FirstGroup launches rights issue to defend credit rating
LONDON (Reuters) - British bus and rail operator FirstGroup moved to defend its investment-grade credit rating on Monday by launching a discounted rights issue it hopes will raise 615 million pounds.
The company, which also reported a steep fall in annual profit, said the rights issue would "remove the risk of a credit rating downgrade", cut its growing 2 billion pound debt and allow it to upgrade its fleet and IT systems.
"The credit rating was the critical issue here," said Espirito Santo analyst Gerald Khoo. "Management has been firm on the importance of defending an investment-grade credit rating and indicated that a downgrade to junk was imminent."
Shares in the group tumbled 21 percent to 177.1 pence by 0945 GMT, their lowest level for six months.
The steep fall was because of investor concern over the dilution of their holdings as well as the company's trading outlook, Jefferies analyst Joe Spooner said.
FirstGroup lost a lucrative deal last year when the 13-year contract for Britain's West Coast Main Line, which it was originally awarded, was pulled by the government after flaws were found in the bidding process.
The company said that the underwritten issue of 722.8 million shares at 85 pence each represents a discount of 39.5 percent to the theoretical ex-rights price - the market price the stock should have after the rights issue.
Chief Executive Tim O'Toole told reporters that the capital raising represented a "decisive moment" for the company, removing constraints from its balance sheet and allowing it to kick-start a 1.6 billion pound four-year investment programme.
FirstGroup has struggled to reduce its borrowings, much of which were incurred by the 1.9 billion pound acquisition of U.S. bus business Laidlaw in 2007. Net debt rose 7.7 percent over the past financial year.
The Scotland-based company, which runs Greyhound buses in the United States, will breach its banking covenants if its debt reaches more than 3.5 times its earnings. Its debt is currently around three times earnings.
Ratings agencies Fitch and S&P both have 'BBB' ratings on FirstGroup. Any cut would have taken it below investment grade, which would immediately trigger a significant rise in the company's financing and pension costs.
FirstGroup had earlier posted pretax profit down 36.5 percent to 172.4 million pounds in the year to March 31. A more than 30 percent profit fall at its restructuring bus unit, higher fuel costs and an end to some of the subsidies received by its rail business.
The company, which runs Greyhound buses in the United States, froze its full-year dividend and said that it would not make a payout at the half-year. It added that it would pay a final dividend for the year to March 31, 2014.
FirstGroup also announced that Martin Gilbert would step down as chairman once a successor has been appointed. The 57-year-old has been with the company 27 years.
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