RPT-Fitch Rates Oberthur Technologies Holding S.A.S (Oberthur)
Oct 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings expects to rate Oberthur Technologies Holding S.A.S (Oberthur) and its associated debt instruments as follows, upon completion of the pending refinancing:
Oberthur Technologies Holding S.A.S
Long-term Issuer Default Rating: 'B', Stable Outlook, is published
Oberthur Technologies S.A. (OTSA), Oberthur Technologies of America Corp
Senior Secured Term Loan B Rating: 'BB-(EXP)'/'R2(EXP)'
Oberthur Technologies Finance SAS, Oberthur Technologies S.A. (OTSA) and
Oberthur Technologies of America Corp
Senior secured RCF: 'BB-(EXP)'/'R2(EXP)'
Oberthur Technologies Holding S.A.S
Senior notes: 'CCC+(EXP)'/'R6(EXP)'
The ratings relate to the pending refinancing of Oberthur's current first lien debt (EUR530m) and second lien debt (EUR100m) from the proceeds of a proposed senior secured Term Loan B for an amount of EUR440m and senior notes issue for an amount of EUR200m.
Fitch has assigned an expected rating of 'BB-(EXP)'/'R2(EXP)' to the EUR440m senior secured Term Loan B and a 'CCC+(EXP)'/'R6(EXP)' to the EUR200m senior notes. In its recovery analysis, Fitch adopted the going concern value of the company, as the resultant enterprise value is higher than the liquidation enterprise value. Under the going concern approach, Fitch believes that an EBITDA discount of 25% on December 2012 EBITDA and a 5x EV multiple are deemed fair in a distressed case.
Final instrument ratings would be contingent upon the receipt of final documentation conforming materially to information already received. Failure to conduct the refinancing according to plan would result in the withdrawal of the above instrument ratings.
Fitch has not classified as debt the EUR267.5m (at end of December 2012) shareholder loan issued at Oberthur Technologies Holding S.A.S and has therefore excluded it from leverage and coverage ratios. The proposed features of this instrument match Fitch's perception of an-equity like instrument (see "Treatment of Junior Corporate Debt in Europe", dated 8 April 2011 at www.fitchratings.com).
KEY RATING DRIVERS
Solid Existing Market Position:
Oberthur is the global number two player in Telecoms (SIM cards & Telecom solutions) with a 12% market share in 2012 (Gemalto is number 1 with a 29% market share) and the number three global player in Payment and Transport (payment smart cards, magnetic smart cards, payment solutions etc.) with a 16% market share in 2012 (Gemalto number 1 with 33% market share). The global smart cards market is highly concentrated with the four leading producers representing almost 70% of the market.
Defensive Business Model:
Oberthur benefits from recurring revenues; automatic card renewals drive approximately one third of issued cards contributing to the solid visibility of Oberthur revenues. Moreover, the critical nature of Oberthur's solutions and services and its highly integrated and specialised offerings increase the loyalty of the client base and represent a significant barrier to entry. Growing Market:
Oberthur is operating in a growing market. The Telecom market (telecom cards unit shipments) is expected to grow at a 4% CAGR through 2012-2016 driven by increasing penetration rates, high churn levels and the arrival of new technologies: LTE (long-term evolution), Near Field Communications (NFC) and machine-to-machine (M2M). The payment market (payment cards unit shipments) is expected to grow at a 17% CAGR through 2012- 2016. Demand in payment is expected to be supported by growth in banking penetration especially in emerging markets, conversion from magnetic stripe cards to chip cards with EMV (Europay, Mastercard and Visa) standards and the emergence of contactless payments driving migration of banks to dual interface cards. In the Identity market research firm, ABI expects the e-document unit shipments to grow by 22% CAGR between 2012 and 2016.
Significant Technology Risk:
Mobile money and banking offer significant growth potential to operators, handset manufacturers and technology providers, however determining the winners in a fast evolving industry is far from clear. NFC is still in its early phases but is expected to grow rapidly. Oberthur's main competitor Gemalto seems better positioned in NFC. How effectively Oberthur's key alternative such as Embedded Secure Element (eSE) will compete is unclear to us at present. These technology shifts have the potential to significantly disrupt the cash flow generation of Oberthur in future years.
Attrition on Commoditised Revenues:
Oberthur's existing position of strength in basic SIM cards and Smart cards is becoming commoditised with price attrition continuing to dilute revenues in these core divisions in the years ahead. Albeit operating performance has been consistent, Oberthur will have to improve its process technology and/or its production efficiencies to a degree sufficient to maintain its margins. Cash Flow Volatility and High Leverage Position:
The group is not forecast to generate free cash flow (FCF) in 2013. Cash flow is exposed to volatility and a degree of execution risk and in order for the company to slowly deleverage from its current high funds from operations (FFO) leverage metrics of 5.7x in 2013 following the refinancing. Based on its projections, Fitch expects FFO adjusted net leverage to decrease from 5.7x in 2013 to 4.8x in 2016. FFO fixed charge coverage is expected to increase from 2x in 2013 to 2.25x in 2016.
Positive: The ratings could be positively affected by FFO net adjusted leverage below 4.5x and FFO fixed charge cover above 2.5x on a permanent basis along with an expectation of consistent positive FCF generation.
Negative: The ratings could be negatively affected by FFO net adjusted leverage above 6.5x and FFO fixed charge cover below 2x on a permanent basis and any material loss in market share in the Payment or Telecom divisions.