November 22, 2017 / 10:39 AM / a year ago

Fitch Rates Roadster Finance's Proposed Bonds 'BBB-(EXP)'

(The following statement was released by the rating agency) MILAN/LONDON, November 22 (Fitch) Fitch Ratings has assigned Roadster Finance DAC (issuer) proposed EUR600 million senior secured bonds an expected rating of 'BBB-(EXP)'. The Outlook is Stable. The final rating is contingent on the receipt of final documents conforming to information already received. Fitch also published its 'BBB-' ratings on the 2032 and 2036 USPP senior secured notes and the 2022 term loan. A full list of rating actions is at the end of this commentary. The issuer is an Ireland-based orphan SPV that raises debt and extends financing to Tank & Rast Group (T&R), Germany's largest operator of motorway service areas (MSA). The ratings consider T&R's strong position in the German MSA sector and its stable cash-flow generation. T&R demonstrated resilience during the economic downturn in 2008-2009, despite being structurally exposed to discretionary spending. T&R's portfolio of concessions is long term with none expiring until 2036. The debt structure embeds creditor-protective features. In the rating case, the transaction quickly deleverages from the five-year average net debt / EBITDA of 5.7x from 2024 when the cash sweep on the first of the two planned bonds issues starts. T&R is moderately sensitive to traffic and fuel volume shocks. KEY RATING DRIVERS Moderate but Resilient Traffic Growth - Volume Risk: Midrange Traffic growth is the key revenue growth driver for fuel, retail, gastronomy and other activities, such as Sanifair, the pay-per-use sanitary facilities. Traffic on the Autobahn network increased modestly at a 10-year CAGR of around 0.5% between 2005 and 2015. Traffic declined 3% from peak to trough through the 2007 and 2010 economic downturns compared to double-digit percentage declines in other European countries. By 2011, traffic recovered to its pre-crisis peak of 2007. The German motorway network plays a key role in the country's mobility and is not exposed to competing parallel roads, in contrast to Italy or Spain. In our view, the potential introduction of motorway network access charges for light vehicles should not change traffic stability, as long as fees are low and collected via a vignette mechanism. The German MSA sector is mature and exposed to discretionary spending. T&R services around 500 million visitors a year. Over the past 10 years, traffic has remained stable while T&R's EBITDA increased at 5.4% CAGR in 2005-2015, as T&R introduced new services, such as Sanifair, and well-known brands, such as McDonald's, that increased turn-in, turn-in to sale conversion rates, and spend per visit. Fixed and Variable Leases - Price Risk: Midrange Contracted operators (individual franchisees and corporate tenants, together herein referred as tenants) provide most of the fuel, hotel, restaurant and retail services under short-term leases of five years on average. T&R directly operates 12 of around 410 sites, to test retail concepts or redress performance before contracting to a new operator. Under this landlord-tenant model, T&R subleases its sites to tenants in exchange for paid monthly fixed and variable leases. T&R receives fuel commissions from the oil companies supplying their tenants. In 2016, nearly half of T&R's revenue came from fixed leases and fixed fuel commissions, providing stable cash flow. In 2013, a new system that allocates fuel rights in part through a competitive tender process helped to boost T&R's revenue. Low Cost and Supply Risks - Operation Risk: Stronger T&R passes on most operating obligations to tenants. Its cost base is predictable as it mainly comprises personnel, maintenance and concession fees. Capex intensity is low in our view. Fuel purchases for its self-supply fuel business are passed through to revenue. We do not forecast supply constraints in terms of fuel supply or tenants. An abundance of oil companies can supply fuel and T&R has in place contingent physical security of supply contracts. The tenant portfolio is diversified, comprising about 90 private individuals operating a few sites, while the top five corporate tenants account for around 18% of lease revenue. Bank guarantees on lease payments, direct debt arrangements and short payment terms mitigate T&R's exposure to each tenant. A large pool of replacement tenants is available. The tenants' profitability is low, although over the past 12 years only seven tenants went bankrupt, out of which three tenants were during a running lease contract. These three tenants were replaced easily. T&R has extensive powers over the tenanted assets, including a budgeting/financial data-reporting framework, and termination rights with a 12-month notice period after 2021 in the case of underperformance. Discretionary Capex - Infrastructure Development and Renewal: Stronger The T&R sites are well maintained and do not require expansionary capex to accommodate the projected traffic under our Fitch base and rating cases. The debt structure covenants minimum annual capex maintenance expenditure of EUR25 million, which reduces as the concessions' remaining life approaches 10 years. T&R's management anticipates expansionary investments through to 2025 on existing sites and new off-motorway initiatives to sustain revenue growth. These investments are flexible and cancellable. The technical advisor expects such capex to generate EUR78 million of additional revenue in 2025. Fitch expects the operational cash flows to fully cover the capex requirements. Mix of Bullet and Amortising Debt - Debt Structure: Midrange T&R's outstanding bank loan will be partially refinanced with the issuance of two public bonds totalling up to EUR600 million. The target capital structure will then comprise a combination of amortizing private placements with 5- to 10-year grace periods, bank debt and public bonds. All are senior secured and pari passu. The public bonds, including the one planned to be issued in 2018, are bullet with mandatory cash sweep post expected maturity. Our forecasts anticipate the full repayment of the bonds before legal maturity. The security package supports the orphan SPV's loan to T&R Group, with the benefits passed indirectly from the orphan SPV to the senior secured creditors. The security comprises first-ranking securities over T&R Group assets and a cross-guarantee system provided by members of the Group with carve-outs. T&R has two vanilla interest rate swaps on the bank debt, whose negative mark to market (MtM) was partially restructured via an offsetting swap at the time of USPP pricing in mid-September; the balance of negative MtM is being restructured via an additional offsetting swap at closing of two public bonds. We include the crystallised MtM in our leverage metric calculations. A downgrade to below investment grade would trigger a dividend lock-up. Additional debt is subject to rating confirmation at 'BBB-' and compliance with the dividend lock-up ratios. The documentation also includes minimum hedging policy and limitation on debt maturity concentrations. The rated debt benefits from a EUR50 million liquidity facility covering 12 months of debt service, EUR50 million working capital and EUR200 million capex committed facilities. At inception, the financial counterparty minimum rating for hedging providers is 'BBB-'. Financial Metrics Net debt/EBITDA remains high at an average 5.7x during the initial five years, but we anticipate deleveraging after the bonds' expected maturities when the cash sweeps begin. Fitch rating case forecasts net debt/EBITDA falling to around 4.5x in 2024. The robust project life coverage ratio with a minimum of 1.7x highlights T&R's ability to retire the debt ahead of the first concession's maturity in 2036. T&R is moderately sensitive to traffic or fuel volume shocks, and does not rely on expansionary capex. Cash flows are resilient to no increases in average spending per customers in the gastro and retail businesses. PEER GROUP Fitch compared T&R to large EMEA toll-road operators, which have both lower 2017 and five-year average leverage metrics, albeit higher ratings. In contrast, T&R's debt structure includes extensive security/liquidity packages and creditor-protective features such as cash sweep, covenanted deleveraging path and rating affirmation requirement at 'BBB-' before contracting additional debt. From an operational standpoint, traffic on Germany's motorway network was more resilient than in Italy, Spain and Portugal. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: - An upgrade is unlikely based on the current additional indebtedness language that requires post-tap ratings no less than investment grade. An upgrade could be anticipated if five-year average Fitch adjusted net debt/EBITDA reduces below 5x and sponsors and management commit not to re-leverage. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: - Five-year average Fitch adjusted net debt/EBITDA above 6x TRANSACTION SUMMARY The Project is located in 'AAA' rated Germany, which regulates the MSA sector through a stable framework. T&R has a strong position in the sector, operating 584, or around 90%, of MSA concessions on about 410 sites along the near-13,000km German road network. The scarcity of commercially attractive locations limits competition from off-motorway service areas (Autohoefe). T&R benefits from an average concession lifetime of about 22 years with most concessions maturing between 2036 and 2038. Fitch Rating Case Our rating case forecasts EBITDA increasing at around 2.2% CAGR between 2017-2035, mainly as a result of our modest 0.5% forecast traffic growth and 1.4% long-term inflation assumptions. This reflects our view that T&R is exposed to discretionary spending and may not be able to repeat previous business innovations, such as Sanifair, that have supported growth. We stressed turn-in to sales conversion rates to account for potentially higher-than-expected fuel efficiencies. We assumed the price of washroom services to be flat, while revenue per customer in the gastro and retail business only increases in line with Fitch-assumed inflation under the rating case. We discounted the contribution to revenues from expansionary investments to 2025 by 30% to 40%, whilst keeping the EUR465 million capex outlay unchanged. The rating actions are as follows: EUR225 million 2.29% fixed-rate senior secured USPP notes maturing October 2032: publishing rating of 'BBB-'; Outlook Stable EUR282 million 2.76% fixed-rate senior secured USPP notes maturing October 2036: publishing rating of 'BBB-'; Outlook Stable EUR913 million floating-rate term loan maturing October 2022: publishing rating of 'BBB-'; Outlook Stable EUR300 million fixed-rate senior secured notes maturing 2024: assigning the rating of 'BBB-(EXP)'; Outlook Stable EUR300 million fixed-rate senior secured notes maturing 2027: assigning the rating of 'BBB-(EXP)'; Outlook Stable Contact: Primary Analyst Danilo Quattromani Senior Director +39 02 87 90 87 275 Fitch Italia - Societa Italiana per il Rating S.p.A. Via Morigi, 6 2013 Milan Secondary Analyst Giulia Noli Analyst +44 20 3530 1124 Committee Chairperson Stephane Buemi, CFA Senior Director +44 20 3530 1236 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Rating Criteria for Infrastructure and Project Finance (pub. 24 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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