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Fitch Assigns Moto Finance Plc's GBP 150m Second Lien Notes Final 'B+' Rating.
April 21, 2017 / 4:09 PM / 8 months ago

Fitch Assigns Moto Finance Plc's GBP 150m Second Lien Notes Final 'B+' Rating.

(The following statement was released by the rating agency) LONDON, April 21 (Fitch) Fitch has assigned UK-based Moto Finance Plc's GBP 150 million 4.5% Second Lien Notes due October 2022 a final rating of 'B+'/RR3/52%. The notes have been issued as part of the refinancing by the parent company, the UK-based Moto Ventures Limited. Fitch has also affirmed Moto Ventures Limited Issuer Default Rating (IDR) at 'B'. The Outlook is Stable. The assignment of the final rating and the affirmation of the IDR follow a review of the final documentation which materially conforms to the information received at the time the agency assigned expected rating to the notes on 13 March 2017. The new notes have replaced the previously outstanding senior secured notes of GBP175 million due 2020 issued by the same entity. The notes are structurally and contractually subordinated to the senior secured bank debt comprising a committed term loan of GBP450 million, a capex facility of GBP100 million and a revolving credit facility (RCF) of GBP10 million. The notes benefit from the same security and guarantor coverage as the previous notes. In addition to the planned early redemption of the existing notes and issuance of new second lien notes, Moto Ventures Ltd. (Moto) has also refinanced its bank loan facilities at the level of Moto Investments Ltd. by extending the maturity to March 2022, repricing the facilities and increasing the headroom under the lock-up tests, financial covenants and certain permitted baskets. KEY RATING DRIVERS Stronger Cash Flow; Rising Leverage: The company's rating affirmation reflects Fitch's expectations of a stable operating performance with increasing profitability and cash-flow generation in the context of higher financial indebtedness. Resilient Business Model: Moto's performance has remained resilient through the cycle, despite the exposure to inherently volatile retail demand, and we see this as a strong supportive factor for the rating. This is because of the less discretionary, captive nature of motorway travel retail compared to traditional high street retail, a highly regulated environment limiting direct competition, and a strong franchise portfolio with favourable terms which allows a high degree of operational flexibility. We also do not anticipate near-term changes to sector regulation. Moreover, given Moto's recent extension of maturing franchise contracts, we project steadily improving profitability from existing sites. Asset Productivity to Improve: The medium-term capex plan will improve profitability through the expansion of existing and the development of new sites, as well as the roll-out of selective branded stores. Based on Moto's past capex efficiency and our assessment of the investment return of comparable businesses, we view the incremental earnings projected by the management as reasonable. Meanwhile, a considerable step-up in capex and the simultaneous implementation of numerous asset development projects entail moderate execution risks. However, increased profits from the planned expansion will mitigate refinancing risks related to increased levels of debt. Negative Free Cash Flows: The rating remains constrained by negative free cash flows (FCF) due to regular shareholder distributions. Before considering any dividend distributions, Moto remains structurally a cash-generative business, capable of funding a significant part of growth investments. As long as Moto remains compliant with the lock-up tests and maintenance covenants, and organic cash generation remains sound, the negative free cash-flow profile will not put pressure on the rating. Leverage Headroom Exhausted: Higher projected drawn debt at refinancing, together with utilisations under the capex facility between 2017-2019, will lead to some re-leveraging to 7.0x on a funds from operations (FFO) basis, leaving only small leverage headroom under the current rating. In the absence of scheduled debt amortisations and a slow earnings ramp-up from growth investments, the level of financial risk is projected to remain persistently high at the entry level of 7.0x based on FFO adjusted leverage, which is weak for the current 'B' IDR, although mitigated by demonstrated profit resilience. Above Average Recovery for Note Holders: According to our bespoke recovery analysis, higher recoveries would be realised using a going-concern approach, despite Moto's strong asset backing. Better recovery expectations by preserving the business model, as opposed to liquidating its balance sheet, reflect Moto's structurally cash-generative business and well-managed franchise portfolio. Given the stable nature of the asset and cross-referencing with peers with stable demand features, we apply an EBITDA discount of 15% leading to a hypothetical post-distress EBITDA of around GBP90 million, and maintain the 7.5x EV/EBITDA multiple in distress. Considering the priority of payments on enforcement, the note holders would rank second after senior secured bank debt lenders and in a potential distress scenario would achieve a recovery of 52% of nominal value, resulting in an expected instrument rating of 'B+'(EXP)/RR3/52%, leading to a one-notch uplift from the IDR, as with the currently outstanding senior notes. DERIVATION SUMMARY Moto's IDR of 'B'/Stable reflects an infrastructure-like business profile and operations in a regulated market with high barriers to entry and limited competitive pressures. Moto's performance has been resilient through the cycle, reflecting the less discretionary nature of motorway customers The business is comparable with catering service providers, such as Elior (BB/Stable) or Sodexo (BBB+/Stable), or energy service company Techem (BB-/Stable), all of which face low volume risks given the high share of contracted revenues and low customer churn. The constraining factors for the rating are Moto's less diversified product offering, concentrated geographic footprint with a presence only in the UK, as well as persistently high financial leverage. The shareholders' intention to receive regular dividend distributions signals a financial policy biased towards equity interests. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Moto include: - revenue growth at low single-digit rates; - EBITDA margin gradually improving to above 14% (29% excluding fuel) driven by top-line growth; - capex in line with the business pan with drawdowns in the capex facility to finance expansionary capex; - shareholder distributions in line with the business plan and subject to lock-up test. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Positive and sustained post-dividend FCF generation supported by steadily improving profitability and the earnings accretive expansion programme - Decline in FFO adjusted leverage to 6.0x or below on a sustained basis - FFO fixed charge cover of 2.0x or higher on a sustained basis Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Weak implementation of the capital expansion programme leading to steady EBITDA weakening to below GBP100 million on a sustained basis - An increasingly aggressive financial policy translating into FFO adjusted gross leverage of above 7.0x on a sustained basis - FFO fixed charge cover weakening to below 1.5x on a sustained basis LIQUIDITY Satisfactory Liquidity: Organic pre-dividend cash generation is projected to be positive, at about GBP25 million per year. After shareholder distributions, Moto's unrestricted cash balance is estimated at GBP35 million at year-end. We view these levels as fully sufficient for the company to execute its business plan. In our calculation of liquidity we exclude GBP5 million as restricted cash in transit and tills. We project the five-year committed RCF of GBP10 million will remain undrawn throughout the forecast period. Contact: Principal Analyst Athanasios Smprinis Analyst +44 20 7530 1643 Supervisory Analyst Elena Stock Director +49 69 76 80 76 135 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D-60311 Frankfurt am Main Committee Chairperson Committee Chairperson Pablo Mazzini Senior Director +44 20 7530 1021 Summary of Financial Statement Adjustments - GBP5 million deducted from reported cash as restricted cash kept in transit and tills, - FY16 financial debt adjusted by adding back GBP10.8 million of capitalised debt issue costs, - A multiple of 8x (given the company's location in the UK) used for capitalisation of around GBP9 million of annual rental payments, - Shareholder loan with original face value of GBP350 million issued by Everest UK Bidco Ltd. outside the IDR perimeter treated as equity. 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