TEXT-S&P rates DirectCash Payments 'B+', stable outlook

Wed Jul 25, 2012 2:32pm EDT

Overview
     -- Calgary, Alta.-based automated teller machine (ATM) and prepaid card 
provider DirectCash Payments Inc. recently acquired Australia-based ATM
provider Customers Ltd. for approximately A$173 million plus the assumption of 
about A$44 million of Customers' debt outstanding.
     -- In addition, the company acquired the ATM business of U.K.-based 
InfoCash Holdings Ltd. for approximately C$19 million on May 25, 2012.
     -- DirectCash plans to issue C$125 million in senior unsecured notes and 
C$65 million of common equity, the proceeds of which it will use to repay 
bridge financing and revolver draws used to facilitate the acquisitions.
     -- The company recently entered new senior secured credit facilities that 
included a C$85 million term loan and C$115 million revolver.  
     -- We are assigning our 'B+' long-term corporate credit rating and stable 
outlook to DirectCash.
     -- At the same time, we are assigning our 'B' issue-level rating and '5' 
recovery rating to the proposed senior unsecured notes. 
     -- The stable outlook reflects our expectation that DirectCash will 
maintain its debt-to-EBITDA ratio (adjusted as per Standard & Poor's criteria) 
below 3.5x on a pro forma basis in the next year.

Rating Action
On July 25, 2012, Standard & Poor's Ratings Services assigned its 'B+' 
long-term corporate credit rating to Calgary, Alta.-based automated teller 
machine (ATM) and prepaid card provider DirectCash Payments Inc. The outlook 
is stable.

At the same time, Standard & Poor's assigned its 'B' issue-level rating and 
'5' recovery rating to the company's proposed C$125 million senior unsecured 
note. The '5' recovery rating indicates our expectations of modest (10%-30%) 
recovery in the event of default.

DirectCash plans to use the proceeds from the note issuance to repay bridge 
financing which it used to fund a portion of the Customers acquisition. The 
company recently entered new senior secured credit facilities that included a 
C$85 million term loan and a C$115 million revolver. It used these facilities 
to repay the previous credit facilities and to partially fund the acquisitions 
of Customers and Infocash. Pro forma these acquisitions, as of March 31, 2012, 
DirectCash operated approximately 18,900 ATM sites, and had trailing 12 months 
revenue and EBITDA of C$243 million and C$73 million, respectively.

Rationale
The ratings on DirectCash reflect what Standard & Poor's views as the 
company's "weak" business risk profile and "aggressive" financial risk 
profile, as defined by our criteria. 

DirectCash is the largest operator of ATM terminals in Canada and, with the 
acquisition of Customers, the largest operator of ATMs in Australia. Pro forma 
the Customers and InfoCash acquisitions, as of March 31, 2012, the company 
operated 7,200 ATM terminals in Canada, 6,000 in Australia, 4,700 in the U.K., 
600 in New Zealand, 355 in Mexico and 30 in the U.S. The company also provides 
prepaid cards in various markets, and debit terminals in Canada. 

We view DirectCash's business risk profile as weak, primarily reflecting the 
challenging operating environment in the company's core ATM services market 
and its limited operational diversity. Approximately 80% of the company's pro 
forma gross profit is derived from the ATM industry, which is experiencing 
unfavorable secular trends. In recent years, the shift toward electronic 
payment methods has pressured industrywide ATM transaction volumes. At the 
same time, competitive intensity has increased, with ATM providers offering 
what we view as aggressive rebates to merchants to secure sites, most notably 
in the Australian market. 

DirectCash is also exposed to an uncertain regulatory environment. The 
majority of the company's prepaid card customers are in the payday loan 
business, which has recently experienced regulatory changes that in turn have 
negatively affected operating results at this segment. It remains unclear 
whether additional regulations or legislation will be passed that further 
limit the use of, or fees that can be applied to, prepaid cards (or related 
ancillary products) by payday lenders. In addition, surcharge and interchange 
changes have been discussed in the past that, if implemented, could materially 
affect the ATM business. 

We view DirectCash's financial risk profile as aggressive, reflecting its 
acquisitive growth strategy and shareholder-friendly dividend policy. Its 
recent acquisition of Customers--a company approximately equivalent in size to 
itself--and its historical dividend payout ratio of more than 50% underscore 
this view. In our opinion, these factors outweigh pro forma credit metrics 
that are better than those typically indicated for an aggressive financial 
risk profile. On a pro forma basis, the company's 2011 debt-to-EBITDA ratio 
(adjusted as per our criteria) is about 3x.

Based on our assumption that DirectCash will integrate its planned 
acquisitions successfully, we forecast the company's 2012 pro forma results as 
follows:
     -- Mid-single-digit revenue growth (from pro forma 2011 levels), due 
primarily to the continued deployment of financial institution ATMs in 
Australia;
     -- Moderate gross margin compression due to continued rebate pressure 
from merchants and increased costs to deploy ATM initiatives in Australia and 
New Zealand; and
     -- Low-to-mid-single-digit EBITDA growth, owing primarily to synergies 
and lower public company costs derived from the integration of acquired 
companies.

Key risks to our forecast include potential acquisition integration/execution 
challenges or the possibility of heightened secular and competitive pressure 
in the ATM market. We note that both Customers and DirectCash have experienced 
negative year-over year ATM transaction volumes and EBITDA declines in their 
most recent reporting periods. 

Liquidity
DirectCash's liquidity is adequate (as per our criteria). In the next 12 
months, we expect sources of funds to exceed uses by more than 1.2x and 
believe sources will remain positive even if projected EBITDA declines by 15%. 
As of March 31, 2012, after giving effect to the notes and equity offering 
(which we expect to close as anticipated), pro forma sources of liquidity 
include about C$115 million of revolver availability and our expectation of 
funds from operations of about C$50 million in the next 12 months. Pro forma 
uses of funds in the next year include approximately C$24 million in dividend 
payments, capital expenditures that we estimate at about C$30 million, and 
modest debt amortization.

We expect DirectCash to maintain covenant headroom in excess of 15% on its 
financial covenants, which include a maximum total leverage ratio and minimum 
fixed charge coverage ratio.

Recovery analysis
We rate the proposed C$125 million senior unsecured notes 'B', one notch below 
the corporate credit rating, with a recovery rating of '5', indicating our 
expectation of modest (10%-30%) recovery in the event of payment default. 

For the complete recovery analysis, see the recovery report on DirectCash, to 
be published on RatingsDirect on the Global Credit Portal following this 
report.

Outlook 
The stable outlook reflects our expectation that DirectCash will maintain its 
pro forma debt to EBITDA ratio (adjusted as per Standard & Poor's criteria) 
below 3.5x in the next year. Pro forma credit metrics are stronger than those 
typically indicative of an aggressive financial risk profile, reflecting what 
we view as the potential for integration/execution challenges associated with 
the company's recent sizable acquisitions to weigh on operating results. We 
could raise the ratings on DirectCash if it integrates these acquisitions 
successfully while simultaneously demonstrating that it can stabilize or 
increase transaction volumes and EBITDA on a pro forma basis. We could lower 
the ratings if pro forma leverage increases to above 4x, which we believe 
would most likely occur if unforeseen integration/execution challenges arise 
from the pending acquisitions. 

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Global 
High Technology Industry, Oct. 15, 2009
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Assigned

DirectCash Payments Inc.
 Corporate credit rating                   B+/Stable/--
 Proposed C$125M sr unsec notes            B
  Recovery rating                          5


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.