International Car Wash Group Ltd. Rating Lowered To 'B-' On Impact Of COVID-19 On Traffic Levels; Outlook Stable

  • International Car Wash Group Ltd.'s (ICWG's) revenues and EBITDA are likely to decline sharply in 2020 in Europe and U.S. in the context of weak car traffic following the outbreak of COVID-19.
  • This should lead to weak credit metrics such that funds from operations (FFO) cash interest coverage of about 1.6x-1.8x in the next 12 months.
  • We are lowering to 'B-' our long-term issuer credit rating on ICWG. At the same time, we are lowering our rating on the senior secured first-lien debt to 'B-', and our rating on the senior secured second lien debt to 'CCC'.
  • The stable outlook reflects our view that ICWG should remain self-funded with adequate covenant headroom in 2020.
PARIS (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rating actions listed above.
We expect ICWG will face a sharp decline in traffic in 2020 in the context of the COVID-19 outbreak and numerous site closures.  We anticipate ICWG will face a significant decrease in traffic in 2020 under quarantine and containment measures affecting many European countries and the U.S. because of the pandemic. Currently, the majority of sites in Continental Europe are closed because of the local containment measures.
We anticipate a reduced EBITDA base in 2020 and deterioration in credit metrics, despite ICWG's flexible business model and measures taken to reduce operating expenses.  We forecast a significant decline in sales volumes and EBITDA generation in Europe and in the U.S., especially in the first half of 2020. In our view, ICWG can implement some measures to reduce its cost base and limit the impact of lower volumes on its EBITDA generation. Cost-savings initiatives include the reduction in labor cost, especially outside of the U.S. where sites are managed by self-employed operators that can quickly adjust workforce, and the negotiation of delays on rent payments. We estimate the decline in EBITDA will result in an FFO cash interest coverage ratio of about 1.6x-1.8x over the next 12 months.
ICWG has flexibility to protect its cash flow generation and sufficient liquidity to meet its financial commitments in the short term.  We anticipate that ICWG can reduce its investment in growth capital expenditures (capex) and in acquisition of new sites on short notice, thereby protecting its liquidity. Consequently, we estimate ICWG will be able to generate neutral or slightly positive FOCF of about £5 million-£10 million in 2020. In our view, the company has sufficient liquidity available, including about $45 million-$50 million of cash available as of December 2019, and $75 million of revolving credit facility (RCF) that is now drawn, to meet its financial commitments for the short term.
The stable outlook reflects our view that ICWG should remain self-funding in 2020 thanks to its large cash balances, and ability to generate neutral or slightly positive FOCF thanks to the flexibility of its cost structure and its ability to reduce total capex on short notice. In our base case for 2020 we project lower revenues but adjusted EBITDA margin of about 33%-34%. We think ICWG should be able to maintain an adjusted FFO cash interest coverage ratio of about 1.5x-2.0x over the next 12 months.
We could lower the rating if ICWG's liquidity position comes under pressure due to ICWG generating large negative free cash flow in 2020. This could come for example, from prolonged closure of sites in reaction to the covid-19 outbreak combined with inability to efficiently reduce its labor costs or inability to delay capital expenditures.

We could raise our rating if we see a significant improvement in EBITDA generation driven by the company's ability to restore its growth momentum in Europe and to continue to grow profitably in the U.S. Under such a scenario, we would expect to witness an improvement in ICWG's FFO cash interest coverage sustainably above 2x combined with evidence of continued deleveraging from the high levels of 2020.
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