Fitch downgrades CRH credit rating over long-term debt default risk

INTERNATIONAL RATINGS agency Fitch said yesterday that there was an increased risk that building materials group CRH could default on unsecured long-term debt.

The agency re-rated the Irish company’s senior unsecured debt from BBB+ to BBB, but changed the outlook for the group from “negative” to “stable”.

The rating means that Fitch still classes CRH as satisfactory, and the agency said it reflects its position as a major building materials group with strong geographic and product diversification.

A downgrade in a company’s credit rating could result in it paying higher interest on future borrowings to compensate lenders for increased risk.

Fitch said weak trading conditions and low operating margins could prevent CRH’s creditworthiness from returning to BBB+ levels when the building industry improves and the Irish company returns to “significant acquisition activity”, which the agency defined as spending €1.5 billion a year or more on buying up other businesses.

Its statement noted that the Irish group had been cautious about spending money on acquisitions this year, and committed just €159 million on 13 small purchases in the first six months of 2010. The agency pointed out that CRH had a good track record in generating cash flow from its operations and absorbing any acquisitions it does make into the overall group.

“Further restructuring measures in 2010 – costing €58 million to implement – are expected to result in annualised savings of €220 million and should give the group additional flexibility when demand improves,” Fitch said.

CRH recently reported that pretax profits in the first half fell 77 per cent to €25 million and warned that earnings would not reach levels it had predicted in an earlier trading statement.

The Irish company’s most significant businesses are in the US, where it had hoped that a pick-up in public building projects such as highway construction, backed by federal spending, would help turnaround its business there this year.

However, that pick-up has not materialised and Fitch warned yesterday that infrastructure activity in the US could be lower next year.

CRH’s net debt was €4.7 billion at the end of June. Around €1.1 billion of this is has to be repaid by 2012. It has around €1.1 billion in cash available to it while its banks have committed to loaning it a further €1.5 billion which it has yet to draw down.