infrastructure projects that Webuild is part of have relaunched, such as the Genoa railway hub and the Verona-Padua highspeed/high-capacity railway.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Outlook

The stable outlook reflects our expectations that Webuild will post FFO to debt of about 17%-18% in 2021-2022, while integrating Astaldi without major hinderance or cost overruns.

Downside scenario

We could lower the ratings if:

- The company faces further project postponements or delays in collecting payments, leading to a material decline in operating margins and FOCF;

- FFO to debt falls below 15% with low prospects for a swift recovery;

- There are difficulties in integrating the acquired businesses, particularly Astaldi; or

- Liquidity weakens.

Upside scenario

We could raise the ratings if:

- FFO to debt improves to well above 20%;

- Webuild posts significant FOCF on a sustainable basis; and

- The group shows commitment to maintaining these metrics over the business cycle.

Company Description

Webuild is a midsize Italian engineering and construction group, with reported revenue of €5.3 billion in 2020. It builds large infrastructure in areas including sustainable mobility, water, hydroelectric energy, and green buildings. The group benefits from good geographical diversity, generating about 36% of revenue in Europe, 28% in the U.S., 14% in the Middle East, 10% in Australia, and the remainder in Africa and Latin America. Webuild is listed on the Milan stock

www.spglobal.com/ratingsdirect April 27, 2021 3 Research Update: Webuild S.p.A. 'BB-' Ratings Affirmed And Taken Off CreditWatch On Expected Credit Metrics Improvement; Outlook Stable

exchange, and the Salini family owns about 45% of its share capital.

Our Base-Case Scenario

Assumptions

- Global GDP growth of 5.6% (4.1% in Europe, 6.4% in North America, and 6.7% in Asia-Pacific) in 2021, and 4.1% (4.1% in Europe, 6.4% in North America, and 4.7% in Asia-Pacific) in 2022.

- Healthy growth for the infrastructure market in the U.S., Europe, and Australia, supported by infrastructure plans that include both new projects and infrastructure renewal.

- Like-for-like revenue growth recovery of 9%-10% in 2021, then organic growth of 3%-6%, supported by the healthy order backlog in Italy and low-risk countries.

- A 12-month perimeter impact from the acquisition of Astaldi.

- An adjusted EBITDA margin of about 8%, pro forma the Astaldi acquisition. We consider this average for the construction industry.

- Limited working capital cash inflows in 2021, boosted by advance payments in Italy.

- Capital expenditure (capex) of about €200 million-€250 million.

- Dividends of about €50 million in 2021, and contained dividend increases in 2022.

- Limited bolt-on acquisitions.

Key metrics

Table 1

Webuild S.p.A.--Key Metrics*

--Fiscal year ended Dec. 31--

2019a 2020a 2021e 2022f 2023f

(Mil. €)

Revenue 5,130.0 4,463.4 6,400.0-6,500.0 6,700.0-6,800.0 7,000.0-7,100.0

Revenue growth (%) (10.7) (13) 44.0-46.0 3.0-5.0 3.0-5.0

EBITDA margin (%) 10.1 4.0 7.8-8.0 7.9-8.1 8.0-8.2

Capital expenditure 98.9 183.8 200.0-250.0 200.0-250.0 300.0-400.0

Free operating cash flow (FOCF) (3.2) (65.0) 50-150 50-150 50-150

Debt to EBITDA (x) 3.8 10.3 3.5-3.7 3.5-3.7 3.4-3.6

Funds from operations to debt (%) 17.6 2.6 17.0-18.0 17.0-18.0 17.5-18.5

EBITDA interest coverage (x) 6.1 2.0 5.0-6.0 5.0-6.0 5.0-6.0

*All figures adjusted by S&P Global Ratings. a--Actual. e--Estimate. f--Forecast.

Our debt adjustments include about €900 million of adjustments related to factoring, leasing, pension liabilities, cash haircuts, and financial guarantees.

www.spglobal.com/ratingsdirect April 27, 2021 4 Research Update: Webuild S.p.A. 'BB-' Ratings Affirmed And Taken Off CreditWatch On Expected Credit Metrics Improvement; Outlook Stable

Liquidity

We view Webuild's liquidity as adequate, supported by its long-dated debt maturity profile, good cash-interest coverage, and significant cash holdings on the balance sheet. We estimate that the group's liquidity sources will exceed uses by more than 1.2x over the next 12 months.

In our base-case scenario, we forecast the following liquidity sources in the next 12 months:

- More than €2.4 billion of cash on balance sheet.

- About €250 million of cash FFO expected.

We assume the following liquidity uses over the next 12 months:

- Short-term debt of about €1.3 billion, including the drawn RCFs.

- About €200 million-€250 million of capex.

- Seasonal working capital requirements of up to €300 million.

- Dividends of about €50 million.

Issue Ratings - Recovery Analysis

Key analytical factors

- The €500 million senior unsecured bond due October 2024, €750 million senior unsecured bond due December 2025, and €250 million senior unsecured bond due January 2027 are rated 'BB-', the same level as the long-term issuer credit rating. The recovery rating on the bonds is '4', reflecting their unsecured and unguaranteed nature and their structural subordination to amounts of prior-ranking claims. We expect 30% recovery in the event of a payment default.

- The documentation for the bonds is broadly the same, with one incurrence covenant stipulating a minimum consolidated interest coverage ratio of 2.5x, and permitting debt of the issuer or material subsidiaries of up to 15% of consolidated assets. There is no restricted-payment covenant, but the documentation includes a €50 million cross-default threshold provision.

- In our hypothetical default scenario, we assume a prolonged economic downturn affecting the construction sector, combined with a decline in infrastructure projects and operational delays in completing existing ones, which would result in severe margin contractions. This, in our view, would reduce Webuild's ability to meet its debt obligations and would trigger a payment default in 2025.

- We value Webuild as a going concern, based on its strong brand value, market position, and global presence.

Simulated default assumptions

- Year of default: 2025

- Jurisdiction: Italy

- Emergence EBITDA (after recovery adjustments): €323 million

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- Implied enterprise value multiple: 5.0x

Simplified waterfall

- Gross recovery value: €1,613 million

- Net recovery value for waterfall after administrative expenses (7%): €1,500 million

- Estimated priority claims: €512 million

- Unsecured debt claims*: about €2,864 million

- Recovery range**: 30%-50% (rounded estimate 30%)

- Recovery rating: 4

*All debt amounts include six months of prepetition interest

Ratings Score Snapshot

Issuer Credit Rating: BB-/Stable/--

Business risk: Fair

- Country risk: Intermediate

- Industry risk: Moderately high

- Competitive position: Fair

Financial risk: Aggressive

- Cash flow/Leverage: Aggressive

Anchor: bb-

Modifiers

- Diversification/Portfolio effect: Neutral (no impact)

- Capital structure: Neutral (no impact)

- Liquidity: Adequate (no impact)

- Financial policy: Neutral (no impact)

- Management and governance: Fair (no impact)

- Comparable rating analysis: Neutral (no impact)

Related Criteria

- General Criteria: Group Rating Methodology, July 1, 2019

- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016

www.spglobal.com/ratingsdirect April 27, 2021 6 Research Update: Webuild S.p.A. 'BB-' Ratings Affirmed And Taken Off CreditWatch On Expected Credit Metrics Improvement; Outlook Stable

- Criteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016

- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014

- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

- General Criteria: Methodology: Industry Risk, Nov. 19, 2013

- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

- Italian Construction Group Webuild S.p.A. 'BB-' Rating Remains On CreditWatch Negative On Cash Flow Uncertainties, Aug. 10, 2020

- Salini Impregilo SpA 'BB-' Ratings Placed On CreditWatch Negative On Disappointing Operating Cash Flow, March 24, 2020

Ratings List

Ratings Affirmed; Outlook Action

To From

Webuild S.p.A.

Issuer Credit Rating BB-/Stable/-- BB-/Watch Neg/--

Senior Unsecured BB- BB-/Watch Neg

Recovery Rating 4(30%) 4(35%)

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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