I need to estimate Moody's adjusted leverage trend for 2022 by analyzing the financial data provided. First, let me understand what "Moody's adjusted leverage" typically refers to. Moody's adjusts financial statements to better reflect credit risk, typically: - Adding operating leases to debt - Adding pension liabilities to debt - Treating certain hybrid instruments as debt rather than equity - Making other adjustments to better reflect economic reality Let me calculate key leverage metrics from the data: **Balance Sheet Data (2022-01-01 vs 2023-01-01, which represents end of 2021 vs end of 2022):** Total Assets: €24,882M (2022-01-01) → €26,284M (2023-01-01) — increase of 5.6% Total Equity: €5,829M → €6,354M — increase of 9.0% Total Liabilities: €24,882M - €5,829M = €19,053M → €26,284M - €6,354M = €19,930M — increase of 4.6% **Key Debt Components:** Noncurrent Debt Securities and Bank Borrowings: - Infrastructure projects: €7,362M → €7,893M - Excluding infrastructure projects: €2,151M → €2,883M - Total noncurrent borrowings: €9,513M → €10,776M Current Debt Securities and Bank Borrowings: - Infrastructure projects: €47M → €74M - Excluding infrastructure projects: €1,049M → €803M - Total current borrowings: €1,096M → €877M Total Debt Securities and Bank Borrowings: €10,609M → €11,653M Other Noncurrent Financial Liabilities: €72M → €838M (significant increase) Lease Liabilities: - Noncurrent: €115M → €120M - Current: €58M → €64M - Total leases: €173M → €184M **Moody's Adjustments to Consider:** 1. **Operating Leases**: Already on balance sheet under IFRS 16 (Right-of-use assets: €176M → €183M, matching lease liabilities) 2. **Infrastructure project debt**: Moody's may consolidate proportionally or look at recourse vs non-recourse. The infrastructure project debt increased significantly. 3. **Hybrid instruments**: Need to check for perpetual subordinated bonds. I see "Perpetual Subordinated Bonds" of -€8M in 2022 and -€7M in 2021. These are typically treated as equity by IFRS but potentially as debt by Moody's. 4. **Pension liabilities**: Noncurrent provisions for employee benefits are minimal (€2-3M), so not material. **Key Ratios to Track:** Debt/EBITDA or Debt/Total Capital: Total reported debt (borrowings): €10,609M → €11,653M (increase of 9.8%) Total Capital (Equity + Debt): €5,829M + €10,609M = €16,438M → €6,354M + €11,653M = €18,007M Debt/Total Capital: 64.5% → 64.7% (relatively stable) But let's look more carefully at the earnings and cash flow picture: **Profitability:** - Profit Loss 2021-2022: €1,336M → €302M (significant decline) - Profit Loss Before Tax 2021-2022: €966M → €268M - Operating profit (Profit Loss From Operating Activities): €1,479M → €423M **Cash Flows:** - Operating cash flow: €810M → €1,002M (improved) - Investing cash flow: €457M → -€732M (deteriorated - more investments) - Financing cash flow: -€2,221M → -€316M (less debt repayment) **Critical Observations:** 1. **Debt increased significantly**: Total borrowings up from €10.6B to €11.7B (9.8% increase) 2. **Profits declined dramatically**: From €1,336M to €302M (77% decline) 3. **Infrastructure investments increased**: Investments in infrastructure projects went from €239M to €784M 4. **EBITDA coverage would weaken**: With lower profits but higher debt However, equity also increased (from €5,829M to €6,354M), partly due to: - Comprehensive income of €889M - Noncontrolling interests increasing significantly (from €1,790M to €2,241M) **Moody's Specific Adjustments Likely:** - Treat perpetual subordinated bonds as debt (small amount, ~€8M) - Possibly reclassify some hybrid equity as debt - Consolidate infrastructure SPVs more fully if they have significant Ferrovial support The key trend is: - Debt/EBITDA likely worsened due to lower earnings - Debt increased faster than equity on a gross basis - However, equity cushion improved absolutely Looking at the **trend in credit quality indicators**: - Interest coverage: Financial result worsened (-€335M to -€320M), but operating profits fell much more - The 2021 results had a large fair value gain (€1,014M in "Fair Value Adjustments Member" for Profit Loss Before Tax), making 2021 unusually high - 2022 "Before Fair Value Adjustments" profit was €312M vs -€47M in 2021, so underlying operating performance actually improved before fair value items Wait - let me re-read this. The 2021-2022 period shows: - Profit Loss Before Tax "Before Fair Value Adjustments": -€47M - With fair value adjustments: +€966M And 2022-2023: - Profit Loss Before Tax "Before Fair Value Adjustments": +€312M - With fair value adjustments: +€268M So the underlying operating performance actually **improved** from -€47M to +€312M before fair value adjustments. The 2021 number was boosted by €1,014M of fair value gains. This means **Moody's-adjusted EBITDA likely improved** because: 1. Underlying operating performance improved significantly 2. The 2021 base was artificially inflated by fair value gains that Moody's might adjust out 3. 2022 shows more sustainable, improved operating profitability However, debt levels did increase. Let me check debt/EBITDA more carefully: For 2022 (year ending 2023-01-01): - Operating profit before impairment: €429M - Add back amortization: €299M - Approx EBITDA: €728M (very rough) For 2021 (year ending 2022-01-01): - Operating profit before impairment: €340M - Add back amortization: €270M - Approx EBITDA: €610M Debt/EBITDA: - 2021: €10,609M / €610M = 17.4x - 2022: €11,653M / €728M = 16.0x This suggests leverage actually improved slightly on a debt/EBITDA basis! Also, the cash flow from operations improved (€810M to €1,002M), and the company reduced its financing cash outflow significantly, suggesting better cash flow management. The equity base grew faster than debt in percentage terms (9.0% vs 4.6% for total liabilities, or 9.8% for gross debt). Given: 1. Underlying operating profitability improved significantly (before fair value adjustments) 2. Debt/EBITDA likely improved or stayed stable 3. Equity cushion increased 4. Operating cash flow improved 5. The company is investing more in infrastructure (growth capex, not maintenance) The trend appears to be **Improving** or at worst **Stable**. The key is that the quality of earnings improved (less reliant on fair value gains), underlying operations are stronger, and the debt increase is funding growth investments rather than covering operating shortfalls. However, I need to be careful. Total debt did increase by €1B, and the infrastructure project debt (which is often non-recourse) increased substantially. If Moody's takes a more conservative view and treats more of this as corporate debt, leverage could look worse. But the standard Moody's approach for infrastructure companies typically: - Recognizes the ring-fenced nature of project debt - Focuses on corporate-level recourse debt - Adjusts for equity-accounted investments Corporate-level debt (excluding infrastructure projects): - 2022: €2,151M + €1,049M + €72M = €3,272M - 2023: €2,883M + €803M + €838M = €4,524M This increased by 38%, which is significant. But EBITDA at corporate level likely improved too. Given the mixed picture but generally improving underlying profitability and cash flow generation, with debt/EBITDA likely stable to improving: Stable