PARIS (Reuters) - Credit ratings agency Standard & Poor's has put French nuclear power engineering group Areva on "creditwatch negative" and will decide within 30 days whether to downgrade its credit ratings by one notch into non-investment grade territory.
A downgrade into the junk category would make its shares and bonds unattractive for investment funds who only seek investment-grade securities, but Areva's finance chief said the firm was not worried about its liquidity or borrowing costs.
Areva's BBB- long-term issuer rating from S&P has been hovering above junk status since December 2011, when it was downgraded two notches from BBB+. S&P made that downgrade after Areva booked a 2.4 billion-euro ($3.2 billion) charge for project delays and canceled orders in the wake of Japan's Fukushima nuclear disaster.
"In view of the deteriorated operating performance and forecast negative free cash flow over 2014-2015, we currently believe a downgrade of one notch is possible," S&P said in a statement.
On Aug. 1 Areva AREVA.PA shocked investors with a 694 million-euro loss caused by disappointing nuclear revenue, a writedown on its withdrawal from a solar power business, and a cut in its 2014-2016 core earnings and cash flow targets.
Its stock fell 20 percent that day, the worst fall since Areva was formed in 2001.
S&P said it believed there was an increased possibility Areva would post more negative free cash flows, despite its decision to curb capital expenditures, and that net debt may materially increase over 2014-2015.
The agency said it will make its ratings decision after further discussions with management and with the firm's state shareholder, to assess whether any measures will be made to limit net debt increases.
Areva Chief Financial Officer Pierre Aubouin told reporters that even in the worst-case scenario of a downgrade, Areva had no concerns regarding its liquidity position and financing structure.
"We do not see a significant impact of a possible downgrade on our cost of borrowing," Aubouin said on a conference call.
He reiterated that Areva had 2.3 billion euros of net cash available, plus a 2-billion euro undrawn credit line. Areva has relatively modest debt repayment needs of around 300 million euros this year and next. But it has to pay down more than 1.2 billion euros in 2016 and more than 800 million euros in 2017.
To shore up its balance sheet, Areva has several options: it could sell more assets, further cut costs and investments or hope for an improvement of business conditions in the nuclear sector to boost its profits.
In the current depressed nuclear market, an improvement in business conditions is not looking likely. And if Areva cannot cut costs and investments quickly enough, the French state, which owns an 87-percent stake, could be forced to inject hundreds of millions of euros into the firm to boost its balance sheet.
"Depending on what the company and the government would do to contain net debt, this could have a rating impact. In order to offset the expected negative free cash flow, significant cash inflows would be needed to prevent net debt increases over 2014-2015," S&P analyst Lucas Sevenin said.
For the cash-strapped French state, which is struggling to meet its deficit targets as it fights rising unemployment, injecting more cash in the firm would be a challenge.
Sevenin had told Reuters last month Areva's outlook was no longer in line with S&P's assumptions for the firm.
Areva shares closed 1.8 percent lower on Tuesday, underperforming the wider market, which was down 0.5 percent. The shares are down 36 percent since the start of the year.
Reporting by Geert De Clercq; Editing by Greg Mahlich and Keiron Henderson