May 30, 2012 / 7:43 PM / 5 years ago

TEXT-S&P affirms Mobile Mini Inc

Overview	
     -- We expect Mobile Mini Inc., a lessor of portable storage units
and mobile office units, to gradually improve its financial profile with modest 	
earnings growth and continued debt paydown.	
     -- We are affirming all ratings, including our 'BB-' long-term corporate 	
credit rating, on the company. 	
     -- The stable outlook reflects our expectations that the company's 	
financial profile will stay within the range we consider acceptable for the 	
rating while earnings improve modestly.	
	
Rating Action	
On May 30, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' 	
corporate credit rating on Tempe, Ariz.-based portable storage units and 	
mobile office units leasing company Mobile Mini Inc. The outlook remains 	
stable.	
	
At the same time, we affirmed our 'B+' rating (one notch below the corporate 	
credit rating) on the senior unsecured notes. The '5' recovery rating, 	
indicating our expectations that lenders would receive a modest (10%-30%) 	
recovery in the event of a payment default, is unchanged. 	
	
Rationale	
The ratings on Mobile Mini reflect its narrow operations (the leasing and sale 	
of portable storage units and mobile office units) and its exposure to 	
cyclicality in certain end markets. Somewhat offsetting these weaknesses are 	
the company's leading market position and relatively stable earnings and cash 	
flow. We categorize Mobile Mini's business risk profile as "fair," its 	
financial risk profile as "aggressive," and its liquidity as "adequate" under 	
our criteria.	
	
Mobile Mini is the only national lessor of portable storage units in an 	
otherwise fragmented industry in the U.S. The company also has a dominant 	
market position in the U.K. and limited operations in the Netherlands and 	
Canada. Leasing portable storage units provides a flexible, low-cost, and 	
convenient alternative to permanent warehouse space and self-storage sites. In 	
addition to storage purposes, customers use portable units as mobile offices. 	
The company also sells new and used portable storage units and provides 	
delivery, installation, and other ancillary products.	
	
Mobile Mini has a fleet of about 236,600 units and a diverse customer base of 	
more than 80,000 lessees. Portable storage units (often converted marine cargo 	
containers) make up about 81% of the fleet, mobile office units 17%, and 	
storage trailers 2%. Although office units make up a smaller portion of the 	
fleet, relative to the storage units, they have a high book value because the 	
boxes are customized to become suitable for workspace. Accordingly, office 	
container leases contribute more to revenues than the proportion of these 	
units in Mobile Mini's fleet. As of March 31, 2012, approximately 33% of the 	
units on lease were leased to consumer services and the retail industry, 34% 	
to construction, 18% to industrial and commercial customers, and the remaining 	
15% to a mix of customers including government institutions and homeowners. 	
The company's current mix of end markets is more diverse than in 2007, when 	
43% of units were on lease to the construction industry. 	
	
Fleet utilization steadily increased over the past year, averaging 56.8% for 	
the quarter ended March 31, 2012, compared with 53.9% in the prior-year 	
period. Still, current levels are depressed relative to the five-year 	
historical average of 64.9% and reflect the weak, albeit improving U.S. 	
economy and cyclical pressures. Seasonality also plays a role in fleet 	
utilization. For example, the construction industry tends to be busy in the 	
summer, and the retail industry experiences seasonal pick-up in the fall, 	
ahead of the holiday season. Although improved utilization and lease rates 	
have contributed to earnings growth, margins have declined primarily due to 	
expenses related to building and opening new locations. For the 12 months 	
ended March 31, 2012, operating margins (after depreciation) declined to about 	
27% from 29% a year ago and more than 30% in 2009. We expect that margins 	
could experience modest pressure over the next year from expenses rise for 	
additional "greenfield" locations. Greenfield locations are low-cost, start-up 	
operational yards where the company redeploys idle fleet.	
	
As a leasing company, Mobile Mini can operate at higher leverage than a 	
typical like-rated industrial company. Although the company has paid down more 	
than $200 million of debt since December 2008, we still consider its financial 	
profile aggressive, largely as a result of $541 million in incremental debt 	
the company assumed in conjunction with the acquisition of Mobile Storage 	
Group (MSG) in June 2008. On April 14, 2011, $147.4 million of convertible 	
preferred stock automatically converted into common equity. Prior to the 	
conversion, we treated the preferred stock as debt, in line with Standard & 	
Poor's rating methodology. Mobile Mini's ongoing debt paydowns, conversion of 	
preferred stock into common equity, and earnings growth have contributed to an 	
improved financial profile. As of March 31, 2012, lease-adjusted debt to 	
capital was 49% (low for a leasing company), debt to EBITDA 5.1x, and funds 	
flow from operations (FFO) to debt 15.2%. We expect FFO to debt to remain in 	
the mid-teens percent area, and debt to EBITDA to decrease to less than 5x and 	
debt to capital to decrease to the mid-40% area over the next year. 	
	
Liquidity	
Mobile Mini has adequate liquidity. We believe its sources of cash will likely 	
exceed its uses substantially over the next 12 months. Cash sources include 	
existing unrestricted cash balances of $2 million and $550.7 million in 	
availability (after taking into consideration outstanding letters of credit) 	
under its $900 million secured asset-based revolving credit facility 	
(unrated), which matures in 2017.	
	
Revolver availability is subject to a borrowing base calculation based on a 	
valuation of the company's eligible accounts receivable, eligible fleet, and 	
other property. We believe that the company's revolver and FFO will be 	
sufficient to cover working capital needs and modest capital spending in 2012. 	
Mobile Mini's capital expenditures are almost all discretionary and for the 	
purposes of meeting anticipated demand. Accordingly, in our evaluation of 	
liquidity, we estimated a moderate amount of minimum capital spending. We also 	
expect cash uses to include $0.4 million in remaining debt maturities for 2012.	
	
In accordance with Standard & Poor's methodology and assumptions, in our view, 	
the relevant aspects of Mobile Mini's liquidity include:	
     -- Coverage of cash uses by cash sources well in excess of 1.2x, the 	
minimum level for an adequate designation, for the next year;	
     -- Our expectation that net sources would be positive, even with a 15% 	
drop in EBITDA, consistent with our criteria standard of 15%;	
     -- Mobile Mini's ability to absorb low-probability, high-impact shocks, 	
based on positive cash flow and ability to scale down capital spending 	
drastically; 	
     -- Mobile Mini's sound relationships with banks, in our assessment, 	
including arranging credit facilities; and	
     -- Generally prudent risk management, in our view, including reducing 	
capital spending sharply (as demonstrated in 2009).	
	
Financial covenants are springing, tested only if borrowing availability falls 	
below the greater of $90 million or 10% of the facility size. As of March 31, 	
2012, the company's borrowing availability far exceeded the test threshold. 	
Springing financial covenants include a maximum leverage ratio of 5.5x and a 	
minimum fixed-charge coverage ratio of 1x. Mobile Mini uses a different 	
definition of debt and EBITDA than Standard & Poor's.	
	
Recovery analysis	
Mobile Mini's bank financing consists of a $900 million secured asset-based 	
revolving credit facility maturing in 2017 (unrated), a $150 million senior 	
unsecured note maturing in 2015, and a $200 million senior unsecured note 	
maturing in 2020. For the complete recovery analysis, see Standard & Poor's 	
recovery report on Mobile Mini to be published on RatingsDirect following this 	
research update.	
	
Outlook	
The outlook is stable. We expect the company to gradually improve its 	
financial profile with modest earnings growth and by paying down debt and 	
keeping capital spending modest. Over the long term, we expect Mobile Mini to 	
benefit from improving market fundamentals. 	
	
We expect that the company's financial measures will improve gradually in 2012 	
and beyond. We could upgrade the company if this improvement is stronger than 	
expected, resulting in FFO to debt approaching 20% and operating margins 	
returning to higher than 30%. However, if the company's financial profile 	
changes substantially, because of weaker-than-expected earnings growth, 	
causing FFO to total debt to fall to the high-single-digit area for a 	
sustained period, we could lower the ratings.	
	
Related Criteria And Research	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 	
Issuers' Speculative-Grade Debt, Aug. 10, 2009	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
Ratings List	
	
Ratings Affirmed	
Mobile Mini Inc.	
 Corporate credit rating               BB-/Stable/--	
 Senior unsecured                      B+	
  Recovery rating                      5

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