(The following statement was released by the rating agency)
July 24 -
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Summary analysis -- Nobina AB ------------------------------------- 24-Jul-2012
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CREDIT RATING: CC/Negative/-- Country: Sweden
Primary SIC: Transportation
services, nec
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Credit Rating History:
Local currency Foreign currency
02-Jul-2012 CC/-- CC/--
23-Apr-2012 CCC+/-- CCC+/--
13-Dec-2011 B-/-- B-/--
24-Dec-2009 B/-- B/--
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Rationale
The ratings on Sweden-based bus service provider Nobina AB and subordinate holding company Nobina Europe Holding AB (collectively Nobina) reflect Standard & Poor's Ratings Services' view that Nobina's announcement of an extension for its EUR85 million senior secured notes on July 20, 2012 will lead to a distressed restructuring under our criteria and consequently will lead to a selective default of the issuer and default of the security at the Aug. 1, 2012 maturity date. In our opinion, the terms of the extension will offer less value than the promise of the original securities given that the maturities are being extended without providing adequate offsetting compensation and our assessment that the offer is distressed rather than opportunistic.
Prior to the announced extension, Nobina launched a note exchange offer on July 2, 2012 and subsequently updated the timeline for acceptance on July 6 and July 13, 2012. In our view, this exchange offer was also a distressed restructuring under our criteria and, as such, would also have led to a selective default of the issuer at the Aug. 1, 2012 maturity date and default of the security. We understand that Nobina had received support for the exchange offer from holders representing more than 80% of the notes outstanding; however, the minimum acceptance level for the exchange was 98%. We further understand that Nobina has received support from almost all noteholders to participate in a refinancing of the notes and discussions on the terms of this remain ongoing. In order to provide the necessary time to settle the terms of a refinancing, Nobina is seeking a temporary deferral of the notes. The details of the temporary deferral are yet to be finalized and will be released once completed.
Under the exchange offer, noteholders would have been able to exchange their holdings at par (EUR85 million) for EUR97 million (Swedish krona 860 million) of new notes due Dec. 31, 2014. If Nobina has cash exceeding a certain threshold, a 9.125% coupon will be paid in cash on the new notes. However, if cash balances are below the threshold, the coupon will be 11.125% payment in kind (PIK). In addition, under the terms of the new notes, noteholders will benefit from a cash sweep, subject to certain conditions, which replaces the existing amortization feature.
In our view, the offer is distressed rather than opportunistic because there is a real possibility of a conventional default on the senior secured notes over the near term. For example, Nobina could file for bankruptcy or fall into payment default. In addition, we consider that, as per our criteria, noteholders will receive less value than the promise of the original securities, notably due to the PIK element of the new notes and their potentially slower amortization profile.
In addition, the ratings also reflect the group's 'weak' business risk profile and 'highly leveraged' financial risk profile. The rating is limited by our assessment of the liquidity position as 'weak', given the imminent refinancing.
In our view, the main factors constraining the financial risk profile are Nobina's weak liquidity position, and high debt levels that lead to weak credit metrics. Moreover, we consider the financial policy to be aggressive, evidenced by the fact that the imminent debt maturity has not yet been refinanced. The business' low capital expenditure requirements are positive, in our opinion.
The business risk profile benefits from Nobina's predictable revenue-generating activities and competitive position as the leading provider of contractual passenger bus transportation in the Nordic region. We expect the group's revenue to remain relatively stable; over 90% is generated by regulated bus operations, underpinned by medium-term contracts granted directly or indirectly by public transport authorities. The contracts substantially protect Nobina from passenger fare box risk (passenger volume and pricing risks) because payments are based on fixed hours and kilometers driven, as stipulated in contract agreements. Nobina's relatively low profit margin, which partly reflects the competitive tender environments in the regulated Nordic bus markets, limits the business risk profile.
S&P base-case operating scenario
In our base case we anticipate that Nobina's revenues will remain stable overall for the full-year ending February 2013. Furthermore, we forecast Standard & Poor's-adjusted EBITDA of about SEK750 million. This corresponds to a slight improvement in EBITDA margins. We expect the improvement will be due partly to increased efficiency in Nobina's Norwegian operations following the change in management at Nobina Norway.
Nobina's revenues are highly visible due to the structure of the regional transport contracts. Moreover, thanks to the contract structure revenues bear limited correlation with the development of the economy, passenger growth, and increasing fuel prices. Nonetheless, in the short term fuel increases could have an impact on Nobina's cash management as the compensation takes place retroactively.
The ongoing trend toward increased public tendering of concession contracts provides opportunities for Nobina to increase its market share, particularly outside Sweden. Although Nobina's size provides it with some advantages compared with smaller operators, we believe this trend could also lead to intensifying competition.
S&P base-case cash flow and capital-structure scenario
We anticipate that credit metrics will improve for the year ending February 2013, and forecast Standard & Poor's-adjusted funds from operations (FFO) of about SEK580 million. Although we expect an improvement in FFO and EBITDA, we anticipate that growing finance lease obligations will increase our adjusted debt and constrain credit metrics. We forecast the FFO-to-debt ratio will remain at over 10.0% and the debt-to-EBITDA ratio will increase to over 6.0x. We forecast an improved EBITDA interest coverage ratio of about 2.5x.
The actual debt ratios will depend on how Nobina refinances the maturing notes, and the amount of financial debt ultimately outstanding.
Liquidity
We assess Nobina's liquidity position as 'weak' under our criteria. This is
mainly due to the impending shortfall on Aug. 1, 2012 when the existing bonds mature. While Nobina has launched an exchange offer to extend the maturity of these notes to 2014, the outcome remains subject to consent among the noteholders. As such we currently forecast a shortfall between uses and sources of cash over the 12 months to Feb. 28, 2013. The group has large refinancing requirements since its EUR85 million senior secured notes are due in August 2012.
Over the period we calculate total sources of liquidity of about SEK700 million comprising:
-- SEK90 million of unrestricted cash;
-- SEK256 million available under a revolving receivables discounting facility. We understand that this expires in October 2012, and as such do not consider it in our analysis; and
-- Standard & Poor's forecast unadjusted FFO of between SEK360-SEK420 million.
We forecast uses of approximately SEK1.5 billion over the period, including:
-- SEK1.5 billion of debt and capital expenditure. Nobina's short-term debt maturities now include the EUR85 million senior secured notes, as well as approximately SEK650 million of finance lease payments.
Cash balances, internal operating cash flows, and the receivables discounting facility are Nobina's only liquidity sources, absent available committed credit facilities. We expect Nobina to fund the majority of the capex, which pertains to new buses with financial leases.
We understand that there are no maintenance financial covenants in the documents relating to Nobina's debt.
Recovery analysis
The issue rating on Nobina Europe Holding's EUR85 million senior secured notes maturing in August 2012 is 'CC', in line with the corporate credit rating on Nobina AB. The recovery rating on the notes is '4', indicating our expectation of average (30%-50%) recovery for senior secured lenders in the event of a payment default. For our full recovery analysis, see 'Nobina Europe Recovery Rating Profile' published July 26, 2011.
Outlook
The negative outlook reflects our view that Nobina's announcement of an extension for its EUR85 million senior secured notes on July 20, 2012 will lead to a distressed restructuring under our criteria and consequently will lead to a selective default of the issuer and default of the security at the Aug. 1, 2012 maturity date. In our opinion, the terms of the extension will offer less value than the promise of the original securities given that the maturities are being extended without providing adequate offsetting compensation and our assessment that the offer is distressed rather than opportunistic.
If an exchange offer goes ahead, we will review Nobina's new capital structure and liquidity profile on completion. We could raise the corporate credit rating on the group to 'B-' from 'SD' after the completion of the offer to reflect our view of the group's 'highly leveraged' financial risk profile and 'weak' business risk profile.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008
-- Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative-Grade Debt, Aug. 10, 2009
(Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net)
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