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Fitch Assigns Moto Finance Plc's GBP150m Senior Secured Notes Expected 'B+' Rating
March 13, 2017 / 2:29 PM / 8 months ago

Fitch Assigns Moto Finance Plc's GBP150m Senior Secured Notes Expected 'B+' Rating

(The following statement was released by the rating agency) LONDON, March 13 (Fitch) Fitch Ratings has assigned UK-based Moto Finance Plc's proposed GBP150 million senior secured fixed rate notes due 2022 a 'B+'(EXP) expected rating. The assignment of the final rating is subject to receipt of final bank loan and bond documentation being substantially on the terms as presented to Fitch. The new notes will be issued by Moto Finance Plc and replace the currently outstanding senior secured notes of GBP175 million due 2020 at the same entity. The notes will be structurally and contractually subordinated to the senior secured bank debt comprising a committed term loan of GBP450 million, capex facility of GBP100 million and a revolving credit facility (RCF) of GBP10 million; they will benefit from the same security and guarantor coverage as the existing note holders. Concurrently with the planned early redemption of the existing notes and issuance of new senior secured notes, Moto Ventures Ltd. (Moto) is refinancing its bank loan facilities at the level of Moto Investments Ltd. by extending maturity to March 2022, repricing the facilities and increasing the headroom under the lock-up tests, financial covenants and certain permitted baskets. Upon completion of this refinancing, based on the shareholder's intention to use the existing group structure for this purpose, Fitch expects to affirm Moto's Long-term IDR at 'B' with Stable Outlook. KEY RATING DRIVERS Resilient Business Model: Despite the exposure to inherently volatile retail demand, Moto's performance has remained resilient through the cycle and we see this as a strong supportive factor for the rating. This is because the less discretionary, captive nature of motorway travel retail compared to traditional high street retail, a highly regulated environment limiting direct competition, and strong franchise portfolio with favourable terms 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 Moto's profitability through expansion of existing and development of new sites, as well as 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 simultaneous implementation of multiple asset development projects bring moderate execution risks; in our view, increased profits from the planned expansion will mitigate refinancing risks related to increased levels of debt to finance such growth programme. Negative Free Cash Flows: The rating remains constrained by sustainably 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, such a sustainably negative free cash flow profile will not pressure 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 close 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 considered weak for the current 'B' IDR, albeit 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 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 operating in a regulated market with high barriers to entry and limited competitive pressures. Despite its exposure to cyclical and volatile retail demand, Moto's performance has been resilient through the cycle, implying a 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 rating constraining factors are Moto's less diversified product offering, concentrated geographic footprint with presence only in the UK, as well as persistently high financial leverage. We also point to its shareholders' intention of regular dividend distributions, signalling a financial policy biased towards equity interests. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenue growth at low single-digit rates, - EBITDA margin gradually improving in excess of 14% (29% excluding fuel) driven by top-line growth, - CAPEX in line with the Business Plan, - drawdown in 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, averaging GBP20 million per year. After shareholder distributions, Moto's unrestricted cash balance is estimated at GBP20 million-GBP30 million at year-end. We view such liquidity levels as sufficient for the company to execute its business plan. In our liquidity computation 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 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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