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Downer's finances at critical juncture January 25, 2011 - 12:20PM

Exclusive: On Thursday morning Downer Group shareholders can expect to wake up to a provision of more than $150 million and if ratings agency Fitch decides to downgrade its credit rating, the company will also be forced to go to the market and raise capital.

It is understood that investment bank UBS is working with Downer boss Grant Fenn on the size of the company's provision, and the size and type of capital raising should Finch pull the trigger and cut its debt rating.

Downer went into a trading halt mid-yesterday after information was brought to the attention of Fenn and the board relating to a technical issue relating to the testing of the trains in its $1.9 billion Waratah train building project with the NSW Government.

Advertisement: Story continues below This is a big moment for Fenn and Downer in terms of credibility and reputation. After this latest shock announcement, the company cannot afford any more stuff-ups or delays.

Fenn also has his credibility on the line. He will need to detail to the market a revised production schedule and project costs - and this time make sure there are no more issues with a project that has dogged the company since it was signed.

Downer has a 49 per cent stake in the (unfortunately named) Reliance Rail consortium, which has a 40-year contract to build and maintain 78 car trains for Sydney in a public private partnership with the NSW government.

Downer made a $190 million provision relating to the Waratah train project on June 1, of which $40 million is related to a contingency to cover liquidated damages due to the late delivery of the first train set. That $40 million has now been blown and the company is expected to announce a further provision of more than $150 million on Thursday. This provision relates to the other 77 train sets and how late they are now expected to be.

The company is believed to be doing the final numbers on the size of the provision, which includes estimating how many months the trains are expected to be delayed.

But the company will face another blow if Fitch decides to downgrade its ratings. In its last ratings report it said if there were delays to the trainsets this would have a big influence on its rating. If there is a downgrade, the company will have no option but to raise capital. The size is expected to be $100 million, but it could be more.

CBA analyst Ben Brownette said in a note that he doesn't expect Fitch to downgrade Downer any time soon.

?In Fitch's (and the banks) view, should additional contract-related cash payments from Downer to the vehicle materialise, then Fitch is confident these can be accommodated within its BBB- ratings triggers, in part because it treats those payments as non recurring and strips them out of earnings," he said.

"As a result, despite Reliance Rail proving a material hit to Downer's 2010 earnings and now perhaps 2011, the impact is limited to the change on its balance sheet debt levels. On this basis, further cash losses can be accommodated within the existing ratings parameters.?

Fenn ? and Downer's shareholders - will hope Brownette is right. Right now negotiations are fierce.

Thoughts on this guys?