ISS Outlook Revised To Negative From Stable On Continuing Pressure On Credit Metrics; 'BBB' Rating Affirmed

Danish facility management firm ISS A/S experienced a challenging 2019, and we no longer anticipate credit metrics will fully recover in 2020.
  • Increased costs as a result of the cyber-attack in February 2020 and uncertainty surrounding the impact of the COVID-19 pandemic, could impair ISS' ability to reduce adjusted leverage and generate free operating cash flow.
  • We are therefore revising our outlook on ISS to negative from stable, and affirming our 'BBB' rating on the company.
  • The negative outlook reflects our anticipation of a weaker-than-expected operating performance and cash flow generation in 2020, resulting in funds from operations to debt falling below 20%, but recovering to over 20% in 2021 assuming an improved operating environment.
DUBLIN (S&P Global Ratings) March 24, 2020--
S&P Global Ratings today took the rating actions listed above.
We anticipate ISS A/S' credit metrics will not fully recover in 2020 following weaker-than-expected results in 2019 and due to present unforeseen operating challenges.  Despite revenue growth of 6.7% in 2019, adjusted EBITDA margins declined to 6.2% from 7.3% in 2018, adjusted leverage increased to 3.6x from 3.0x, and funds from operations (FFO) to debt was 21%, the lower end of the range commensurate with the current rating. These weaker metrics are due to the company's two loss-making contracts in Denmark and Hong Kong, delayed operational improvements in France, increased implementation costs relating to the Deutsche Telekom contract, and loss of the Novartis contract, as well as a Danish krona (DKK) 1.2 billion reduction in factoring that negatively affected working capital. These factors, coupled with the impact of the cyber-attack suffered by the company in February, and uncertainty surrounding the global spread of COVID-19, leads us to forecast EBITDA margins below 5% in 2020, instead of improving to 7% as previously anticipated. We also now expect adjusted leverage will increase to over 4.0x, and FFO to debt will fall below 20%, leaving limited headroom under the thresholds for the current rating.
We will continue to monitor the global effects of the spread of COVID-19, and will adjust our assumptions where necessary.
We forecast the company will maintain a prudent financial policy.   In light of uncertainty surrounding the full effects of the spread of COVID-19, the company has withdrawn their ordinary dividend payment scheduled for April 2020 in order to preserve its liquidity. We believe the company will evaluate the appropriate amount to be returned to shareholders in 2020 when there is more clarity on the impact of the COVID-19 pandemic. Additionally, we understand the company has already obtained an additional €400 million line of credit. We expect any share repurchase funded from the proceeds of the divestment of noncore assets will also be postponed and reviewed on an ongoing basis. Furthermore, we do not expect the company will make any acquisitions in 2020 while it focuses on its core businesses.
The negative outlook reflects our anticipation of weaker-than-expected operating performance and cash flow generation in 2020, resulting in FFO to debt falling below 20%, but recovering to above 20% in 2021, assuming the operating environment improves.
We could lower the rating if ISS continues to demonstrate a weaker operating performance as a result of elevated restructuring costs, the impact of the cyber-attack, any further material contract losses, or the continuing spread of COVID-19, resulting in FFO to debt falling below 20% on a prolonged basis.
We could revise the outlook to stable if the company is able to sustain FFO to debt comfortably above 20% over the next 12 months, having withstood current operating challenges.
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