Moody’s Reduces Its Rating of Fluor Corp.’s Long-Term Debt
Moody’s Investors Service on Monday lowered its rating of Fluor Corp.’s long-term debt below what Wall Street analysts consider “investment grade” and placed a “below prime” rating on the company’s commercial paper.
The greater risk ratings are expected to make it more expensive for the giant Irvine-based natural resources and construction and engineering corporation to borrow funds in the future.
The downgrading came just three days after Fluor suspended its quarterly 10-cent dividend.
Moody’s, in explaining its reasons for downgrading of Fluor’s debt ratings, said that “pressures on (Fluor’s) earnings and cash flows are likely to continue for some time . . . although Fluor’s continuing core businesses have strong positions within their industries and have staying power.”
Moody’s predicted that Fluor, which has had two consecutive years of losses, will continue to have difficulty making money, despite attempts by its engineering and construction units to pursue industrial and service work to replace the oil-related projects that were Fluor’s mainstays several years ago.
Rob McCreary, associate director of basic industries at Moody’s, said the general construction and engineering area on which Fluor is refocusing its efforts already is crowded, with “many companies competing for a smaller base of business.”
Additionally, Moody’s said Fluor’s mining segment “has not yet shown any meaningful rebound” because of low prices, particularly for lead and zinc, even though its gold mining operations show promise and coal has regained profitability.
David S. Tappan Jr., Fluor’s chairman and chief executive, said in a prepared statement that the company was “disappointed Moody’s has chosen to reduce the company’s debt rating. We said a year ago that Fluor’s recovery would be both gradual and uneven, and that pattern is continuing.”
The dividend suspension announced Friday is designed to save nearly $32 million annually for the company, which posted a loss of $60.4 million on sales of $4.66 billion in its latest fiscal year ended Oct. 31. The company said it wanted to use the savings to acquire other engineering and construction companies and to accelerate its gold production.
Moody’s downgraded to BA2 from BAA3 Fluor’s publicly traded debt securities, such as senior notes, Eurobonds, pollution control bonds and industrial revenue bonds.
In analyzing Fluor’s ability to repay its debts, Moody’s has redesignated Fluor’s long-term debt from a “medium-grade obligation” to a “security with certain speculative elements,” McCreary said.
Fluor’s commercial paper rating was lowered from Prime-3 to Not Prime.
The combination of the suspended dividend and lowered debt rating caused the selling price of Fluor’s common stock to tumble to $14 per share at the close of trading Monday on the New York Stock Exchange, down $1.375 from Friday’s close.
Flour spokesmen said it is the fourth time that Moody’s has downgraded Fluor’s debt rating since the first comprehensive debt review of Fluor was under taken in 1981 in connection with Fluor’s borrowing of $1 billion to finance the $1.2-billion purchase of St. Joe Minerals Corp.
Fluor officials said the new Moody’s rating will not affect the $390 million in public debt that Fluor currently holds because the interest rates on that debt are fixed. While the new rating would require Fluor to pay higher interest on similar borrowings in the future, Tappan said “the company has no current need or plan to issue new debt.”
Moody’s said “Fluor has reduced its debt from the peaks reached following the 1981 acquisition of St. Joe Minerals through asset sales and major sale-leaseback transactions. However, major write-offs and operating losses in the past two years have eroded Fluor’s equity base. On balance, Fluor’s capital structure is still quite leveraged.”
Meanwhile, Fluor’s debt continues to have a higher rating from Standard & Poor’s. Joe Hynes, Standard & Poor’s vice president of industrial ratings, said, “We downgraded Fluor in the summer of last year from A minus to triple B plus,” which he added is still significantly higher than the Moody’s rating. He said that Standard & Poor’s has no immediate plans to further lower its rating of Fluor’s long-term debt but that it will continue to watch the company.
Hynes said it is “not a particularly healthy sign” that Fluor “has to suspend dividends to finance capital spending and growth programs. It is not something you would typically see a company in a strong position do or want to do.”
