La Financiere Atalian Downgraded To 'B' On High Leverage; Outlook Stable

  • French facilities services provider La Financiere Atalian (Atalian), reported weaker EBITDA generation and higher debt than anticipated for the third quarter of 2018.
  • As result, we no longer expect debt to EBITDA to decline below 5x in 2019, but instead to remain above 6x over the next 12 months. Accordingly, we are lowering our rating on Atalian to 'B' from 'B+'.
  • We are also downgrading the company's senior notes to 'B' from 'B+'. The '4' recovery rating is unchanged.
  • The stable outlook reflects our expectation that despite Atalian remaining acquisitive, adjusted leverage will improve to 6x and free operating cash flow will be positive by year-end 2019 as a result of EBITDA growth, realization of synergies, and lower integration costs.
PARIS (S&P Global Ratings) Dec. 7, 2018--S&P Global Ratings said today that it 
lowered its long-term issuer credit rating on France-based La Financiere 
Atalian SAS (Atalian) to 'B' from 'B+'. The outlook is stable. 

At the same time, we lowered the issue rating on the company's senior debt to 
'B' from 'B+'. The recovery rating is unchanged at '4', indicating our 
expectation of average recovery (30%-50%; rounded estimate 35%) in the event 
of a payment default.

The downgrade reflects our expectation that Atalian's leverage will be higher 
and funds from operations (FFO) to debt weaker than we previously forecast, 
with debt to EBITDA remaining above 5x and FFO to debt below 10% (our 
respective downgrade thresholds) in 2018 and 2019. 

The company's top-line growth over the past 12 months has remained supported 
by both acquisitions and organic growth of 2%-4% range. However, EBITDA 
margins have been hit by the change in the CICE ("crédit d'impôt pour la 
compétitivité et pour l'emploi") employment and competitiveness tax credit 
rate (about a 20-basis-point reduction). In addition, new contracts in the 
U.K. are not yet operating at full profitability and a number of large French 
contracts were renewed at lower margins. 

Furthermore, in the third quarter, the company drew €20 million on its €98 
million revolving credit facility (RCF) and increased its factoring facility 
drawings by an additional €25.5 million to €153 million. Proceeds of which 
were used to fund working capital outflows and bolt-on acquisitions. Atalian 
experienced significantly negative changes in working capital year to date to 
September 30, 2018. This is partially explained by one-off developments such 
as French social security late payments in the first quarter, but also delays 
in customers' invoicing. Although we do anticipate deleveraging in 2019, it 
will now be at a slower pace. This is because of Atalian's higher debt 
(including factoring), lower EBITDA margins, and our expectation of costs 
associated with the integration of additional acquisitions over next 12 
months.  

The issuer credit rating reflects the company's operations in a highly 
fragmented and competitive market, with limited barriers to entry, low 
margins, and significant exposure to wage inflation. We view the recent 
acquisitions, including U.K.-based Servest Limited, as favorable given they 
reduce the company's exposure in France (about 45% of the combined group's 
revenues) and provide further access to the U.K market (about 20%-25% of the 
combined group's revenues). Although the acquisitions will also enable the 
group to diversify its customer base further and produce coverage, this market 
remains very competitive and subject to price pressure, which could continue 
to challenge the company's ability to increase margins. 

We expect leverage to be around 7.2x at year-end 2018 if we include Servest 
and other acquisitions on a pro forma 12-month basis, improving to mid-6.0x 
range in 2019. Gross reported debt will be about €1.5 billion, including the 
existing €625 million and €604 million senior notes, €153 million factoring 
facility, €20 million drawings under the RCF, and other financial debt of 
about €25 million. We add back to Atalian's reported debt our estimate of 
operating-lease liabilities of about €56 million for the combined group, and 
pension obligations of about €24 million. We also deduct our estimate of €110 
million of surplus cash expected for the end of 2018 to arrive at the overall 
adjusted debt figure of about €1.4 billion. 

Our base-case scenario assumes: 
  • GDP growth of 1.6% in both 2018 and 2019 in France; 1.3% in 2018 and 1.3% in 2019 in the U.K.; and 2.0% and 1.7% in the eurozone.
  • The combined group's pro forma revenue will increase to about €3.0 billion-€3.1 billion in 2018 and about €3.2 billion in 2019.
  • We expect Atalian's revenue (excluding Servest) to rise by about 14% in 2018, much higher than GDP growth, as growth is supported by acquisitions (full-year contribution of the previous year's acquisition and additional acquisitions completed in 2018). We also incorporate moderate organic growth of the international business and 1.5%-2.0% growth in the French market.
  • Adjusted EBITDA margins of around 6% in 2018, constrained by integration costs, starting costs of new contracts, and the negative impact from the lower CICE rate. We expect margins to improve from 2019, however, supported by synergies and higher operating margins of Servest and recent acquisitions, but held back by negative pricing pressure in the French market.
  • We estimate integration and restructuring costs of €8 million-€10 million in 2018.
  • Capex of about €50 million per year, which represents about 1.5% of the group's combined revenue.
  • Earn-out payments of about €10 million per year.
  • Working capital outflow of about €70 million in 2018 due to the timing of French social security payments, seasonal delays relating to customer invoicing, and strong revenue growth in the U.K. We expect more normalized levels of around €25 million outflow in 2019.
  • Factoring drawings of approximately €25 million in 2019.
  • Dividend payment of about €18 million in 2018 and €5 million per year thereafter.
Based on these assumptions, we arrive at the following credit measures: 
  • Adjusted debt to EBITDA of about 7.2x by year-end 2018 (including pro forma 12-month contribution from Servest), improving to mid-6.0x by the end of 2019.
  • Adjusted FFO to debt of about 8.5%-9.0% at the end of 2018, improving to around 9.0%-9.5% in 2019.
  • Minimal to no adjusted free operating cash flow (FOCF) to debt in 2018, and about 3.5%-4.0% in 2019.
The stable outlook reflects our expectation that despite Atalian remaining 
acquisitive, adjusted leverage will decline to 6.0x-6.5x and FOCF will return 
to positive by year-end 2019 as a result of EBITDA growth, realization of 
synergies, and lower integration costs. 

We could lower the rating if we anticipated that Atalian would post 
weaker-than-expected EBITDA margins resulting in FOCF remaining negative in 
2019 or FFO cash interest coverage declining below 2x. We could also take a 
negative rating action if the group attempted further material debt-funded 
acquisitions, or undertook exceptional shareholder distributions beyond our 
expectations, resulting in significantly increased leverage, or if our 
liquidity assessment weakened. 

We could raise the rating if Atalian's credit metrics improved following the 
purchase of Servest and additional debt-funded acquisitions that we expect the 
company to make over the next 12 months. In particular, we could raise the 
rating if adjusted debt to EBITDA improved to around 5.0x and FFO to debt 
increased to around 12% on a sustained basis. This could happen if the group's 
profitability and cash flow generation improved significantly because of 
higher-than-expected synergies from acquisitions and improved working capital 
management.