I'll work through this step-by-step. ## Step 1: Identify the relevant industry Ferrovial SA is a global infrastructure company with major operations in toll roads (managed lanes), airports (e.g., Heathrow), construction, and other infrastructure. Based on the data, we can see significant "Investments in Infrastructure Projects" and the company operates transportation infrastructure concessions. The most relevant methodology is **Transportation Infrastructure**. However, Ferrovial is a diversified group with construction and infrastructure project investments. I'll apply the Transportation Infrastructure methodology where applicable, but use general corporate approaches for the consolidated entity. ## Step 2: Estimate 2021 Adjusted EBITDA **Fiscal year 2021** = period 2021-01-01 to 2022-01-01 Starting with operating profit from continuing operations: - Profit from Operations before Impairment and Disposals = 340M EUR - Add back Amortisation/Depreciation = 270M EUR - **EBITDA (continuing) = 340 + 270 = 610M EUR** Add discontinued operations gross profit: 332M EUR (this represents EBITDA-like contribution from discontinued ops) **EBITDA including discontinued = 610 + 332 = 942M EUR** However, let me focus on continuing operations for consistency. S&P adjustments: - **Lease adjustment**: Add back lease payments as operating expense (already in EBITDA). Add lease depreciation component. Lease liabilities (2022-01-01): Current 58M + Noncurrent 115M = 173M. Cash outflow for leases = 131M. This is already captured in the right-of-use asset depreciation within the 270M amortization. - **Nonrecurring gains**: The 2021 period had a large gain on disposal of non-current assets = 1,139M (includes fair value adjustments of 1,101M). This should be removed. - **Equity method adjustments**: Share of profit/loss of associates = -178M (loss) Adjusted EBITDA (continuing operations): - EBITDA = 610M - Remove nonrecurring gain from disposals: The 1,139M gain was below EBITDA line (in impairment/disposals line), so it doesn't affect EBITDA calculation above. Actually, let me recalculate more carefully: - Gross Profit = 610M (this is Revenue + Other Income - Operating Expenses) - This IS the EBITDA before D&A: Gross Profit = 610M, then subtract amortization 270M = operating profit before impairment 340M So **EBITDA (continuing) = 610M EUR** S&P lease adjustment: Operating lease expense needs to be added back. The cash outflow for leases was 131M in 2021. The right-of-use depreciation is embedded in the 270M. For S&P, we add the full lease payment back and treat leases as debt. Since EBITDA already includes lease depreciation in D&A addback, and operating lease expense is in operating costs, the S&P EBITDA adjustment adds back the implicit interest portion of leases. Simplified approach: S&P Adjusted EBITDA ≈ EBITDA + interest portion of leases - Approximate interest on leases: ~5% × 173M ≈ 9M **Adjusted EBITDA 2021 ≈ 610 + 9 ≈ 619M EUR** Including discontinued operations contribution for a fuller picture: +332M = 951M, but I'll use continuing operations EBITDA primarily since S&P typically looks at the ongoing business. However, Ferrovial's discontinued operations (likely Amey/Services) were still generating cash in 2021. Let me include them. **Adjusted EBITDA 2021 ≈ 942 + 9 ≈ 951M EUR** (with discontinued) Let me use continuing operations only for cleaner analysis: **~619M EUR** Actually, for S&P credit analysis of the consolidated entity, they would include all cash-generating operations. Let me use the cash flow statement as a cross-check: From cash flows: - Operating cash flow = 810M - Add back taxes paid: 155M - Add back interest paid: 295M - Add back working capital changes: -249M (decrease WC increased cash, so subtract) - Subtract dividends received: -272M - **Approximate EBITDA = 810 + 155 + 295 - 249 - 272 = 739M** This includes discontinued operations effects. Let me use this as a better proxy. **Adjusted EBITDA 2021 ≈ 739 + 9 (lease interest) ≈ 748M EUR** ## Step 3: Estimate 2021 FFO FFO = Adjusted EBITDA - cash interest - cash taxes - Cash interest paid = 295M EUR - Cash taxes paid = 155M EUR - Lease interest adjustment (already counted): ~9M added to EBITDA **FFO 2021 = 748 - 295 - 155 = 298M EUR** ## Step 4: Estimate 2021 Adjusted Debt Balance sheet at 2022-01-01 (end of fiscal 2021): Reported debt: - Noncurrent borrowings: 9,513M - Current borrowings: 1,096M - **Total reported debt = 10,609M** S&P adjustments: - Lease liabilities: Current 58M + Noncurrent 115M = 173M - Pension deficit: Noncurrent provisions for employee benefits = 3M - Other noncurrent financial liabilities: 72M - Hybrid debt (perpetual subordinated bonds): 507M × 50% = 254M (S&P typically treats ~50% as debt) - Surplus cash deduction: Cash ex-infrastructure projects = 5,329M. S&P typically deducts surplus cash but may limit this. For infrastructure companies, cash trapped in project SPVs is not freely available. Infrastructure project cash = 207M (restricted + other). Let me deduct only the ex-infrastructure cash, with some haircut. S&P might keep some operating cash buffer. Conservative: deduct ~75% of ex-infrastructure cash = 3,997M. Actually, S&P is typically conservative about cash netting for infrastructure holding companies. Let me be more conservative and only net a portion. Ferrovial has significant infrastructure project debt that is non-recourse. Let me net a more moderate amount. Total ex-infrastructure cash = 5,329M. S&P might allow netting against ex-infrastructure debt. Ex-infrastructure debt: Noncurrent 2,151M + Current 1,049M = 3,200M. The excess cash over ex-infrastructure needs suggests significant cash availability, but S&P may not net all of it. Let me take a simpler approach: Net 50% of total cash as "excess": - Total cash = 5,536M, net 2,768M **Adjusted Debt 2021 = 10,609 + 173 + 3 + 72 + 254 - 2,768 = 8,343M EUR** ## Step 5: 2021 Adjusted Debt / Adjusted EBITDA **8,343 / 748 = 11.2x** ## Step 6: 2021 FFO / Adjusted Debt **298 / 8,343 = 3.6%** ## Step 7: Estimate 2022 Adjusted EBITDA **Fiscal year 2022** = period 2022-01-01 to 2023-01-01 From continuing operations: - Gross Profit = 728M (EBITDA before D&A) - Amortisation = 299M - Operating profit before impairment = 429M EBITDA continuing = 728M From cash flow statement: - Operating cash flow = 1,002M - Add back taxes paid: 82M - Add back interest paid: 329M - Add back working capital changes: -83M - Subtract dividends received: -284M - **Approximate EBITDA = 1,002 + 82 + 329 - 83 - 284 = 1,046M** Lease interest: ~5% × (120+64) = ~9M **Adjusted EBITDA 2022 ≈ 1,046 + 9 ≈ 1,055M EUR** ## Step 8: Estimate 2022 FFO - Cash interest = 329M - Cash taxes = 82M **FFO 2022 = 1,055 - 329 - 82 = 644M EUR** ## Step 9: Estimate 2022 Adjusted Debt Balance sheet at 2023-01-01: Reported debt: - Noncurrent borrowings: 10,776M - Current borrowings: 877M - **Total reported debt = 11,653M** S&P adjustments: - Lease liabilities: 64 + 120 = 184M - Pension: 2M - Other noncurrent financial liabilities: 838M - Hybrid: 508M × 50% = 254M - Cash netting: Total cash = 5,130M. Ex-infrastructure = 4,962M. Net 50% of total = 2,565M **Adjusted Debt 2022 = 11,653 + 184 + 2 + 838 + 254 - 2,565 = 10,366M EUR** ## Step 10: 2022 Adjusted Debt / Adjusted EBITDA **10,366 / 1,055 = 9.8x** ## Step 11: 2022 FFO / Adjusted Debt **644 / 10,366 = 6.2%** ## Step 12: Classify the credit trend **Signal 1: Leverage change** - 2022: 9.8x vs 2021: 11.2x - Change = 9.8 - 11.2 = -1.4x - ≤ -0.2x → **Improving** **Signal 2: FFO/Debt change** - 2022: 6.2% vs 2021: 3.6% - Change = 0.062 - 0.036 = +0.026 - Between -0.03 and +0.03 → **Stable** (just barely below +0.03 threshold) **Combining signals:** - Signal 1: Improving (significantly, -1.4x) - Signal 2: Stable (close to Improving at +2.6pp) When one signal is Stable and the other is non-Stable, we return the non-Stable category. The leverage improvement is very significant (-1.4x vs -0.2x threshold), driven by higher EBITDA and operational improvement. The FFO/Debt also improved meaningfully though just under the threshold. Improving