Engineering and Construction: Building a Stronger Global Industry

In contrast to the nadir of the mid to late 1980s, when overcapacity and excessive concentration in the petroleum-related markets of the Middle East produced severe stress within the industry when oil market prices fell, the credit quality of the larger firms in the global engineering and construction (E/C) industry is evolving toward fundamental stability. Certain industry changes and trends have recently triggered more frequent rating activity for E/C companies at Standard & Poor’s, an international credit-rating agency and publisher of financial information on the U.S. and foreign corporate and municipal debt obligations. Industry volatility is diminishing as higher rated participants more actively manage their project portfolios, avoiding geographic and end-user market segment concentrations that intensify risk. E/C companies are going beyond simply broadening the business base by widening the range of design and construction services offered. They are taking on responsibilities for project operation and management following completion, thus providing additional buffers from traditional industry cyclicity. However, the increasing tendency of E/C companies to take partial equity stakes in certain projects has increased the capital intensity of the business. Diversification strategies of higher rated companies are usually funded primarily by ample internal free cash flow generating abilities and generally build on existing core strengths rather than adding riskier new business legs. Thus, Standard & Poor’s believes that the continuation of these trends could lead to enhanced ratings stability or gradual improvement depending on individual company performance.