(The following statement was released by the rating agency)
-- U.K.-based roadside assistance provider RAC Finance (Holdings) Ltd.(RAC) is adding a new GBP260 million term loan C facility to its capitalstructure.
-- The proceeds of this new facility, plus GBP30 million of cash on thebalance sheet, will be used to repay GBP290 million of existing shareholderloans. The existing term loan B facility will remain in place.
-- We are affirming our 'B+' long-term corporate credit rating on RAC,reflecting our assumption that the group will raise its new GBP260 million termloan C facility.
-- The stable outlook reflects our opinion that, even taking aconservative view of future growth prospects, the RAC should be able tomaintain the financial flexibility necessary to service its highly leverageddebt structure.
Rating ActionOn Oct. 10, 2012, Standard & Poor's Ratings Services affirmed its long-termcorporate credit rating on RAC Finance (Holdings) Ltd. (RAC) at 'B+'. Theoutlook is stable.
In addition, we affirmed our 'B+' issue rating on the RAC's existing seniorsecured debt facilities, in line with the corporate credit rating on thegroup. We revised our recovery rating on these facilities downward to '4' from'3', indicating our expectation of average (30%-50%) recovery in an event ofpayment default.
At the same time, we assigned our 'B+' issue rating to the RAC's proposed newGBP260 million term loan C, subject to the group raising the loan successfully.The recovery rating on the loan is also '4'.
The affirmation follows the RAC's proposal to add a new GBP260 million term loanC facility to its capital structure. The proceeds of this new facility, plusGBP30 million of cash on the balance sheet, will be used to repay GBP290 millionof existing shareholder loans. The existing term loan B facility will remainin place.
The affirmation reflects our view that the RAC is effectively swapping aportion of its existing shareholder loans for bank debt. As we alreadyconsidered the existing shareholder loans as debt under our criteria, thegroup's financial risk profile remains in the "highly leveraged" category,despite the change in its capital structure. The remaining shareholder loanswill continue to accrue payment-in-kind interest at a rate of 12% per year.
We continue to assess the group's business risk profile as "fair," reflectingits low-risk, membership-based, operating model; national scale; and strongU.K. brand recognition. The group has relatively limited exposure tomacroeconomic cycles and benefits from significant barriers to entry. The"fair" business risk profile also reflects the RAC's limited geographicdiversification, since it generates almost all its revenues in the U.K.
We anticipate that the RAC's membership-based operating model for itsindividual membership business will continue to exhibit limited cyclicality,given that more than three-quarters of customers renew their policiesannually. The corporate partnership business, which accounts for about 40% ofannual sales, won several new contracts in 2011, which largely offset businesslost in 2009. We anticipate that the RAC's insurance broking business willbegin to generate stronger results as it matures and increases in scale.
In our base-case operating scenario, we anticipate that the RAC will achieverevenue growth of about 5% to just above GBP460 million in the financial yearending Dec. 31, 2012 (financial 2012). The group has been developing andstrengthening its sales force, which should support organic revenue growth.
We anticipate that, in the year to Dec. 31, 2012, the RAC's Standard &Poor's-adjusted EBITDA will increase to just above GBP125 million, from aboutGBP95 million in financial 2011. Management has successfully delivered againstambitious internal efficiency and cost-cutting targets in the currentfinancial year.
The RAC remains strongly cash flow-generative. We forecast that the group willgenerate stable funds from operations (FFO) of just less than GBP90 million infinancial 2012 and adjusted FFO to debt of about 10% (just less than 14%excluding shareholder loans). The group can reduce its leverage quickly at asenior level, as it demonstrated by making significant early repaymentsagainst the GBP520 million term loan B facility it took out when it separatedfrom the Aviva Group in September 2011.
We assess RAC's liquidity as "adequate" under our criteria. We anticipatethat
liquidity sources, including adjusted FFO, will be in excess of our 1.2xguidance in financial 2012 for an "adequate" liquidity position.
We forecast that liquidity sources will be about GBP165 million in financial2012, including:
-- About GBP45 million of cash (this excludes about GBP20 million ofrestricted cash and cash used in day-to-day operations).
-- GBP25 million under an undrawn committed RCF maturing in 2017.
-- Just less than GBP90 million of FFO.
-- Modest inflows from improvements in working capital.
Over the same period, we estimate that the RAC's liquidity needs will be aboutGBP40 million, including:
-- Capex in the region of GBP10 million-GBP15 million.
-- Based on the RAC's history of unscheduled debt repayments, ourassumption of repayments of GBP30 million.
The RAC has negligible annual debt repayments before 2017. Following thegroup's refinancing in 2011, we consider that headroom under the proposedcovenants is likely to remain "adequate" in the near-to-medium term (that is,sufficient for forecasted EBITDA to decline by 15% without the group breachingcovenant tests, as per our criteria).
Recovery analysisThe issue rating on the RAC's senior debt facilities is 'B+', in line with thecorporate credit rating. The senior debt facilities comprise: a GBP25 millionRCF; a GBP30 million capex and restructuring facility (currently GBP20 milliondrawn); a GBP520 million term loan B facility (GBP410 million currentlyoutstanding); and the GBP260 million new term loan C. The recovery rating on thesenior facilities is '4', indicating our expectation of average (30%-50%)recovery in the event of a payment default.
The downward revision of the recovery rating on the existing facilitiesreflects our view that the addition of GBP260 million term loan C has reducedthe recovery prospects for the various senior secured debtholders.
The recovery rating is underpinned by unconditional guarantees from allmaterial subsidiaries (representing at least 80% of EBITDA and gross assets),and by our favorable view of the U.K. jurisdiction from a creditorperspective. At the same time, the recovery rating is constrained becausethere are limited freehold assets; most of the assets pledged are intangible;and the security package for the senior facilities only includes a pledge onthe nonregulated assets of operating subsidiaries RAC Financial Services andRAC Motoring Services, which are modest in value.
The senior debt facilities incorporate reset financial covenants and onlymodest debt incurrence baskets.
To determine recovery prospects, we simulate a hypothetical default scenario.Our default scenario assumes that greater competitive pressures could resultin the loss of key corporate contracts, which, combined with potentiallyhigher costs, could put revenues under pressure and lead to a default in 2015.
Given the strength of the RAC's brand and substantial customer portfolio, wevalue the group on a going-concern basis. We primarily use a market multipleapproach, with an EBITDA multiple of 5.5x at the point of default, based onour analysis of peers with similar business risk profiles. On this basis, wedetermine a stressed enterprise value of about GBP365 million at our simulatedpoint of default. After deducting GBP20 million of enforcement costs, thisleaves about GBP345 million for the senior secured debtholders. Includingprepetition interest, the senior secured facilities amount to about GBP755million, which translates into meaningful recovery in the 30%-50% range.
The stable outlook reflects our opinion that, even taking a conservative view
of future growth prospects, the RAC should be able to maintain the financialflexibility necessary to service its highly leveraged debt structure. Thisreflects the group's solid operating track record, positive free cash flowgeneration, and our view of the stability of its individual membershipbusiness model. The outlook also reflects the absence of near-term refinancingchallenges, provided that the group maintains adequate headroom under itsfinancial covenants.
We could lower the rating if the group failed to maintain adjusted FFO to debtabove 7% (adjusted for leases and the shareholder loans).
We see a positive rating action as unlikely in the near-to-medium term,because the RAC has a highly leveraged capital structure.
Related Criteria And ResearchAll articles listed below are available on RatingsDirect on the Global CreditPortal.
-- Methodology And Assumptions: Liquidity Descriptors For GlobalCorporate Issuers, Sept. 28, 2011
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,2012
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008Ratings ListRatings Affirmed; Revised Downward
RAC Finance (Holdings) Ltd.Corporate Credit Rating B+/Stable/-- B+/Stable/--RAC Finance (Holdings) Ltd.Senior Secured Debt B+ B+Recovery Rating 4 3New RatingsRAC Finance (Holdings) Ltd.Senior Secured Debt B+Recovery Rating 4
(Caryn Trokie, New York Ratings Unit)