Livingston International Inc. Affirmed At 'B-' With A Stable Outlook; Proposed Debt Rated

  • Livingston International Inc. plans to refinance its existing capital structure with proceeds from new secured credit facilities.
  • We expect the proposed transaction to reduce debt by about C$80 million and push out the company's debt maturity profile, thereby improving liquidity and reducing the company's refinancing risks.
  • As a result, S&P Global Ratings affirmed its 'B-' long-term issuer credit rating on Livingston.
  • We also assigned our 'B-' issue-level rating and '3' recovery rating to the company's proposed US$272 million first-lien term loan facility due 2026 and C$175 million revolving credit facility due 2024.
  • In addition, we assigned our 'CCC' issue-level rating and '6' recovery rating to Livingston's proposed US$75 million second-lien term loan facility due 2027.
  • The stable outlook reflects our expectation that positive annual organic revenue growth of 1%-2% and improving adjusted EBITDA margins should contribute to positive free operating cash flow (FOCF) and adjusted funds from operations (FFO)-to-cash interest coverage of 1.5x-1.8x over the next couple of years.
TORONTO (S&P Global Ratings) April 23, 2019--S&P Global Ratings today took the rating actions listed above. Livingston plans to refinance its existing capital structure with proceeds from new secured credit facilities. We expect about C$460 million net proceeds from the debt issuance along with just under C$200 million of equity provided from Platinum Equity Capital Partners will be used primarily to purchase the equity interest in Livingston, repay the company's debt outstanding, and pay related fees and expenses. The proposed transaction pushes out the company's debt maturity profile, thereby improving liquidity and reducing the company's refinancing risks. That said, our ratings also reflect our forecast for adjusted FFO-to-cash interest coverage of 1.5x-1.8x over the next couple of years and our view that Livingston has significant exposure to rising short-term interest rates, given that the majority of its debt outstanding will have a variable benchmark rate. Our relatively weak outlook for coverage ratios is a function of our assumption that average short-term interest rates will increase in North America. In our view, relatively low interest coverage ratios and sensitivity to interest rates, combined with the company's private equity ownership and high debt level, constrain the rating at this time. Our rating also reflects our view of Livingston's small scale when compared to the broader business services industry because the company generates less than C$100 million of adjusted EBITDA.
We expect modest improvement in operating results, with limited refinancing risk following the transaction. Operating performance improved through 2018, underpinned by an increase in adjusted EBITDA margins of about 160 basis points; and we expect further improvement through 2020. This incorporates our forecast of annual revenue growth of 1%-2% and lower transaction and integration costs, as well as the execution of cost-saving initiatives that Livingston and Platinum have identified. That said, adjusted EBITDA margins should remain below 20% over the next few years, which we consider relatively low for a company that offers professional services.
The stable outlook reflects our expectation that positive annual organic revenue growth of 1%-2% and improving adjusted EBITDA margins should contribute to positive FOCF and adjusted FFO-to-cash interest coverage of 1.5x-1.8x over the next couple of years.
We could lower our ratings within the next 12 months if revenue growth and adjusted EBITDA margins trend below our expectations, potentially contributing to negative FOCF and adjusted FFO-to-cash interest coverage below 1.5x. This scenario could result from lower trade volumes potentially due to weaker-than-expected macroeconomic conditions that lead us to conclude that the company's financial commitments are unsustainable.
We could raise our ratings on Livingston within the next 12 months if we expect the company to sustain adjusted FFO-to-cash interest coverage above 2x and adjusted debt-to-EBITDA near 5x. This could occur from solid organic growth prospects and execution of the company's cost-saving initiatives, which in turn contribute to adjusted EBITDA margins above 20% and stronger-than-expected FOCF.
Livingston is a provider of customs brokerage and compliance services in North America. The company also offers international trade consulting and international freight forwarding across the continent and around the globe. Livingston employs more than 3,200 employees at more than 105 key border crossings, seaports, airports, and other strategic locations in North America, Europe, and Asia.
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