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