NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on The Brink's Company's (BCO) Issuer Default Rating (IDR), unsecured credit facility and unsecured private placement notes at 'BBB-'. The Rating Outlook is Stable. A full rating list is included at the end of the release. The ratings apply to approximately $500 million of debt.
KEY RATING DRIVERS
BCO's ratings reflect its leading market share in nearly every market it serves, strong operating profile, solid financial flexibility, and low leverage. Although revenue has been falling recently, driven by a strengthening U.S. dollar (USD), Fitch expects profitability in its largest five markets (U.S., France, Mexico, Brazil and Canada) to be higher than in 2014. Ongoing restructuring improvements and organic growth in nearly all of its markets should continue to 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 be north of 8% in the intermediate term driven by organic growth and improved efficiency measures expected to reduce direct costs by approximately $45 million - $50 million in 2015.
BCO has historically maintained a relatively conservative capital structure, with minimal debt on its balance sheet, though the recent devaluation in Venezuela and falling currencies in Europe, Brazil and Canada, among others, have weakened credit metrics. BCO's LTM lease-adjusted leverage (total adjusted debt/EBITDAR) has risen to 4.27x as of June 30, 2015, up from 2.72x at the same time prior year. Assuming limited additional currency weakness for the remainder of 2015, Fitch expects total debt/EBITDA to decline to below 1.9x by year-end, which would be down from 2.0x at year-end 2014. Free cash flow (FCF) was slightly negative in both 2013 and 2014 and Fitch expects FCF to be near break-even in 2015. FFO adjusted leverage has risen from 3.57x at year-end 2013 to 5.95x at year-end 2014 mostly driven by currency. Fitch expects full-year FFO adjusted leverage to retreat back into the high 3x range assuming limited additional unfavorable currency movement in 2015.
Rating concerns include the substantial portion of the company's liquidity held outside the U.S., BCO's current level of North American profitability, weak FCF generation, and potential business risk if the company chooses to re-enter the home-security market. 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 80% of its revenues outside of the U.S. in 2014, which is a concern, given that the vast majority of its debt has been raised in the U.S. and is denominated in USD. 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 current practice of leasing vehicles in North America could further enhance FCF in the region.
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. 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. In the past, BCO operated with a highly decentralized organizational structure with duplicative administrative, support and country-level operational management. As part of its global restructuring and technology investments the firm is currently addressing all of these issues, which could lead to higher profitability that is more in line with its competitors over the intermediate term.
In 2014, BCO recognized a $143 million loss due to the devaluation of the Venezuelan bolivar, compared to a $15 million loss in 2013. The exchange rate has moved considerably from approximately 50 bolivars to the USD in March 2014 to roughly 174 by February 2015. At Dec. 31, 2014, BCO held $13 million of cash and equivalents, $11 million of other net monetary assets and $60 million of assets held on an equity-method basis in Venezuelan operations. Most of BCO's past requests to convert bolivars to USD have been denied and certain past processes to obtain USD are no longer available, thus BCO does not expect to be able to use cash held in Venezuela for any purpose outside of the country. BCO took a $34 million write-down on its Venezuelan assets in the second quarter of 2015 (2Q15) and Fitch believes the likelihood of further write-downs is high. Though revenue from Venezuela represented $212 million or 6% of consolidated revenue in 2014, the rapidly depreciating currency has greatly diminished its earnings impact as it is currently on pace to contribute just 2% of revenue in 2015.
Brink's maintains solid financial flexibility with adequate liquidity totalling $460 million at June 30, 2015, which consisted of $147 million in cash (excluding $34 million held in customer accounts that are not available for corporate purposes) and $313 million in availability on its $525 million unsecured revolver. BCO tends to maintain solid liquidity in each of its geographic regions, and its non-U.S. operations are largely funded through operating cash flow, the BCO revolver and local credit facilities. An additional risk is the company's recent reduced ability to generate FCF largely driven by currency movements. As its primary source of debt, draws on its revolver, and thus leverage, will be driven by seasonal cash flow fluctuations.
BCO does not have any material debt maturities until its revolver matures in 2020. 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. 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.
Fitch's key assumptions within our rating case for the issuer include:
--2015 revenue in the $3 billion range;
--2015 capital expenditures at roughly $150 million;
--EBITDA margin in 2015 at roughly 8%;
--No major acquisitions, buybacks or significant shift in financial strategy in the near term;
--Limited additional negative impact from currency movements.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Maintaining FFO adjusted leverage below 3.25x;
--Maintain FCF margin between 4%-5%;
--Operating profit margin greater than 5% in largest five markets.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--An increase in FFO adjusted leverage to above 4.5x for an extended period;
--Producing persistently negative FCF;
--Inability to repatriate cash flow in a timely and effective manner;
--Large debt-funded acquisitions or shareholder-friendly activities.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
The Brink's Company
--IDR at 'BBB-';
--Unsecured credit facility at 'BBB-';
--Unsecured private placement notes at 'BBB-'.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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