Europcar Upgraded To 'BB-' On Sound Operating Performance; Outlook Stable; Proposed Senior Notes Rated 'B'

  • France-based Europcar Mobility Group has made good progress in the integration of its recent acquisitions of Goldcar and Buchbinder, and in the realization of expected cost synergies. The group has reported sound operating performance in 2018 and moderately improved its credit metrics.
  • Europcar Mobility Group plans to issue €450 million senior notes due 2026 and increase its revolving credit facility (RCF) by €150 million in order to refinance in full its €600 million senior notes due 2022.
  • We are upgrading Europcar Mobility Group to 'BB-' from 'B+' and raising our issue ratings on the group's debt. (See Ratings List below for details.)
  • At the same time, we are assigning our 'B' issue rating to the proposed €450 million senior notes due 2026. The recovery rating is '6', indicating our expectation of negligible recovery in the event of a payment default. We will withdraw the rating on the €600 million senior notes due 2022 when the transaction is completed.
  • The stable outlook incorporates our expectation that Europcar Mobility Group will generate a stable EBIT margin of 13%-14% over the next 12 months and sustain EBIT interest coverage at about 1.8x, funds from to operations (FFO) to debt at about 15%, and debt to capital of 84%-85%.
PARIS (S&P Global Ratings) April 15, 2019—-S&P Global Ratings today took the rating actions listed above. The upgrade follows Europcar Mobility Group's progress integrating Goldcar and Buchbinder, the two sizable acquisitions made at the end of 2017, as well as the group's realization of nearly one-third of the €40 million cost synergies expected by 2020. The group reported sound operating performance in 2018, with 22% revenue growth (3.4% pro forma for the 2017 acquisitions) and an adjusted EBIT margin of 12.9%. These results translated into moderately stronger credit metrics, notably FFO to debt of 15% and EBIT interest coverage of 1.7x, up from 13% and 1.4x, respectively, in 2017. Our base-case scenario envisages consistent credit metrics over the next year, despite the industry's cyclicality, capital intensity, and exposure to event risks, as well as the group's ambitious growth strategy.
We believe Europcar Mobility Group's margins will moderately improve over the next 12-14 months, particularly on the back of the group's focus on the faster-growing, higher-margin, low-cost segment, as well as the vans and trucks segment segment (mainly supported by the acquisition of GoldCar and Buchbinder), and ongoing strategy to attract business customers that need longer holding periods. This is on top of additional synergies that will emerge, including, among others, better fleet-purchasing power (higher discounts and lower interest) and lower overheads. We also factor in Europcar Mobility Group's cost-efficiency measures, which include network rationalization and improved efficiency in stations supported by digital and technology.
Furthermore, we acknowledge Europcar Mobility Group's focus on urban mobility solutions, as it seeks to buffer itself from potential disruptive changes in the industry. This is mostly driven by the expectation that people in cities are choosing to swap the costly responsibility of car ownership for the convenience of on-the-spot mobility solutions, such as chauffeur services, car sharing, and peer-to-peer car sharing.
We continue to see Europcar Mobility Group benefitting from a solid market position and brand recognition in its main markets of operations, which remain fragmented. We expect Europcar Mobility Group will retain its leading position in the car mobility and rental business, supported by its expanding operating scale and geographic presence in more than 18 countries (and more than 130 franchised countries). We see its operational mix as balanced between business (40% of revenues) and leisure (60%), and between airport (44% of revenues) and off-airport (56%) locations.
The off-airport presence is notably higher than that of its U.S. peers (both Hertz and Avis Budget generate only about 30% of revenues from off-airport locations), but lower than other peers, such as Car Inc., which generates about 80% of its revenues from off-airport sites; Localiza, about 70%. We note the off-airport market is more stable, with relatively consistent demand throughout the year, and is generally less cyclical with higher profitability.
We also consider that Europcar Mobility Group has solid relationships and good fleet diversification in terms of vehicle manufacturers (Volkswagen, 27%; PSA, 20%; Fiat Chrysler, 14%; Renault-Nissan-Mitsubishi, 10%; and others, 29%) in relation to its significant buyback agreements (about 90% of fleet). The latter compares favorably with its U.S. peers, which are more exposed to second-hand markets. We believe the group enjoys good operational flexibility and efficiency, with a solid average fleet utilization rate of 76.1% in 2018.
Europcar Mobility Group's business risk is constrained by our view of the price-competitive, cyclical, and capital-intensive nature of the car rental industry. Additionally, we incorporate the car rental industry's relatively short lease terms (both in absolute terms and as a percentage of an automobile's economic life) compared with other peers in the operating leasing industry.
We think Europcar has limited business and geographic diversity outside of Europe, which accounts for about 95% of revenues. In addition, we view Europcar Mobility Group as exposed to low-probability, high-impact events, such as severe weather, air traffic disruptions, and geopolitical shocks, which can impact all travel-related industries.
Moreover, the group faces a possible threat from ride-sharing services. We expect this risk will intensify over time but recognize the group's efforts of investing in those segments through its New Mobility division.
We also note that Europcar Mobility Group is currently facing potential legal claims on inflating repair bill costs in the U.K. that could cost the group about €45 million. This amount is fully provisioned in the group's accounts since 2017. We will monitor the evolution and possible consequences of such claims and possible contagious effect within the industry. We understand that Europcar Mobility Group's operating performance in the U.K. was back to normal in 2018, after weak trading in 2017, but we remain mindful that in the situation of a no-deal Brexit the group could suffer from higher inflation and somewhat lower travelling from the U.K. to South Europe during the summer period.
Although Europcar Mobility Group has good cost management and sound interest-servicing capability, supporting its healthy EBIT interest coverage ratio, we acknowledge the weakness of its FFO-to-debt ratio compared with rated peers.
The stable outlook reflects our expectation that Europcar Mobility Group will generate stable EBIT margin of 13%-14% over the next 12 months, sustaining FFO to debt of about 15%, EBIT interest coverage of about 1.8x, and debt to capital of 84%-85%. This is despite the group's ambitious growth plans and shareholder returns.
We could lower the ratings if a decline in utilization rates or stiffening price competition weakened the group's margins and cash flows. A downgrade trigger could be Europcar Mobility Group's EBIT interest coverage declining below 1.3x or its FFO to debt falling below 12%. Rating pressure could also arise if we observed that the financial policy was becoming more aggressive, for instance through additional debt-funded acquisitions or increased shareholder remuneration.
Although unlikely over the next 12 months, we could raise the ratings on Europcar Mobility Group if better-than-expected earnings, due to stronger volumes or pricing, pushed FFO to debt above 20% and debt to capital below 82% sustainably, while EBIT interest coverage remained comfortably above 1.3x.
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