The Italian parent company of one of the largest contractors working on the Honolulu rail project now has a credit rating just above junk-bond status, and officials with the Honolulu Authority for Rapid Transportation want assurances that that won’t affect the $5.26 billion project.
A report by Fitch Ratings on Thursday noted that Italian defense and aerospace company Finmeccanica SpA is struggling with large amounts of debt and reductions in defense spending in its primary markets, which include Europe and the United States.
Those factors contributed to a negative long-term credit outlook rating for the firm in the latest Fitch credit review, with Fitch giving the company a BBB- rating.
Finmeccanica is the parent of rail transportation firms AnsaldoBreda and Ansaldo STS, which together make up the joint venture called Ansaldo Honolulu JV.
Ansaldo Honolulu holds the largest single contract in city history, a $1.4 billion agreement to construct train cars as well as design and build the high-tech driverless operating system. The company will also run and maintain the system until at least 2024.
HART Finance Committee Chairman Don Horner on Thursday asked that the city bring top Ansaldo executives to Honolulu to discuss company finances.
The proposed HART budget for fiscal year 2014 includes nearly $426 million for equipment purchases with much of that money earmarked for Ansaldo to begin building rail cars. Horner said he wants to hear from Ansaldo executives before the city issues notices to proceed on that work.
"As stated at our finance committee meeting and board, HART will not proceed with budgeted equipment purchases from (the) vendor until we receive an overall management update which will be a public meeting," Horner said Saturday in an emailed response to questions.
A spokesman for HART said no date has been set for that meeting.
Concerns about Finmeccanica’s financial condition last year prompted HART to delay awarding the contract to Ansaldo Honolulu, but the city eventually finalized the agreement.
HART Executive Director Daniel Grabauskas said the latest news about Finmeccanica is not expected to effect the city’s project.
"HART continues to work closely with contractor Ansaldo Honolulu Joint Venture on design work for the rail project’s core systems contract, which includes the train cars and train control center," Grabauskas said in a written statement.
Moody’s Investors Service last month lowered its rating for Finmeccanica to Baa3, which is also one notch above junk-bond status. Moody’s cited concerns about Finmeccanica’s debt as well as a weak European economic environment and reductions in international defense spending.
The Fitch rating report cited concerns about delays in Finmeccanica’s restructuring plans, an effort that may include selling the company’s energy division and transportation operations.
Published reports indicate Finmeccanica has been in talks with Hitachi Ltd. of Japan about the sale of AnsaldoBreda and Ansaldo STS but has not announced a deal to sell either company.
BOTH companies continue to do business, with AnsaldoBreda announcing this month it had won a $313 million contract with Miami-Dade County, Fla., to produce 136 rail cars. Ansaldo STS announced earlier this month it had won a $19.7 million train signaling contract in Perth, Australia.
Horner said that HART is "closely monitoring any change of ownership."
"The primary vendor is Ansaldo STS, which has 85 percent of our contracts," he said. "They remain profitable with increased revenues and maintain a world leader position in rail core systems with major operations in the U.S., which is where the majority of our equipment is to be manufactured, which is a federal funding mandate."
Ansaldo STS is a publicly traded company independent of Finmeccanica, which is a 40 percent shareholder of Ansaldo STS, he said.
"Additionally, the board was informed our contracts are structured such that any potential ownership change would not release our surety performance bonds nor the corporate guarantees" to complete the project, Horner wrote.
Finmeccanica’s restructuring plan was announced last year, and assets were supposed to be sold this year, but that effort "appears to have slipped somewhat behind schedule," the Fitch report said.
"Fitch believes that for Finmeccanica to maintain its investment-grade status, asset disposals of the magnitude publicly targeted by the company will need to be announced over the coming several months in order to improve the presently high leverage levels," Fitch said.
Finmeccanica chief Giuseppe Orsi has also been the subject of an investigation of allegations that bribes were paid to secure a $724 million helicopter contract with India. Orsi has denied any wrongdoing, but Fitch said its could downgrade its assessment of Finmeccanica if there are "significant adverse findings in the corruption investigation pertaining to present members of management."
Despite those problems, Horner pointed out that the Moody’s assessment described Finmeccanica’s outlook as "stable," in part because the company is part-owned by the Italian government and has "the benefit of ongoing sovereign support."
But the same report notes that Moody’s analysts decided to downgrade Finmeccanica’s credit rating Oct. 25 in part because Moody’s had downgraded the bond rating for the Italian government.
The rail contract requires Ansaldo Honolulu to design and build 80 rail cars for $574 million. The company will also handle interim operations and maintenance for the system during construction for an additional $167 million, and will provide regular operation and maintenance for the rail system for five years after it becomes fully operational, for an additional $339 million.
The city has an option to extend the operations and maintenance contract for Ansaldo for five years, from 2024 to 2029, for an additional $317.6 million.
