Investing.com -- S&P Global Ratings has upgraded Sabre (NASDAQ: SABR ) Industries Inc.’s credit rating to ’B’ from ’B-’, citing the company’s continued improvement in leverage. The ratings agency also raised the debt rating for the company.

The upgrade is backed by Sabre’s ability to sustain an adjusted leverage of about 5x, which is supported by increased backlogs and resilient demand even amid challenging macroeconomic conditions. Over recent quarters, Sabre has shown profitability improvements and higher sales volumes from new orders, leading to significant earnings growth. The company’s efforts to reduce its debt have resulted in an improved adjusted leverage of 4.x-5x.

The company’s credit quality has improved due to its ability to lower its leverage so that adjusted leverage is sustained at about 5x, a decrease from the previous expectation of about 7x. By the end of fiscal 2025, Sabre is expected to record 3%-5% higher revenues, 20% higher adjusted earnings, and about 300 basis points (bps) higher adjusted EBITDA margins compared to fiscal 2024.

The substantial improvement in earnings and adjusted EBITDA margins, combined with the company’s debt-reduction efforts using free cash, have resulted in adjusted leverage improving to the 4.5x-5x range. This is about 2x lower than the previous expectation of about 7x.

Despite potentially challenging business conditions over the next 12 months, the company is expected to sustain credit measures that align with the higher rating, specifically an adjusted leverage of about 5x.

Sabre’s products are expected to continue benefiting from long-term favorable growth drivers of infrastructure demand. The company’s growing order backlogs provide confidence regarding revenue and earnings over the next few years. Despite generally challenging macroeconomic and business conditions, demand for Sabre’s products remains somewhat resilient due to ongoing investments in infrastructure projects for grid hardening, 5G network buildout, and green energy projects.

The company is expected to generate healthy free cash and maintain adequate liquidity. Solid earnings are expected to continue to drive strong cash generation. Reduced interest costs from capital cost optimization efforts over the past 12 months are likely to further boost operating cash flows. This, combined with modest capital expenditures, is likely to result in free cash that could be used towards upcoming debt maturities, inorganic growth, or shareholder returns.

The stable outlook on Sabre Industries reflects the expectation that the company will maintain an adjusted leverage of about 5x and EBITDA interest coverage of at least 2x over the next 12 months, even as macroeconomic and operating conditions remain difficult.

S&P Global Ratings could lower ratings on Sabre within the next year if adjusted earnings decline by over 35%, causing leverage to rise above 7x and EBITDA interest coverage to decline closer to 1.5x. This could happen if a severe downturn drastically reduces demand for the company’s products or if cost inflation that could not be passed on compresses adjusted EBITDA margins by more than 550 bps.

An upgrade could be possible if the adjusted debt to EBITDA improves to well below 5x and those levels can be sustained through most market conditions, and if the financial sponsor demonstrates a commitment to maintaining this level for multiple years.

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