Fitch Affirms Garda World Security Corporation's IDR at 'B+'; Outlook Stable
The recent announced acquisition of Aegis Group (Aegis) will likely be funded by incremental additional debt and cash on the balance sheet. Though Garda's leverage is elevated relative to its industry peers, this is mitigated by recent accretive acquisitions, stable reoccurring revenue and positive fee cash flow (FCF). Any additional debt-funded dividends could materially affect Garda's ratings; however, given the track-record of the company's private equity owners (Apax Partners LLP and The Cretier Group), Fitch believes that the likelihood of this is low in the near term.
KEY RATING DRIVERS
Garda's ratings reflect the company's leading position in the North American cash logistics and Canadian security solutions businesses and its solid and improving operating margins. Rating strengths include expected positive FCF generation following the successful integration of other recent acquisitions including G4S Cash Solutions (Canada) Ltd. in 2013, and the acquisition of 32 currency vaults from Bank of America in 2014. Additional strength comes from the stable reoccurring nature of Garda's revenues and operating profits for both of its segments and leading market share in nearly every one of its business lines. Garda currently has leading market share in cash logistics in North America and the Aegis acquisition strengthens Garda's position across 10 African and Middle East emerging markets, in addition to Aegis's long-term and growing relationship with U.S. Government. This deal expands Garda's geographic footprint considerably as a full 88% of its revenue was generated in North America prior to the transaction.
The company recently announced the acquisition of Aegis, a leading provider of highly specialized protective services with annual run-rate revenues of approximately CAD450 million. The transaction is awaiting U.S. Department of Justice approval and is expected to close by September of this year. Fitch expects the pro forma EBITDA leverage of the combined entity to be under 6x.
Rating concerns include Garda's continued appetite for additional leverage through debt-funded acquisitions and dividends, its concentrated customer base, and its historically low, though currently improving, FCF margin. Additional dividends, particularly debt-funded, would significantly reduce the likelihood of debt reduction in the near to intermediate term. Customer concentration is also a credit negative as Garda's top 11 customers represent approximately 31% of the revenue (prior to the Aegis acquisition). In addition, the Aegis acquisition only mildly improves customer concentration as a large portion of Aegis's revenue comes from the U.S. Government, though it is more diversified from a geographic perspective. The loss of a significant customer would have a material impact on Garda's revenue though Fitch would expect the impact on margins from such an event to be attenuated by the company's variable cost structure.
The strength of Garda's business profile provides somewhat of an offset to the relatively elevated leverage in the company's credit profile. Also, the recurring nature of the company's revenues, long customer contracts, and relatively stable operating margins are features of higher rating categories. Garda enjoys a more stable operating profile than most issuers in the 'B+' rating category. Although high leverage and debt service costs will continue to be the largest intermediate term risk, positive FCF should, to a degree, counterbalance them.
Garda maintains a relatively high leverage level of 7.31x (total debt/EBITDA) latest 12 months (LTM) as of April 30, 2015, down from 7.91x at Jan. 31, 2015 (Garda's year-end). This leverage is mitigated by a very aggressive acquisition strategy which, thus far, has materialized into significant margin improvement and an improved market position. The company's EBITDA margin as of April 30, 2015 was 10.79% on an LTM basis, up from 9.38% on Jan. 31, 2014. Since October of 2013 Garda's Cash Services segment and Service Solutions segment have each improved EBITDA margins considerably from 14.5% to 15.8% and from 5.9% to 8.4% respectively as of April 30, 2015. Fitch expects aggregate EBITDA margins to be in the 12%-13% range in the intermediate term, assuming successful acquisition integration.
Fitch expects Garda to primarily deploy excess cash toward acquisitions. Financing costs have been reduced recently due to refinancing. Fitch expects pro forma funds from operations (FFO) interest coverage to be 3.4x compared to 2.4x at year end fiscal 2015. Following a number of one-time costs in fiscal 2015, Fitch expects Garda to produce solidly positive FCF going forward with stable capital expenditures. With an asset-light business model (the firm's largest cost is personnel) Garda utilizes operating leases for its armored vehicle fleets and other heavy equipment, which allows for cash flow flexibility. The medium-term maturity schedule is favorable with no material debt maturities until 2020, though the nearly CAD1.4 billion in maturities due that fiscal year is cause for concern. The company has adequate liquidity with a CAD44 million cash balance as of April 30, 2015 and USD17 million of availability under its multi-currency revolving facility. Fitch expects the revolver to continue to be used for acquisitions and other general corporate purposes.
The rating of 'BB+/RR1' on Garda's senior secured credit facility reflects its substantial collateral coverage and outstanding recovery prospects in a distressed scenario, which Fitch estimates in the 90% to 100% range. Collateral consists of nearly all U.S. and Canadian assets of restricted subsidiaries, including such assets which may be under lease agreements. This includes without limitation, accounts receivables, inventory, equipment, investment property, intellectual property, other general intangibles, and owned (but not leased) real property. The equity interests of the borrower and all equity interests of any wholly owned subsidiaries are also included within the collateral package. The rating of 'B-/RR6' on the company's senior unsecured notes reflects the minimal recovery prospects on the notes, estimated by Fitch to be in the 0% to 10% range in a distressed scenario.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--Approximately 10% revenue growth in fiscal year (FY) 2016, driven by acquisitions;
--The company achieves an EBITDA margin in FY2016 of at least 12%;
--There are no additional debt-funded dividends in the medium term;
--Additional depreciation in the CAD vs the USD is limited;
--Successful closing of the Aegis transaction by September of this year.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Maintaining EBITDA leverage below 5.0x;
--Maintaining FCF margin between 4%-5%;
--Maintaining an EBITDA margin above 12%;
--Successful M&A integration.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--An increase in EBITDA leverage to above 6.5x for an extended period;
--Continued debt-funded dividend pay-outs to private equity owners;
--A decline in the company's EBITDA margin to below 10% on a sustained basis;
--Loss of a material contract or customer.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Garda World Security Corporation
--IDR at 'B+';
--Secured revolving credit facility at 'BB+/RR1';
--Secured USD term loan B at 'BB+/RR1';
--Secured CAD term loan B at 'BB+/RR1';
--Senior unsecured notes at 'B-/RR6'.
The Rating Outlook is Stable.
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