We assess Cerved's liquidity profile as "adequate" under our criteria, supported by our view that liquidity sources will comfortably exceed the group's funding needs in financial year 2013.
We anticipate that Cerved's sources of liquidity for the year ending Dec. 31, 2013, will total more than EUR1.3 billion, including:
-- EUR780 million of total proceeds from the proposed new bond issuances;
-- Cash balances in excess of cash tied to daily operations of EUR50 million;
-- Availability under committed credit facilities of about EUR75 million;
-- Strong FFO of a further EUR50 million; and
-- Share issuance resulting in an increase in common equity to EUR350 million (contributed by the new owners CVC Capital Partners).
We estimate that Cerved's uses of liquidity will consist of:
-- About EUR290 million to repay the existing bank facilities and vendor loans;
-- About EUR50 million of fees relating to the acquisition;
-- An outflow of funds to the sellers, Bain Capital, of about EUR700 million; and
-- Capex of between EUR10 million and EUR15 million.
We forecast that there will be no debt amortizations in 2013; the new RCF does not mature until 2018 and the proposed bonds do not start to mature until 2019.
The proposed EUR250 million senior secured floating rate notes (FRNs; due 2019) and EUR300 million senior secured fixed notes (due 2020) issued by Cerved Technologies have been assigned a preliminary issue rating of 'B', in line with the corporate credit rating. The recovery rating on the secured notes is '4', indicating our expectation of average (30%-50%) recovery in the event of a payment default.
The EUR230 million subordinated notes (due 2021) also issued by Cerved Technologies have been assigned an issue rating of 'CCC+', two notches below the corporate credit rating. The recovery rating on the subordinated notes is '6', indicating our expectation of negligible (0%-10%) recovery in the event of a payment default.
The group also has access to a EUR75 million super senior revolving credit facility (RCF; due 2018, not rated), available to Cerved Technologies and other subsidiaries. The secured notes also rank junior to three factoring facilities for a modest EUR29 million (all held at operating subsidiaries).
We note that Cerved Technologies S.p.A., the issuer of the notes and main borrower of the RCF, is expected to be merged with Cerved Holding, and Cerved Group S.p.A. The surviving entity is then expected to carry most of the group's debt and assets, and generate most of its EBITDA.
The super senior RCF and the senior secured notes share a similar first-ranking on a relatively weak security package, including share pledges over the shares of the issuer, intercompany loans, receivables, and certain intellectual properties (plus some movable assets for the RCF). However, the RCF has a super-priority claim on the proceeds of enforcement. Only the super senior RCF benefits from guarantees from the holding companies and material subsidiaries. The group must ensure that the guarantors represent more than 80% of the group's EBITDA and more than 80% of the group's assets and revenues. The notes are unguaranteed.
The rating on the proposed secured notes is constrained by their subordination to the RCF and factoring facilities, their weak guarantee and security package and the Italian jurisdiction that we view as relatively unfriendly for creditors. The documentation for the proposed notes is relatively standard for this type of instrument, providing limited credit protection, except for an incurrence-based limitation on debt with various, relatively permissive carve-outs.
Recovery prospects for the rated debt are supported by our expectation that, in a default, the company would be reorganized rather than liquidated, given the group's leading market positions and strong clients and customer relationships, which we believe amount to a sustainable business model.
To determine recoveries, we simulate a default. Under our hypothetical scenario, we envisage a combination of the operating and macroeconomic stresses and the company's excessive financial leverage and interest burden. This scenario would lead to a default in 2016, with EBITDA declining to about EUR80 million.
At the hypothetical point of default, we value the group at about EUR440 million, based on a market-multiple approach. We then deduct priority liabilities consisting of enforcement costs and part of the unfunded pension liabilities and factoring lines (fully utilized) totaling EUR77 million.
The residual value for the RCF lenders would be about EUR362 million. After removing RCF claims of about EUR78 million (including six months' prepetition interests), the residual value for noteholders would be about EUR284 million, which would allow average recovery expectations at the high end of the 30%-50% range, translating into our recovery rating on the notes of '4'. There is no residual value left for the proposed subordinated notes.
The stable outlook reflects our view that Cerved's credit metrics will remain in line with levels commensurate with a "highly leveraged" financial risk profile. Our base case also assumes that EBITDA margins will remain stable.
We consider that rating upside is limited at this stage, given the group's high tolerance for aggressive financial policies, such as high leverage, potential acquisitions, and cash dividends. However, sustained deleveraging, improvements in EBITDA and cash flow generation, and stronger-than-anticipated credit metrics could cause us to raise the ratings. Specifically, the group's ability to sustain an adjusted debt-to-EBITDA ratio of less than 5x, and an adjusted FFO-to-debt ratio of more than 12% could provide the basis for a positive rating action.
We do not anticipate that Cerved will increase its debt at this stage. However, we could lower the rating if the group experiences weak operating conditions that lead to severe margin pressure, or poorer cash flows leading to weaker credit metrics. Additionally, debt-financed acquisitions, and/or an increase in shareholder distributions, could also result in weaker credit metrics, which could in turn lead us to lower the rating.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Key Credit Factors: Global Criteria For Rating Companies In The Service Sectors, Nov. 12, 2012
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative-Grade Debt, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Cerved Technologies SpA
Corporate Credit Rating B(prelim)/Stable/--
Senior Secured B(prelim)
Senior Secured Recovery Rating 4(prelim)
Subordinated Recovery Rating 6(prelim)