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Fitch Rates Oberthur's New Senior Secured Debt 'B+'/'RR3'
December 20, 2016 / 9:25 AM / a year ago

Fitch Rates Oberthur's New Senior Secured Debt 'B+'/'RR3'

(The following statement was released by the rating agency) LONDON, December 20 (Fitch) Fitch Ratings has assigned Oberthur Technologies Group SAS (OT) new senior secured facilities a final rating of 'B+' with a Recovery Rating of 'RR3' and withdrawn the ratings on the company's existing debt. A full list of rating actions is at the end of this commentary. The rating action assumes that the final documentation for OT's preferred equity certificates and shareholder loan, which will be released at completion of Morpho acquisition around 1H17, will conform to the draft version presented to Fitch and thus will be excluded from OT's total indebtedness. KEY RATING DRIVERS Morpho Strategic Fit Fitch views the proposed Morpho acquisition as a strong fit with OT. It will add significant scale and a broader, more rounded business mix. OT is, in Fitch's view, already well-positioned in the financial services (secure payment) and telecoms markets with a developed but much lower weighting in identity solutions (including passports, driving licenses, ID cards). Morpho will more than double the size of the company - both in terms of sales and EBITDA. Its revenue mix is strongly weighted towards identity and security (border control, surveillance, biometric database management), which together account for more than 70% of sales, and is therefore highly complementary to OT's existing businesses. Both companies have a strong growth record. Margin performance at OT suggests that management has the ability to deliver cost efficiencies and position revenues in higher-value segments. Enhanced Business Profile OT's underlying business profile supports our positive view of management's strategy and execution. Strengths are particularly evident in the payments business, where the company benefits from entrenched, high-quality and wide-ranging customer relationships, a consistent card replacement cycle and leadership in evolving technologies. The Morpho transaction adds scale, synergies, growth potential as well as a more balanced business mix. A record of delivering cost savings suggests synergies are likely to be delivered over time, hence strengthening the rating potential over the medium term. Leverage Constrains Rating Initial leverage and a historically weak visibility of cash flow performance prevent a higher rating. Deleveraging potential following the Morpho purchase, expected sometime in 2017, will depend on integrating the acquired company. Our principal upgrade guideline of 4.5x funds from operations (FFO) net leverage is not forecast to be met until 2019, which is beyond the rating outlook horizon. Fitch estimates the size and structure of the acquisition adds roughly 1.2x net debt-to-EBITDA to the capital structure, excluding synergies. As part of the transaction, EUR195m of vendor loans, currently treated as hybrid equity, are being repaid. Fitch forecasts that 2017 pro-forma FFO net leverage of 5.6x is expected to lead to an extended period of higher leverage. This, along with weak free cash flow (FCF) visibility, places the IDR at 'B'. Strong Competitive Position OT has delivered strong revenue and margin expansion, reflecting its market and competitive technology positions. Margin performance amid current soft revenue conditions supports Fitch's view that technology risk is being managed. The global payments sector shows established upgrade cycles with OT at the forefront of evolving technologies. The company's OT Motioncode is an example of sophisticated solutions for inherent security challenges in the sector. Morpho is likely to provide revenue synergies in addition to cost savings. Treatment of Non-Recurring Items The consistency of non-recurring items in OT's cash flow leads us to take a cautious view on them and we partially treat these items as non-operational but recurring. Items such as refinancing and IPO preparation are treated as one-offs. Operational restructuring is more recurring in nature and included within FFO. Integration of Morpho is expected to lead to several tens of million euros of restructuring costs, while the increased size of the business is likely to lead to synergy opportunities and related costs. Fitch views non-recurring items on a case-by-case basis. However, we will include some integration and restructuring expenses within our cash flow measures. This will have an impact on the pace at which forecast FFO metrics improve. Recoveries, Instrument Rating Fitch applied a bespoke and going concern approach to recoveries to OT as outlined in our criteria, Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers, dated 7 April 2016. The capital structure will be almost entirely financed with secured debt following the company's refinancing. Recoveries will therefore fall to secured lenders and the company's strong technology positions are likely to support a fairly strong post-distress valuation. The absence of unsecured debt and the size of the revolving credit facility, however, limit recoveries to 'RR3'. This implies recoveries of between 51% and 70%, supporting a one-notch uplift from the IDR and instrument ratings of 'B+'/'RR3'. DERIVATION SUMMARY OT has no immediately obvious, similarly rated peers. Its closest rival and the market leader is Gemalto. Following the Morpho transaction, OT will have similar scale and will be strongly positioned in market and technology leadership relative to Gemalto. However, margins, including margin dilution from Morpho, will be lower than its rival and its balance sheet more leveraged. Fitch estimates Gemalto had a trailing LTM June 2016 EBITDA margin of 18.5% and net debt/EBITDA leverage of 0.6x, compared with OT's standalone LTM September 2016 metrics of 16% and 3.9x, respectively. Rated European technology peers, such as Nokia and STMicroelectronics, sit in the high sub-investment grade/low investment grade range. They have far greater scale, somewhat higher revenue and margin volatility but stronger cash flows and no net leverage. For a technology-driven company, OT's leverage is unusual. Its business position and technology leadership within its chosen markets are regarded as strong. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Mid-single digit growth driven mainly by growing identity and security divisions; - Improving EBITDA margin from about 14% in 2017 to 18% in 2021 reflecting cost synergy and operational efficiencies as well as a positive sales mix; - Capex average around 6% of sales annually; - Reversal of working capital trends with a negative outflow of about EUR30m from 2017 onward; - Recurring restructuring costs reflected above FFO of EUR25m. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO-net adjusted leverage below 4.5x combined with an FFO fixed-charge cover above 2.5x on sustained basis. - Demonstrated progress in integrating Morpho, ongoing margin resilience and a low-to mid-single digit FCF margin. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO net-adjusted leverage above 6.5x and FFO fixed-charge cover below 2x on a sustained basis. - A material loss of market share or other evidence of a significant erosion of business or technology leadership in the company's core operations. LIQUIDITY Satisfactory Liquidity At end-September 2016, OT had cash of EUR64m and access to a EUR88m revolving credit facility, of which EUR38m was available. Following close of the new financing, liquidity primarily will be provided by a new EUR300m revolving credit facility due 2022. Debt financing is also structured to ensure a material cash buffer post acquisition close. Fitch estimates a cash balance exceeding EUR100m at end-2017. FULL LIST OF RATING ACTIONS Oberthur Technologies Group SAS: Long Term Issuer Default Rating: unaffected at 'B'; Outlook Stable Unsecured notes due 2020: 'CCC+'/'RR6'' withdrawn EUR2.1bn equivalent term loan B due 2023: 'B+'/'RR3' assigned EUR300m revolving credit facility due 2022: 'B+'/'RR3' assigned Oberthur Technologies SA Senior secured debt due 2019: 'BB-'/RR2'; withdrawn EUR2.1bn equivalent term loan B due 2023: 'B+'/'RR3' assigned EUR300m revolving credit facility due 2022: 'B+'/'RR3' assigned Oberthur Technologies of America Corp Senior secured debt due 2019: 'BB-'/'RR2'; withdrawn EUR2.1bn equivalent term loan B due 2023: 'B+'/'RR3' assigned EUR300m revolving credit facility due 2022: 'B+'/'RR3' assigned Oberthur Technologies Finance SAS, Oberthur Technologies of America Corp, and Oberthur Technologies SA Revolving credit facility due 2018: 'BB-'/'RR2' withdrawn Contact: Supervisory Analyst Victoria Ghannage Associate Director +44 203 530 1190 Fitch Ratings Limited 30 North Colonnade London E14 5GN Principal Analyst Athanasios Smprinis Analyst +44 203 530 1643 Committee Chairperson Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Date of Relevant Rating Committee: 24 November 2016. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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