Food Service Provider Compass Group PLC Outlook Revised To Negative Amid COVID-19 Outbreak; 'A/A-1' Ratings Affirmed

  • The majority of Compass Group PLC's sports and leisure and education businesses in continental Europe and North America have temporarily closed, while operations in its business and industry segments have significantly reduced following the COVID-19 outbreak.
  • Although it is currently difficult to predict the extent of the pandemic's effect, we now expect the group's revenue and S&P Global Ratings-adjusted EBITDA could drop by as much as 25% in the financial year ending Sept. 30, 2020 (FY2020) compared to FY2019.
  • We also expect the group to considerably scale back capital expenditure (capex), interim dividends, and acquisition spending in FY2020 to offset the reduction in operating profit and return to its stated financial policy targets from FY2021.
  • We are affirming our 'A/A-1' long- and short-term issuer credit ratings on Compass, as well as the 'A' issue rating on the group's senior unsecured debt.
  • The negative outlook reflects our view that the COVID-19 outbreak will significantly harm Compass' credit metrics over this financial year. It also reflects the likelihood that the group will not be able to recover to pre-outbreak trading levels before FY2021 if the challenging operating environment persists for a sustainable period or if management does not take sufficient mitigating actions.
LONDON (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now" and "COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure," published on March 17). As the situation evolves, we will update our assumptions and estimates accordingly.
We are revising the outlook on Compass to negative because we expect government initiatives and social distancing measures in continental Europe and North America following the COVID-19 outbreak will significantly harm Compass' performance in FY2020.  The group expects to achieve organic revenue growth of about 0%-2% in the first half of 2020 thanks to a solid start to FY2020 before the effect of the virus. However, we anticipate that the shutdown of facilities and the difficult operating environment could affect up to 50% of the group's revenue if the situation does not normalize before the end of the third quarter of 2020. We forecast that this could result in a drop in revenue and adjusted EBITDA of as much as 25% year on year versus FY2019.
We envisage Compass will reduce capex, shareholder distributions, and acquisition spending to support its credit metrics, in light of the group's stated financial policy.  Compass has strong cash generation, which it has historically used to maintain stable credit metrics, targeting reported net debt to EBITDA of about 1.5x. In our revised base-case scenario, we now forecast adjusted debt to EBITDA to increase to about 2.5x at the end of FY2020, before decreasing to 2.0x from FY2021. We forecast funds from operations (FFO) to debt to fall to about 31%-32% in FY2020 before recovering to about 39%-40% in FY2021 thanks to management's cash retention initiatives. We continue to expect strong free operating cash flow (FOCF) of £830 million in FY2020, on the back of those initiatives aimed at offsetting the sharp drop in operating profit. We also anticipate that cost mitigation measures and the group's highly flexible cost base will prevent a significant reduction in EBITDA margins.
We expect the rebound in Compass' credit metrics to take place in FY2021, absent any prolonging of the COVID-19 outbreak.  Our current base case anticipates a recovery in FY2021. Although we do not anticipate an immediate rebound in earnings to previous levels given what is likely to be a weaker macroeconomic environment, we expect the majority of Compass' contracts will resume once the outbreak has been contained. That said, the timing and the spread of the COVID-19 pandemic remains very uncertain, with any potential protraction of this challenging situation further delaying a recovery and putting pressure on the group's U.S. private placement (USPP) covenants, as well as ratings.
The negative outlook reflects our view that the COVID-19 outbreak will significantly impair Compass' trading this year. It also reflects the likelihood that the group will not be able to recover to pre-outbreak credit metrics before FY2021 if management does not take steps to manage cash, or if social distancing measures and restrictions continue into FY2021.
We would consider lowering the ratings if Compass' cash flow dropped such that adjusted FFO to debt fell below 40% over the next two years or adjusted debt to EBITDA remained consistently above 2.5x. This could happen due to persistently challenging operating conditions without sufficient mitigating actions taken by management regarding shareholder remuneration and cost control.
We could revise the outlook to stable if the current effects of the COVID-19 outbreak are short-lived, supporting FFO to debt returning to above 40% on a sustained basis over the next two years and adjusted debt to EBITDA falling back below 2.0x, in light of a normalized operating environment.
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