Nov 12 -
Summary analysis -- EXOR SpA -------------------------------------- 12-Nov-2012
CREDIT RATING: BBB+/Stable/A-2 Country: Italy
Primary SIC: Holding
Credit Rating History:
Local currency Foreign currency
26-Oct-2005 BBB+/A-2 BBB+/A-2
30-Jun-2003 A-/A-2 A-/A-2
The ratings on Italy-based investment holding company EXOR SpA reflect Standard & Poor's Ratings Services' assessment of the company's "modest" financial risk profile and its "satisfactory" business risk profile.
Our ratings factor in management's relatively prudent investment policy. This includes a limited tolerance for leverage at the holding company and--albeit to a lesser extent--subsidiary levels, the maintenance of generally long-dated outstanding debt, and an investment philosophy focused on long-term value creation. Other key credit strengths comprise diversified assets, with investments held in five listed companies and a number of unlisted holdings, and a large share of listed assets, which account for nearly 85% of EXOR's total portfolio. In addition, we view the additional flexibility arising from fairly liquid financial assets, which make up about 5% of the portfolio's value, as a main constituent of our ratings.
Some factors partly temper these strengths, including EXOR's heavy concentration on automotive manufacturer Fiat SpA (BB-/Stable/B) and professional vehicles and equipment maker Fiat Industrial SpA (BB+/Stable/B), which we estimate accounted for some 17% and 33% of the total portfolio, respectively, as of June 30, 2012. Moreover, we think that the company's investment policy of retaining controlling stakes reduces the liquidity benefits of holding listed shares. EXOR's limited track record in certain business lines (for example TV production and the European office market) is another offsetting parameter, in our view.
Key portfolio developments
EXOR posted a net profit of EUR215 million in the first half of 2012 versus EUR477 million one year earlier. Excluding the nonrecurring income related to the acquisition of control of Chrysler by Fiat (EUR323 million), net profit increased by some 40%, supported by stronger contribution from Fiat Industrial and the reduction in Juventus' losses, with broadly stable income from Fiat and C&W.
There was a number of changes in EXOR's portfolio of assets in the first half, including:
-- The subscription of its entire share of Juventus' rights issue for a total of EUR72 million (actually paid in 2011);
-- The investment of an additional EUR50 million in Fiat and Fiat Industrial to preserve an ownership above 30% after the conversion of their preferred and savings shares into ordinary shares;
-- The divestment of Alpitour SpA to Seagull SpA for EUR225 million, with EXOR reinvesting EUR36 million in the acquirer and in a hotel;
-- The partial sale of its stake (87%) in BTG Pactual for EUR19 million at the time of the Brazilian investment bank's listing;
-- An investment of EUR300 million in an equity and credit instruments fund managed solely for EXOR by The Black Ant Group LLP for a time frame of five years;
-- An investment of EUR25 million for a 2.1% stake in Paris Orleans; and
-- The partial subscription for EUR18 million to Sequana's capital increase (dilution of stake to 18.7% from 28.2%) and dissolution of the EXOR-DLMD shareholders' agreement.
Key cash flow and capital-structure developments
EXOR's loan-to-value (LTV) ratio is well placed at the 13% we calculated on Oct. 29, 2012 (on the basis on net debt and unlisted asset values as reported on June 30, 2012). On that date, its portfolio value would have had to decline by a one-third for our 20% LTV threshold to be met.
We believe operating cash generation (defined as dividends received less operating and interest expenses and dividends paid, which was about EUR10 million in 2011) should benefit from increased dividends in 2012, to more than EUR170 million (including redemption of subsidiaries' reserves) from EUR141 million. In 2013, we also expect operating and financial costs to be stable, and dividends to shareholders to grow by about 5% from the EUR80 million paid in the first half of 2012. As a result, we expect total coverage--the ratio of dividends received to operating and net interest expenses plus dividends paid at holding company level--which was 1.0x in 2011 (0.7x including share repurchases), to be above 1.0x in both 2012 and 2013.
The short-term rating is 'A-2'. We view EXOR's liquidity as "strong," as defined by our criteria, underpinned by the company's moderate leverage, long-dated debt maturities, and hefty liquid financial assets (EUR540 million in mostly investment-grade bonds and small equity investments on June 30, 2012). We anticipate that its sources of liquidity will cover its liquidity needs for the next 12 months well in excess of our 1.5x ceiling.
At half-year 2012, we estimate total liquidity sources for the following twelve months at about EUR835 million, including:
-- Available cash and equivalents estimated at about EUR480 million, pro forma for the EUR150 million bond issuance on Oct. 16, 2012 (100% of reported cash, given the lean structure of the parent company);
-- EUR175 million of undrawn committed lines available beyond June 2013. These lines do not include financial covenants; and
-- Dividend from portfolio companies amounting to close to EUR180 million.
This compares with EXOR's potential liquidity uses of about EUR440 million over the next 12 months (in the absence of imminent investment plans at the time of publication), which include:
-- Close to EUR300 million in short-term debt, including EUR50 million worth of EXOR's unpaid participation to Almacantar's capital increase. There are no subsequent debt maturities until 2016 and 2017--when the company has a EUR200 million bank loan and EUR750 million bond coming due;
-- Operating and net interest expenses of some EUR60 million; and
-- A dividend payout to shareholders of about EUR80 million.
EXOR's debt instruments feature major adverse change clauses and change-of-control provisions, but do not include ratings-related repayment triggers. Cross-default provisions in the bond and bank instruments only apply to EXOR SpA and other financial holdings, and exclude operating subsidiaries. We would expect EXOR, as a holding company, to continue managing its subsidiaries at arms' length, with limited to no intercompany financing, especially for the weaker companies.
The stable outlook reflects our view that EXOR will continue to maintain its conservative capital structure and, consequently, its meaningful financial flexibility, with an LTV ratio below 20%, even in times of high equity market turbulence. LTV at the holding company level was about 13% on Oct. 29, 2011. On that date, it would have taken a 33% decrease in portfolio value to raise it close to our 20% threshold.
We could consider taking a negative rating action on EXOR if the LTV ratio were to exceed 20%, owing to an unexpected and significant decline in equity values for a sufficiently lengthy period of time or additional investments that are not pre-financed with disposals. Any signs we see of increasing operating and financial risks in its largest portfolio companies, especially Fiat and Fiat Industrial, could also have negative implications for the ratings. In addition, any plans by EXOR for a substantial equity injection into any of its subsidiaries would exacerbate pressure on the ratings.
In our opinion, the possibility of a positive rating action on EXOR is remote at this stage. A positive rating momentum would primarily follow further substantial and sustainable improvements in the operations of EXOR's portfolio companies.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Rating Methodology for European Investment Holding and Operating Holding Companies, May 28, 2004