# Analysis of Acciona SA Credit Trend (2021-2022) ## Step 1: Identify Relevant Industry Acciona SA is a diversified infrastructure company operating across multiple segments: - Renewable energy (wind, solar) - Water management - Transportation infrastructure (concessions, roads) - Construction - Other infrastructure services Based on the business description and S&P methodology options provided, **Acciona fits multiple categories**: - **Primary: Transportation Infrastructure & Unregulated Power/Renewable Energy** (significant renewable generation assets) - **Secondary: Regulated Utilities** (water operations) Given the diversified nature, I will apply a **blended approach** focusing on: - Infrastructure company metrics with emphasis on leverage and cash flow generation - Adjustments for leases (material for infrastructure concessions) - Treatment of equity-accounted investments (JVs significant at ~1.3-1.7B EUR) --- ## Step 2: Calculate 2021 Adjusted_EBITDA **From P&L for 2021-01-01 to 2022-01-01:** | Item | Amount (EUR M) | |------|-----------------| | Revenue | 8,104 | | Operating Profit (EBIT) | 829 | | Depreciation & Amortization | 714 | | **Reported EBITDA (approx)** | **1,543** | **Adjustments per S&P methodology:** 1. **Lease adjustments**: Noncurrent lease liabilities (2022-01-01) = 430M; Current lease liabilities = 68M - Implied annual lease expense ≈ 90-100M (from lease payments in cash flow) 2. **Nonrecurring items**: - Impairment gains: +67M (reversal of impairment = benefit) - Other gains/losses: -7M - Net adjustment: +60M 3. **Joint Venture proportional EBITDA**: - Share of profit/loss of associates (negative): -81M - This represents a drag; no proportional consolidation adjustment needed under IFRS 4. **Pension adjustments**: Immaterial based on data provided **2021 Adjusted_EBITDA Calculation:** ``` Reported EBITDA: 1,543 + Lease adjustment (est): +100 + Nonrecurring gains net: +60 - JV drag impact (est): -40 _________________________________ 2021 Adjusted_EBITDA: 1,663 EUR M ``` --- ## Step 3: Calculate 2021 FFO **FFO = Adjusted_EBITDA - cash_interest - cash_taxes** From cash flow statement (2021-01-01 to 2022-01-01): - Interest paid (operating): 206M - Income taxes paid: 82M ``` 2021 Adjusted_EBITDA: 1,663 - Cash interest paid: (206) - Cash taxes paid: (82) _________________________________ 2021 FFO: 1,375 EUR M ``` --- ## Step 4: Calculate 2021 Adjusted_Debt **From balance sheet as of 2022-01-01 (year-end 2021):** | Item | Amount (EUR M) | |------|-----------------| | Noncurrent loans | 2,073 | | Current loans | 280 | | Noncurrent bonds/securities | 2,364 | | Current bonds/securities | 1,666 | | Lease liabilities (noncurrent) | 430 | | Lease liabilities (current) | 68 | | **Gross Debt** | **6,881** | | Less: Cash and equivalents | (2,318) | | Less: Short-term investments | (202) | | **Net Debt** | **4,361** | **Adjustments per methodology:** - Leases are typically captured in reported debt; no additional adjustment needed - No significant pension deficit disclosed - Hybrid instruments: Included in securities line items ``` Reported Debt (total): 6,881 + Lease adjustment: 0 (already captured) - Cash and equivalents: (2,318) - ST investments: (202) _________________________________ 2021 Adjusted_Debt: 4,361 EUR M ``` --- ## Step 5: Calculate 2021 Leverage Ratio ``` 2021 Adj Debt / Adj EBITDA = 4,361 / 1,663 = 2.62x ``` --- ## Step 6: Calculate 2021 FFO/Debt Ratio ``` 2021 FFO / Adj Debt = 1,375 / 4,361 = 0.316 or 31.6% ``` --- ## Step 7: Calculate 2022 Adjusted_EBITDA **From P&L for 2022-01-01 to 2023-01-01:** | Item | Amount (EUR M) | |------|-----------------| | Revenue | 11,195 | | Operating Profit (EBIT) | 1,334 | | Depreciation & Amortization | 762 | | **Reported EBITDA (approx)** | **2,096** | **Adjustments per S&P methodology:** 1. **Lease adjustments**: Lease payments (2023) ≈ 120M - Annual lease expense ≈ 110-120M 2. **Nonrecurring items**: - Impairment reversal: +15M - Other gains/losses: +13M - Net adjustment: +28M 3. **Joint Venture proportional EBITDA**: - Share of profit/loss of associates: -194M (increased drag) 4. **Equity-method investment growth**: - Investment balance grew from 1,325M to 1,730M (+405M) - This indicates significant capital deployed; negative share of profits suggests challenges **2022 Adjusted_EBITDA Calculation:** ``` Reported EBITDA: 2,096 + Lease adjustment (est): +115 + Nonrecurring gains net: +28 - JV drag impact (est): -97 _________________________________ 2022 Adjusted_EBITDA: 2,142 EUR M ``` --- ## Step 8: Calculate 2022 FFO **FFO = Adjusted_EBITDA - cash_interest - cash_taxes** From cash flow statement (2022-01-01 to 2023-01-01): - Interest paid (operating): 209M - Income taxes paid: 215M ``` 2022 Adjusted_EBITDA: 2,142 - Cash interest paid: (209) - Cash taxes paid: (215) _________________________________ 2022 FFO: 1,718 EUR M ``` --- ## Step 9: Calculate 2022 Adjusted_Debt **From balance sheet as of 2023-01-01 (year-end 2022):** | Item | Amount (EUR M) | |------|-----------------| | Noncurrent loans | 2,624 | | Current loans | 553 | | Noncurrent bonds/securities | 3,101 | | Current bonds/securities | 1,139 | | Lease liabilities (noncurrent) | 439 | | Lease liabilities (current) | 72 | | **Gross Debt** | **7,928** | | Less: Cash and equivalents | (2,360) | | Less: Short-term investments | (462) | | **Net Debt** | **5,106** | ``` Reported Debt (total): 7,928 + Lease adjustment: 0 (already captured) - Cash and equivalents: (2,360) - ST investments: (462) _________________________________ 2022 Adjusted_Debt: 5,106 EUR M ``` --- ## Step 10: Calculate 2022 Leverage Ratio ``` 2022 Adj Debt / Adj EBITDA = 5,106 / 2,142 = 2.38x ``` --- ## Step 11: Calculate 2022 FFO/Debt Ratio ``` 2022 FFO / Adj Debt = 1,718 / 5,106 = 0.336 or 33.6% ``` --- ## Step 12: Classify Credit Trend ### Signal 1: Leverage Change ``` Change in Leverage = 2.38x - 2.62x = -0.24x Assessment: ≤ -0.2x → IMPROVING ``` **Note**: Leverage improved by 240 basis points, exceeding the -0.2x threshold. ### Signal 2: Cash Flow Coverage Change ``` Change in FFO/Debt = 0.336 - 0.316 = +0.020 = +2.0 percentage points Assessment: between -0.03 and +0.03 (exclusive) → STABLE ``` **Note**: FFO coverage improved modestly but fell short of the +0.03 threshold. ### Combining Signals - **Signal 1 (Leverage)**: Improving (-0.24x) - **Signal 2 (FFO Coverage)**: Stable (+0.020) Per the methodology: "*If one is Stable and the other is Improving or Deteriorating, return the non-Stable category.*" ### Context & Reasoning **Supporting improvement narrative:** 1. **Revenue growth**: +38% YoY (8.1B → 11.2B), demonstrating strong operational performance and market position 2. **EBITDA growth**: +29% YoY (1.7B → 2.1B), reflecting operational leverage and efficiency gains 3. **Leverage reduction**: Despite gross debt increase from 6.9B to 7.9B (+1.0B), adjusted debt/EBITDA improved significantly due to EBITDA growth substantially outpacing debt expansion 4. **FFO improvement**: +25% YoY (1.4B → 1.7B), indicating stronger cash generation capability 5. **Strategic positioning**: Renewable energy and infrastructure operations positioned well for long-term growth **Mitigating concerns:** - JV losses increased from 81M to 194M, indicating challenges in equity-accounted investments - Absolute debt levels increased materially (+1.1B gross debt) - FFO coverage improvement was modest (+2 percentage points vs. +3pp threshold) - Tax payments surged to 215M, reducing FFO despite higher profits **Magnitude assessment:** - Leverage improvement magnitude: -0.24x is notably beyond the -0.2x threshold (20% more improvement than threshold) - FFO coverage change magnitude: +0.020 is 67% of the +0.03 threshold; close but within the Stable band The leverage signal is material and exceeds thresholds comfortably, while the FFO coverage change is incremental. Given that one signal is decisively improving and the other merely stable (not conflicting/deteriorating), the proper classification is **Improving**. Improving