Nordic Payments Firm Nets Outlook Revised To Developing; 'B' Rating Affirmed; Senior Notes Downgraded To 'B'

  • On Aug. 6, 2019, Nets Topco 3 S.a.r.l. (Nets) said it reached an agreement to sell its account-to-account and instant payment services business to Mastercard for Danish krone (DKK) 21.3 billion (€2.85 billion).
  • The sale reduces the company's scale and revenue diversity but could allow for significant deleveraging depending on how it decides to use the funds.
  • We are therefore affirming our 'B' long-term issuer credit rating on Nets, but changing the outlook to developing.
  • Separately, we have reassessed our recovery analysis and now treat the €220 million senior secured notes equally with the first-lien credit facilities. We are therefore lowering the issue rating on the notes to 'B' from 'BB-'.
  • The developing outlook reflects uncertainty regarding how much of the proceeds Nets will allocate to debt repayments, acquisitions, and shareholder returns.
FRANKFURT (S&P Global Ratings) Sept. 2, 2019—S&P Global Ratings today took the rating actions listed above.
Although the disposal weakens our assessment of Nets' business, this could be offset by a significant gross debt reduction that could become possible using the €2.85 billion proceeds (equivalent to about 85% of gross financial debt). However, Nets will determine the allocation of the funds only around the time of closing, which we expect in first-half 2020.
We do not rule out a significant debt reduction, but have doubts about the level of deleveraging that will eventually occur. This is because Nets is controlled by financial sponsors that have a track record of operating the business under high leverage and have not set any long-term leverage targets for the company. We could lower the rating if Nets used less than half of the disposal proceeds to prepay debt, preventing our pro forma adjusted gross debt to EBITDA from improving toward 8.0x in 2020, compared with 10.5x–11.5x and 8.0x–9.0x in our forecast for 2019 and 2020, respectively, without the sale.
The transaction involves Nets' operations and clearing infrastructure offered mostly to banks for account-to-account and instant payments, as well as its e-billing solutions for corporate clients. These operations jointly constitute 20%-25% of the group's consolidated net revenue, and 25%-30% of EBITDA before special items, as defined by Nets. Apart from reducing the company's scale compared with other rated payment service providers, the sale would reduce the breadth of Nets' product offering, which is a key element in our assessment of the company's business.
Moreover, we think Nets would relinquish operations that have a strong market position and are well integrated into the payments infrastructure in Denmark and Norway. We estimate the sale will dilute the company's net revenue EBITDA margins before special items by about 3 percentage points to 33%-35% (2019 pro forma), compounding the margin dilution from the acquisition of German merchant acquirer Concardis, which closed in January 2019. These considerations would likely cause us to lower our business risk assessment for Nets upon the transaction's closing, absent any acquisitions that strengthen the quality of the business. Importantly, however, we note that Nets' ability to offer account-to-account payments in merchant services is not affected. Therefore, it can continue to provide its merchant customer base with a full range of payment methods. Moreover, the disposal somewhat reduces Nets' customer concentration.
The €2.85 billion of cash from the sale would theoretically allow Nets the flexibility to repay more than 80% of its €3.4 billion gross debt at the end of second-quarter 2019. We consider this scenario unlikely, since we believe Nets' financial sponsor owners will continue to pursue aggressive financial policies and maintain high leverage. However, ratings upside could result if the sponsors decided to prepay gross debt such that our adjusted debt to EBITDA fell sustainably below 7.0x, coupled with a commitment to maintain leverage at this level. We estimate this would require prepayments using 60% or more of the proceeds.
Although some debt repayment may occur, we see a meaningful risk of the majority of the cash being paid to shareholders. This is because the company has not made any commitment regarding the use of the funds and we understand that the debt documentation potentially grants a high level of flexibility. In particular, if Nets is able to designate the sale as a disposal of a noncore asset, as defined in the facilities agreements, and completes the transaction within two years from the leveraged buy-out(by February 2020), the first- and second-lien facility agreements do not require it to prepay debt. Furthermore, we believe in this case these agreements permit distributions from the proceeds subject to covenant leverage being no higher than 6.5x (6.75x for the second-lien facility). Moreover, the inter-creditor agreement does not introduce additional safeguards over and above those set out in the first-lien documents, as per our interpretation. In our forecast, this could allow up to 75% of the proceeds to be used for distributions, translating into our pro forma adjusted debt to EBITDA calculation of 9.0x–10.0x in 2020. In light of the weaker business risk profile after closing, we are unlikely to consider this leverage to be commensurate with the current rating.
The developing outlook reflects the uncertainty as to the proportions of the disposal proceeds Nets will allocate to debt repayments, acquisitions, and shareholder returns. The outlook also incorporates our forecast that Nets will report 2%-4% organic net revenue growth in the next 12 months (excluding the divested assets) and gradually declining exceptional costs. This would enable it to achieve adjusted EBITDA margins on net revenue of more than 24% in 2020.
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