RPT-Fitch Assigns Pendragon's GBP175m Bond Final 'B+' Rating

May 14 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Pendragon plc's (Pendragon) GBP175m 6.875% seven-year bond a final 'B+' rating. The rating is in line with Pendragon's 'B+' Senior Secured Rating.

The bond's final rating follows a review of the final terms and conditions conforming to information already received when Fitch assigned the expected rating on 23 April 2013.

The proceeds of the notes will be used for refinancing existing debt, most of which matures in June 2014 and for general corporate purposes. The notes will constitute direct, secured and unconditional obligations of the issuer, Pendragon, and its guarantor subsidiaries.

The 'B+' senior secured rating applied to the bond is one notch above Pendragon's Issuer Default Rating (IDR). The rating differential reflects Fitch's recovery analysis of the company on a going concern basis, using an industry consistent multiple applied to an appropriately stressed EBITDA level, which derived a recovery band of 50% to 70% and a Recovery Rating of RR3 and lead to a one notch uplift from the IDR.

KEY RATING DRIVERS:

Relationships with Auto OEMs

A significant driver of Pendragon's operations and financial performance is driven by its relationships with the various auto OEMs from which it sources vehicles. While its franchise agreements with the OEMs give Pendragon territorial sales rights and provides it a relatively stable gross margin, Pendragon is also vulnerable to the financial health and / or strategy of the OEMs.

Highly Leveraged Capital Structure

Fitch adjusts Pendragon's on-balance sheet reported debt and off-balance sheet operating lease obligations by adding the stock financing provided by third party finance providers not supplied by the financing arms of the auto OEMs. As such, the company's reported gross and net funds from operations (FFO) adjusted leverage at end-2012 was 4.8x and 4.5x, respectively. Fitch expects these ratios to remain stable in the short to medium term.

Cost Structure Flexibility Given the low operating margins inherent in the vehicle sales business model, the structure and flexibility of Pendragon's operating cost structure is important to offset the possibly volatile demand dynamics. Pendragon has relatively mid-ranging EBITDA margins exhibited in the sector, and since the downturn of 2008 and 2009, has improved its cost flexibility. Nevertheless, another sharp downturn in market demand could stress Pendragon's financial profile.

UK Auto Market

Following the sharp market downturn in 2008 and 2009 in the UK, auto sales have stabilised in the past three years, but still remain a considerable amount below their 2008 peak. Given the sensitivity of earnings to volume movements, the outlook for auto sales remains a key indicator of future performance. A mitigating factor for Pendragon is its aftersales business, which is not highly cyclical and contributes close to 40% of the company's gross profit.

RATING SENSITIVITIES:

Positive: Future developments that could lead to positive rating actions include:

- FFO adjusted leverage below 3x

- FFO fixed charge cover above 2.5x

- Free cash flow (FCF) margin above 1%

Negative: Future developments that could lead to negative rating action include:

- FFO adjusted leverage above 6x

- FFO fixed charge cover below 1.5x

- Negative FCF