Fitch Rates Touax's IDR and Senior Secured Bond at 'BB-(EXP)'
The expected ratings reflect the group's standalone creditworthiness and the envisaged funding and maturity structure, including a proposed five-year senior secured bullet bond issue of EUR200m and proposed repayment and resetting of a portion of existing debt.
The final ratings are contingent upon the receipt of final documents conforming to information already received. Failure to issue the notes would result in the withdrawal of the expected IDR and senior secured debt ratings.
Touax is primarily an operating leasing company (59% of 2014 revenues) and is also active in the sale and management of logistical equipment. Its revenue sources are spread across its four divisions, with a bias towards the shipping container division (57% of 2014 revenues), followed by modular buildings (25%), freight railcars (12%) and river barges (6%). Despite its modest revenue contribution, the railcars division is the largest EBITDA contributor, representing 41% of total EBITDA in 2014. Geographically there is some bias towards continental Europe, but Touax has also built up a wider presence, notably in the global shipping container market.
The expected senior secured bond ratings reflect the underlying risk profile of Touax and other group entities (together the Touax Group; guarantors of the notes), as well as an expectation, based on generic assumptions, of average recovery prospects for the bond in the event of default, despite it being subordinated to a portion of remaining group debt.
KEY RATING DRIVERS - IDRs, SENIOR SECURED DEBT
Touax's cash flow generating ability is supported by a degree of stability resulting from contracted leasing income as well as some barriers to entry. The group also benefits from a geographically diversified profile and the strong positions it has built in its niche markets, albeit Touax has a fairly small absolute size (EUR379m revenues in 2014) when compared with the broader industries in which it operates.
The company's IDR is further supported by its longstanding history, experienced management team and adequate underwriting standards that are commensurate with the group's business profile. Fitch views Touax's asset quality as adequate, supported by its standard, liquid and fairly young asset base and a proven ability to repossess assets with relative ease, as reflected by a low percentage of bad debt to total revenues. Touax has a diverse customer base, although it is exposed to pockets of weak counterparties in some business lines.
Factors that weigh negatively on the ratings include the competitive nature of most of the segments in which Touax is active. This results in limited pricing power despite some barriers to entry. As an operating leasing company Touax is exposed to residual value risk but this is partially mitigated by the standardised nature of the assets in which it invests and the importance of these assets for its customer base. Touax has a sound track record of managing related risks, including releasing or secondary sales of owned assets or assets managed for third parties.
Touax faces challenges in its ability to meet its strategic objectives, notably in the context of a still tough operating environment, and to return to sustained long-term profitability after reporting net losses in 2013 and 2014.
Touax's profitability is viewed as weak by Fitch with net income steadily declining since 2011, among other factors, reflecting challenging market conditions and sub-optimal utilisation rates, particularly in the modular buildings segment which was affected by low demand in its core markets. Fitch will monitor the impact on earnings of Touax's implementation of a strategic turnaround in the modular buildings segment, among other aspects involving the closure of its factory in France and a renewed focus on leasing activity.
Negative net income generation also put pressure on the group's capital and leverage metrics. Gross debt-to-EBITDA has exceeded 8x in the past two years, which is very high for the ratings, while balance sheet leverage is still adequate at 2.5x compared with other international lessors. The ratings assume that the negative earnings trend will be reversed in 2015, which should provide scope for some deleveraging.
The expected secured notes' rating is driven by Fitch's view of average recovery prospects based on generic assumptions. The proposed notes will be secured by first ranking share pledges over key operating subsidiaries and guaranteed by 12 subsidiaries which represent around 60% of the group's EBITDA as of end-December 2014. The instrument rating also takes into account its subordination to a portion of the group's remaining debt and the non-recourse nature of some of Touax's existing debt.
The planned issue supports an extension of Touax's debt maturity profile but Touax remains exposed to a degree of refinancing risk, also in view of the bond's bullet structure. Liquidity is viewed as adequate and benefits from the flexibility offered by the sales and syndication businesses.
RATING SENSITIVITIES IDRs, SENIOR SECURED DEBT RATINGS
Fitch views near-term rating upside as limited, as reflected by the Stable Outlook on the Long-term IDR. However, over time the ratings could benefit from sustained growth in earnings and assets and an improvement in profitability, most likely supported by the successful turnaround of the modular buildings business, translating into a reduction in leverage with gross debt-to-EBITDA and gross debt to equity ratios in the 5x-6x range and 2x range, respectively.
If Touax does not manage to improve its sustained earnings generation and is, therefore, unable to improve leverage ratios from levels reported at end-2014 ratings would come under pressure.
The senior secured debt ratings are sensitive to the same factors as the Long-term IDR and also to developments in the capital structure to the extent that these may lead Fitch to change its assessment of recovery prospects in the event of default.
Комментарии