(The following statement was released by the rating agency)
-- Montreal-based cash logistics and physical security service provider Garda World Security Corp.
is entering into a US$100 million revolving credit facility and a US$250 million term loan to refinance its existing credit facilities as part of its C$1.1 billion management buyout, backed by funds from London-based private equity investor Apax Partners LLP.
-- As a result, we are removing the company from CreditWatch, where it had been placed with negative implications Sept. 7, 2012, and affirming all our ratings on Garda including our 'B+' long-term corporate credit rating.
-- We base these rating actions on our view that the modest weakening of Garda's debt-to-EBITDA ratio following this transaction is acceptable to us at the rating level.
-- We are also assigning our 'BB' issue-level rating and '1' recovery rating to the company's proposed US$350 million credit facility, consisting of a US$250 million term loan and a US$100 million revolving credit facility.
-- The stable outlook reflects what we consider favorable operating momentum and good visibility for Garda's cash flow for the next couple of years, which should allow the company to maintain its adjusted debt-to-EBITDA ratio in the 5x area.
Rating Action On Oct. 3, 2012, Standard & Poor's Ratings Services removed all of its ratings on Montreal-based cash logistics and physical security services provider Garda World Security Corp. from CreditWatch, where they had been placed with negative implications Sept. 7, 2012. At the same time, Standard & Poor's affirmed its ratings on Garda, including its 'B+' long-term corporate credit rating on the company. The outlook is stable.
At the same time, we assigned our 'BB' issue-level rating and '1' recovery rating to the company's proposed US$350 million senior secured credit facility, consisting of a US$250 million term loan and a US$100 million revolving credit facility. The '1' recovery rating indicates our expectations for very high (90%-100%) recovery for lenders in the event of default.
The ratings on the company's US$250 million and C$175 million senior unsecured notes due 2019 outstanding are also affirmed and the recovery ratings are unchanged. We understand that the company is seeking a change-of-control waiver from bondholders, failing which, the company has made arrangements with its bankers to repurchase these obligations.
The company expects to fund the C$1.1 billion buyout with C$280 million of a new equity contribution from London-based private equity investor Apax Partners LLP (not rated), C$99 million of roll-over equity from Garda's management, US$350 million of new credit facilities, and roll-over of C$437 million senior notes outstanding. Following this transaction, Apax will have a 74% interest in Garda; Garda management will hold the remaining 26% equity interest in the company.
The affirmation reflects our view that the modest increase in Garda's adjusted debt-to-EBITDA ratio (to 5.4x for the 12 months ended June 30, 2012) following this transaction is acceptable to us given our view that the company has a "satisfactory" business risk profile. This view is supported by good cash flow visibility with moderate volatility, which should allow the company to accommodate (and service) slightly higher amounts of debt in the near term. We expect the company to deleverage modestly following this transaction, from EBITDA growth and modest debt reduction. We also expect the company's liquidity position to be enhanced as the currently tight financial covenants are reset and credit facility maturities are extended.
The ratings will be subject to final review of loan and sponsor equity documentation. We expect the existing bank facilities to be refinanced completely with proceeds from the new credit facility. We will withdraw the ratings on the existing credit facilities once the proposed transaction is funded and closes, which we expect to occur by the end of October 2012.
The ratings on Garda reflect what Standard & Poor's considers a high debt-to-EBITDA ratio and weak cash flow protection measures. The weaknesses are mitigated in part by the company's solid market position in its core businesses and high barrier to entry to the cash logistics segment.
In our opinion, Garda's "highly leveraged" financial risk profile is the result of its "aggressive" financial policy and rapid expansion strategy that has included large transformational acquisitions. Following the aforementioned buyout, we expect adjusted debt leverage to remain weak in the mid-5x area in the next couple of years with deleveraging primarily driven by EBITDA growth as the company will likely remain opportunistic on acquisitions and investments to drive organic growth. Cash flow protection levels, as measured by Standard & Poor's adjusted funds from operations to debt, are expected to weaken to below 10% following the transaction, but should modestly improve to 13% in the next couple of years. We see these credit ratios to be consistent with a highly leveraged financial risk profile assessment.
Garda provides cash logistics (about 70% of annual EBITDA generation), physical security services, and global risk consulting. It has grown rapidly in the past decade from a combination of transformational acquisitions and organic growth. Garda is now the second-largest player in the North American cash logistic market, with about a 17% market share, as well as the largest provider of physical security in Canada, with about a 10% share of the market. With annual revenues of about C$1.2 billion, Garda is a smaller and more regional player than global peers such as The Brink's Co. (BBB/Negative/--) and G4S PLC (BBB/Watch Neg/A-2); however, the company achieves a comparable profitability margin given its high market share in the regions in which it operates.
Standard & Poor's considers the company's business risk profile satisfactory because, although the company operates in highly competitive and fragmented markets, it has a strong market position in each segment. Cash handling services are normally much more capital-intensive than manned guarding services because they require cash centers, transport networks, and extensive technology solutions. The capital investments and higher regulatory requirements create meaningful barriers to entry. Consequently, the cash handling market is less fragmented than the wider security service industry and supports higher profit margins. The security service industry, on the other hand, is highly fragmented in general and has relatively low barriers to entry; this is reflected in competitive markets and pricing pressures. The prospect of reputational damage because of contract failure is a key risk for security service providers. Nevertheless, we expect Garda to maintain high customer renewal rates (about 90%), which are in line with industry standards, given the company's solid track record to date as a premium service provider.
Garda has experienced high revenue growth in the past decade, supported in part by its relatively successful strategy of buying low-margin businesses and turning them into growing and more profitable businesses. However, the acquisition of U.S.-based ATI Systems International Inc. in 2007 led to significantly higher financial leverage and goodwill impairment. While we expect Garda to continue to participate in the consolidation of the markets through small tuck-in acquisitions, the company continues to pursue organic growth by investing in new markets both in the cash logistics and security solution segments. Although slower economic growth in North America could affect Garda's growth prospects in the near term, we believe the company has significant opportunity to expand its cash logistic operations in the large U.S. market with both existing and new customers. We also see good momentum in the company's Middle East physical security business. As a result, we expect overall revenue to increase at the mid-single-digit rate annually for the next few years. Given that some of the growth will result from expansion in new areas, which will require upfront investment, EBITDA margins should remain relatively stable at the low double-digit level. We note that the company has established a good track record of protecting its profit margin in part owing to its flexible cost base and the high density of its operations.
We consider Garda's pro forma liquidity as adequate, as per our liquidity criteria. We expect sources of funds to exceed uses of funds by more than 1.2x in the next 12 months and sources to exceed uses even if EBITDA falls by 15%. Sources of cash comprise about C$50 million of pro forma availability on the company's new C$100 million revolving credit facility due 2017 and our expectation for funds from operations of more than C$80 million in the next 12 months.
Uses of cash in the next 12 months include capital expenditures estimated at about C$30 million, modest debt amortization of C$2.4 million relating to the new C$240 million term loan due 2019, modest funds for tuck-in acquisitions, and moderate working-capital requirements.
Revised financial covenants under the new bank facilities should provide at least 35% initial headroom, thereby alleviating previous concerns with regard to tight covenants. We expect financial covenants to step-down over time.
Recovery analysis Standard & Poor's rates Garda's US$350 million proposed senior secured facilities 'BB' (two notches above the corporate credit rating on the company), with a recovery rating of '1', indicating our expectation of very high (90%-100%) recovery in the event of default.
We also rate the company's US$250 million and C$175 million senior unsecured notes 'B' (one notch below the corporate credit rating on Garda), with a '5' recovery rating, indicating our expectation of modest (10%-30%) recovery in the event of default.
(For the complete recovery analysis, see the recovery report to be published on RatingsDirect on the Global Credit Portal following this report.)
The stable outlook reflects what we view as Garda's good operating momentum from new business wins and integration of tuck-in acquisitions, which offer good revenue visibility for its existing operations. We expect the company to generate mid-single-digit annual revenue growth and sustain overall margins in the next couple of years, which should allow it to generate more than C$40 million of free cash flow annually. Under these parameters, and even assuming the company remains opportunistic on acquisitions, we believe Garda can sustain an adjusted debt-to-EBITDA ratio in the 5x area--a level which we feel is appropriate for the ratings.
The company's proposed ownership by a private equity investor constrains the ratings as per our criteria. However, an upgrade might be possible if ownership changes and financial policy were to lead to a leverage ratio of below 4x on a sustained basis.
We could consider a downgrade should adjusted debt to EBITDA weaken to the 6x area, likely owing to large debt-financed acquisitions or the loss of significant customer contracts, particularly in the cash logistics operations, from operational missteps.
Related Criteria And Research
-- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Credit FAQ: Knowing The Investors In A Company's Debt And Equity, April 4, 2006
Ratings List Garda World Security Corp. Ratings Removed From CreditWatch And Affirmed/Recovery Ratings Unchanged To From Corporate credit rating B+/Stable/-- B+/Watch Neg/-- Senior secured notes BB BB/Watch Neg Recovery rating 1 1 Senior unsecured debt B B/Watch Neg Recovery rating 5 5 Ratings Assigned Proposed US$250 mil sr secured term loan BB Recovery rating 1
Proposed US$100 mil sr secured revolving cr facility BB
Recovery rating 1
(Caryn Trokie, New York Ratings Unit)