Fitch Affirms Garda World Security Corporation's IDR at 'B+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Garda World Security Corporation's (GW) Issuer Default Rating (IDR) at 'B+'. In addition, Fitch has affirmed GW's senior secured credit facility at 'BB+/RR1' and senior unsecured notes at 'B-/RR6'. The Rating Outlook is Stable. Approximately CAD2 billion of outstanding debt is covered by Fitch's ratings. A full list of ratings actions follows at the end of this release.

KEY RATING DRIVERS

GW's ratings are supported by the firm's significant market position, consistent and improving operating margins, and low capital intensity. Following a period of rapid acquisition-fuelled growth, GW is currently focused on harvesting operational improvements and synergies evidenced by its improved margins and cash flow levels. Fitch expects GW to generate roughly CAD80 million of FCF in calendar 2016, which would be a roughly 3% FCF margin. On July 31, 2016, Rhone Capital acquired 45% of the outstanding shares of GW from Apax Partners and certain management stockholders of GW. Following the transaction, Apax and Stephan Cretier (Founder, Chairman and CEO of GW) will continue to hold a majority of the shares of GW and appoint 60% of the Board of Directors. Fitch does not expect the new equity injection to significantly affect the firm's medium-term strategy as GW remains focused on developing its newly integrated platforms with business development and operational efficiency initiatives.

Rating concerns include GW's willingness to operate at elevated leverage levels, frequent acquisition activity, and relatively concentrated customer base. GW's top 10 customers currently account for approximately 35% of its revenue, a slight increase from the 31% it represented in 2015. Additional concerns include the firm's appetite for shareholder dividends and significant cash restructuring and integration costs. Dividend concerns are somewhat mitigated in the short-term, per the company's credit agreement; GW may not pay a dividend exceeding the greater of CAD25 million or 12.5% of EBITDA, which would be roughly CAD34 million based upon July 31, 2016 numbers, prior to its total leverage falling below 3.75x. In addition, the firm's FCF profile continues to steadily advance driven by operating enhancements and limited capex.

GW has completed 3 significant acquisitions in the past two years acquiring G4S cash services in Canada, 32 currency vaults from Bank of America in the U.S. and the international protective services firm Aegis in January of 2014, April of 2014 and September of 2015 respectively. GW spent an aggregate of roughly US$300 million in the three transactions and has grown revenue and EBITDA immensely over the past three years. Fitch considers the integration of these targets as nearly completed at this point, evidenced by the company's 11.4% normalized EBITDA margin, which compares to a 10.6% and 11% for the calendar years 2014 and 2015 respectively.

GW has operated with elevated leverage to accomplish these acquisitions as the company completed two financings during the past year. GW added a term loan for US$125 million in May of 2015, maturing in 2020 and an additional US$75 million term loan in September of 2015 also maturing in 2020. GW's debt/EBITDA has varied over this time period from 7.9x at year-end 2015 to 6.9x as of July 31, 2016, but this figure is roughly 6.3x on a constant-currency basis. Fitch believes that while GW is still actively looking for acquisition targets, the company's leverage will trend down below 6.5x over the long term, absent a debt-funded acquisition.

The strength of GW's business profile provides somewhat of an offset to the relatively elevated leverage in the company's credit profile. The recurring nature of the company's revenues, long customer contracts, and relatively stable operating margins are features of higher rating categories. GW enjoys a more stable operating profile than most issuers in the 'B+' rating category. Although high leverage and debt service costs will continue to be the largest intermediate-term risk, positive FCF should, to a degree, counterbalance them. Fitch expects GW to generate roughly CAD80 million in FCF in fiscal 2017 fuelled by limited capex and declining cash integration costs.

Fitch continues to be concerned with the slight currency mismatch between cash flow and debt as approximately 40% of the company's current revenue is denominated in USD with the remainder in CAD while CAD1.7 billion or 70% of GW's debt is denominated in USD. Roughly 65% of the company's revenue is generated in North America and the remaining portion consists of U.S. Government contracts in the Middle East that are denominated in USD. GW has experienced significant currency effects over the past few years as the value of the Canadian dollar has fluctuated considerably. The CAD/US exchange rate closed GW's fiscal year (Jan. 31) at CAD1.40 compared with CAD1.27 at the end of January 2015. The average rate of the CAD/USD exchange during the year was CAD1.30 in fiscal 2016 versus CAD1.11 for fiscal 2015. These variations affected all lines of GW's financial statements including adding more than CAD170 million to the firm's long-term debt as well as the recognition of CAD85 million of unrealized loss on foreign exchange. In order to minimize long-term debt exposure these currency fluctuations, GW has entered into U.S. Cross Currency Swaps totalling US200 million and Forward Swaps totalling US120 million, and GW has attained hedge accounting for CAD355 million of its USD debt.

Fitch expects GW to primarily deploy excess cash toward additional, though likely smaller than in recent years, acquisitions. Financing costs have been reduced recently due to refinancing. Fitch expects pro forma funds from operations (FFO) interest coverage to be north of 3x at year end fiscal 2017 compared to 1.7x at year end fiscal 2016. Following a number of one-time costs in fiscal 2015, GW generated CAD50 million of FFO in fiscal 2016 compared to CAD90 million in 2015. With an asset-light business model (the firm's largest cost is personnel) GW utilizes operating leases for its armored vehicle fleets and other heavy equipment, which allows for cash flow flexibility. The medium-term maturity schedule is favorable with no material debt maturities until 2020, though the nearly CAD1.4 billion in maturities due that fiscal year is cause for concern. The company's USD230 million multicurrency revolving credit facility matures in 2018.

The rating of 'BB+/RR1' on GW's senior secured credit facility reflects its substantial collateral coverage and outstanding recovery prospects in a distressed scenario, which Fitch estimates in the 90% to 100% range. Collateral consists of nearly all U.S. and Canadian assets of restricted subsidiaries, including such assets which may be under lease agreements. This includes without limitation, accounts receivables, inventory, equipment, investment property, intellectual property, other general intangibles, and owned (but not leased) real property. The equity interests of the borrower and all equity interests of any wholly owned subsidiaries are also included within the collateral package. The rating of 'B-/RR6' on the company's senior unsecured notes reflects the minimal recovery prospects on the notes, estimated by Fitch to be in the 0% to 10% range in a distressed scenario.

KEY ASSUMPTIONS

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Maintaining total debt/EBITDA below 5.0x;

--Maintaining a FCF margin above 4%;

--Maintaining an EBITDA margin above 12%;

--Continued successful M&A integration.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--total debt/EBITDA above 6.5x for an extended period;

--debt funded shareholder-friendly activity;

--A decline in the company's EBITDA margin to below 10% on a sustained basis;

--Loss of a material contract or customer.

LIQUIDITY

GW maintains minimal cash balances and funds short term needs with operating cash flows and draws from its multi-currency USD230 million senior secured revolver which matures in 2018. The company has adequate liquidity with a CAD79 million cash balance as of July 31, 2016 though this was counterbalanced against CAD90 million of customer advances which Fitch considers restricted and not readily available. GW had USD150 million of availability under its multi-currency revolving facility as of July 31, 2016. Funding needs are manageable given GW's working capital and capital expenditure structure. Working capital volatility is largely kept in check as accounts receivables and payables have only seen large swings in past years due to large new business wins. Inventory is minimal and only includes spare parts to the company's vehicles and aircrafts. The majority of new fixed assets are funded through finance (capital) leases, decreasing annual costs, especially for new armoured vehicles. The security solutions segment is an asset light business and needs minimal capital expenditures as well.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Garda World Security Corporation

--IDR at 'B+';

--Secured revolving credit facility at 'BB+/RR1';

--Secured USD term loan B at 'BB+/RR1';

--Secured CAD term loan B at 'BB+/RR1';

--Senior unsecured notes at 'B-/RR6'.

The Rating Outlook is Stable.

Summary of Financial Statement Adjustments: Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012682

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012682

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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or
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+1-312-368-3139
or
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or
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Contacts

Fitch Ratings
Primary Analyst
Akin Adekoya
Director
+1-212-908-0312
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
or
Committee Chairperson
Alex Bumazhny
Senior Director
+1-212-908-9179
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com