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TEXT-S&P affirms RAC Finance (Holdings)

(The following statement was released by the rating agency)

Overview

-- U.K.-based roadside assistance provider RAC Finance (Holdings) Ltd. (RAC) is adding a new GBP260 million term loan C facility to its capital structure.

-- The proceeds of this new facility, plus GBP30 million of cash on the balance sheet, will be used to repay GBP290 million of existing shareholder loans. 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 term loan C facility.

-- The stable outlook reflects our opinion that, even taking a conservative view of future growth prospects, the RAC should be able to maintain the financial flexibility necessary to service its highly leveraged debt structure.

Rating Action On Oct. 10, 2012, Standard & Poor's Ratings Services affirmed its long-term corporate credit rating on RAC Finance (Holdings) Ltd. (RAC) at 'B+'. The outlook is stable.

In addition, we affirmed our 'B+' issue rating on the RAC's existing senior secured debt facilities, in line with the corporate credit rating on the group. We revised our recovery rating on these facilities downward to '4' from '3', indicating our expectation of average (30%-50%) recovery in an event of payment default.

At the same time, we assigned our 'B+' issue rating to the RAC's proposed new GBP260 million term loan C, subject to the group raising the loan successfully. The recovery rating on the loan is also '4'.

Rationale

The affirmation follows the RAC's proposal to add a new GBP260 million term loan C facility to its capital structure. The proceeds of this new facility, plus GBP30 million of cash on the balance sheet, will be used to repay GBP290 million of existing shareholder loans. The existing term loan B facility will remain in place.

The affirmation reflects our view that the RAC is effectively swapping a portion of its existing shareholder loans for bank debt. As we already considered the existing shareholder loans as debt under our criteria, the group's financial risk profile remains in the "highly leveraged" category, despite the change in its capital structure. The remaining shareholder loans will 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," reflecting its low-risk, membership-based, operating model; national scale; and strong U.K. brand recognition. The group has relatively limited exposure to macroeconomic cycles and benefits from significant barriers to entry. The "fair" business risk profile also reflects the RAC's limited geographic diversification, since it generates almost all its revenues in the U.K.

We anticipate that the RAC's membership-based operating model for its individual membership business will continue to exhibit limited cyclicality, given that more than three-quarters of customers renew their policies annually. The corporate partnership business, which accounts for about 40% of annual sales, won several new contracts in 2011, which largely offset business lost in 2009. We anticipate that the RAC's insurance broking business will begin to generate stronger results as it matures and increases in scale.

In our base-case operating scenario, we anticipate that the RAC will achieve revenue growth of about 5% to just above GBP460 million in the financial year ending Dec. 31, 2012 (financial 2012). The group has been developing and strengthening 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 about GBP95 million in financial 2011. Management has successfully delivered against ambitious internal efficiency and cost-cutting targets in the current financial year.

The RAC remains strongly cash flow-generative. We forecast that the group will generate stable funds from operations (FFO) of just less than GBP90 million in financial 2012 and adjusted FFO to debt of about 10% (just less than 14% excluding shareholder loans). The group can reduce its leverage quickly at a senior level, as it demonstrated by making significant early repayments against the GBP520 million term loan B facility it took out when it separated from the Aviva Group in September 2011.

Liquidity

We assess RAC's liquidity as "adequate" under our criteria. We anticipate that

liquidity sources, including adjusted FFO, will be in excess of our 1.2x guidance in financial 2012 for an "adequate" liquidity position.

We forecast that liquidity sources will be about GBP165 million in financial 2012, including:

-- About GBP45 million of cash (this excludes about GBP20 million of restricted 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 about GBP40 million, including:

-- Capex in the region of GBP10 million-GBP15 million.

-- Based on the RAC's history of unscheduled debt repayments, our assumption of repayments of GBP30 million.

The RAC has negligible annual debt repayments before 2017. Following the group's refinancing in 2011, we consider that headroom under the proposed covenants is likely to remain "adequate" in the near-to-medium term (that is, sufficient for forecasted EBITDA to decline by 15% without the group breaching covenant tests, as per our criteria).

Recovery analysis The issue rating on the RAC's senior debt facilities is 'B+', in line with the corporate credit rating. The senior debt facilities comprise: a GBP25 million RCF; a GBP30 million capex and restructuring facility (currently GBP20 million drawn); a GBP520 million term loan B facility (GBP410 million currently outstanding); and the GBP260 million new term loan C. The recovery rating on the senior 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 facilities reflects our view that the addition of GBP260 million term loan C has reduced the recovery prospects for the various senior secured debtholders.

The recovery rating is underpinned by unconditional guarantees from all material subsidiaries (representing at least 80% of EBITDA and gross assets), and by our favorable view of the U.K. jurisdiction from a creditor perspective. At the same time, the recovery rating is constrained because there are limited freehold assets; most of the assets pledged are intangible; and the security package for the senior facilities only includes a pledge on the nonregulated assets of operating subsidiaries RAC Financial Services and RAC Motoring Services, which are modest in value.

The senior debt facilities incorporate reset financial covenants and only modest debt incurrence baskets.

To determine recovery prospects, we simulate a hypothetical default scenario. Our default scenario assumes that greater competitive pressures could result in the loss of key corporate contracts, which, combined with potentially higher 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, we value the group on a going-concern basis. We primarily use a market multiple approach, with an EBITDA multiple of 5.5x at the point of default, based on our analysis of peers with similar business risk profiles. On this basis, we determine a stressed enterprise value of about GBP365 million at our simulated point of default. After deducting GBP20 million of enforcement costs, this leaves about GBP345 million for the senior secured debtholders. Including prepetition interest, the senior secured facilities amount to about GBP755 million, which translates into meaningful recovery in the 30%-50% range.

Outlook

The stable outlook reflects our opinion that, even taking a conservative view

of future growth prospects, the RAC should be able to maintain the financial flexibility necessary to service its highly leveraged debt structure. This reflects the group's solid operating track record, positive free cash flow generation, and our view of the stability of its individual membership business model. The outlook also reflects the absence of near-term refinancing challenges, provided that the group maintains adequate headroom under its financial covenants.

We could lower the rating if the group failed to maintain adjusted FFO to debt above 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 Research All articles listed below are available on RatingsDirect on the Global Credit Portal.

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate 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, 2008 Ratings List Ratings 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 3 New Ratings RAC Finance (Holdings) Ltd. Senior Secured Debt B+ Recovery Rating 4

(Caryn Trokie, New York Ratings Unit)

((Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging: rm://caryn.trokie.reuters.com@reuters.net))

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