NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an initial Issuer Default Rating (IDR) to The Brink's Company (BCO) of 'BBB-'. In addition, Fitch has assigned a rating of 'BBB-' to BCO's unsecured credit facility and a rating of 'BBB-' to BCO's unsecured private placement notes. The Rating Outlook is Stable. A full rating list follows at the end of this release.
KEY RATING DRIVERS
BCO's ratings reflect its leading market share in nearly every market it serves; strong operating profile that provides a relatively stable top-line performance; solid financial flexibility; and low leverage. Although the recent devaluation of the Venezuelan bolivar and the company's use of the SICAD II exchange rate will pressure profitability in the near term, Fitch expects North American operating profitability to be slightly higher in 2014 than 0.5% realized in 2013, and going forward, technology investments could provide further benefits to the company's margin performance.
Rating strengths include a strong operating profile, solid financial flexibility, and low leverage. BCO's cash logistics business is expanding outside the cash-in-transit (CIT) segment to higher-margin service products, which will increase BCO's exposure to these markets while maintaining the stability realized in CIT volumes. Fitch expects normalized EBITDA margins (Fitch defined) to creep towards 10% in the intermediate term following the pressure experienced in 2014.
BCO has historically maintained a relatively conservative capital structure, with minimal debt on its balance sheet. As a result, BCO's lease-adjusted leverage (total adjusted debt/EBITDAR) is relatively low at 2.72x as of March 31, 2014, and its debt maturity schedule is favorable. However, leverage and other credit protection metrics (e.g. free cash flow [FCF] margin and interest coverage) will be pressured in 2014 with lease-adjusted leverage between 3.5-4.0x due to the aforementioned Venezuelan devaluation.
Rating concerns include the substantial portion of the company's liquidity held outside the U.S., BCO's current level of North American profitability, and potential business risk if the company chooses to re-enter the home-security market. On the last point, although the 'Brink's' name is still recognized within the home-security industry, re-entering the business could add to near-term pressure on credit protection metrics.
BCO generated approximately 82% of its revenues outside of the U.S. in 2013, which is a concern, given that much of its debt has been raised in the U.S. and is denominated in U.S. dollars. Fitch views BCO's liquidity as adequate for the rating category, although the mismatch of cash flow generation and debt obligations is a risk. Offsetting this somewhat is BCO's ability to repatriate cash from its non-U.S. operations (excluding cash in Venezuela) and Fitch's expectation that the North American segment's profitability and cash flow will grow over the intermediate term. BCO has repatriated cash in the past, although it typically prefers to keep cash in foreign jurisdictions to fund local spending needs. The company's practice of leasing vehicles in North America could further enhance FCF in the region.
BCO maintains solid financial flexibility with adequate liquidity totaling $454 million at March 31, 2014, which consisted of $165 million in cash and $289 million in availability on its $480 million unsecured revolver. BCO tends to maintain solid liquidity in each of its geographic regions, and its non-U.S. operations are largely self-funded through cash flow generation and local currency revolvers.
As noted above, BCO's North American profitability has lagged some of its competitors that have invested more heavily in technology and have been more aggressive in revising employee compensation structures. BCO is currently addressing these issues, which could lead to higher profitability more in line with these competitors over the intermediate term. Fitch believes that the technology investments can yield meaningful profitability improvements, as similar systems are used in other transportation-related industries, such as environmental services and less-than-truckload trucking.
Due to the Venezuelan devaluation and specific accounting nuances, BCO's financial results are likely to weaken in 2014. In late March 2014, the company began to use the SICAD II exchange rate of approximately 50 bolivars per USD to translate its bolivar-denominated financials. The SICAD II rate is significantly different from the SICAD I rate used to translate bolivars to USD by most other U.S. companies operating in Venezuela. The SICAD I rate was approximately 11 bolivars per USD in March 2014. Due to the nature of BCO's operations in Venezuela, where it is considered a local operator, the company believes the SICAD II rate is the more appropriate rate to use. Fitch expects BCO's FCF to be negative, and its EBITDA margins to be depressed, in 2014, largely due to the Venezuelan devaluation. The devaluation has also masked the performance of BCO's other operations in its Latin American segment. Fitch expects the company's financial performance to improve materially in 2015 if the economic situation in Venezuela stabilizes.
BCO does not have any material debt maturities until its revolver matures in 2017. Fitch believes outstanding revolver borrowings could possibly be termed out with additional bank debt or another private placement, similar to the one issued in 2011. However, greater-than-expected USD cash generation or increased repatriation of overseas cash could potentially delay the need for a debt issuance in the intermediate term. BCO's first quarter 2014 draw on its revolver was due to seasonal cash flow fluctuations and Fitch expects it to be repaid throughout the remainder of 2014.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Maintaining lease-adjusted leverage (total adjusted debt/EBITDAR) below 2.0x;
--Maintaining an FCF margin between 4%-5%;
--North American operating profit increasing above 5% for an extended period.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--An increase in lease-adjusted leverage to above 3.25x for an extended period;
--Producing persistently negative FCF;
--An inability to repatriate non-U.S. cash in a timely and effective manner, if needed;
--Large debt-funded acquisitions or shareholder friendly activities.
Fitch assigns BCO's ratings as follows:
The Brink's Company
--Unsecured revolving credit facility rating 'BBB-';
--Unsecured private placement notes rating 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', May 28, 2014.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage