(The following statement was released by the rating agency)
Dec 21 -
Summary analysis -- Global Blue ----------------------------------- 14-Dec-2012
CREDIT RATING: B+/Stable/-- Country: Netherlands
Primary SIC: Miscellaneous
Credit Rating History:
Local currency Foreign currency
22-Jun-2012 B+/-- B+/--
The ratings on Netherlands-based holding company Global Blue Acquisition B.V. (Global Blue; formerly known as Globetrotter Acquisition B.V.) reflect Standard & Poor’s Ratings Services’ view of the group’s “highly leveraged” financial risk profile and “fair” business risk profile.
The rating on Global Blue is primarily constrained by the group’s high leverage, which is partly offset by its good capacity to generate free operating cash flows and a swift amortization schedule for senior debt.
The fair business risk profile reflects our view that Global Blue’s business model, which primarily consists of VAT refund services to international travelers, is fairly small-scale, with growth prospects ultimately depending on the number and purchasing trends of travelers from emerging markets. This leaves Global Blue somewhat exposed to event risk and potential travel disruptions, the risk of regulatory changes in European travel regulation and VAT policies, and, as a result, potential volatility of earnings and demand generation, in our view. Still, the group’s track record of double-digit sales growth, its healthy profitability as reflected in a reported EBITDA margin above 35%, and positive demand trends in travel retail, are supportive rating factors.
S&P base-case operating scenario
In our base-case credit scenario, we foresee a continued potential for a double-digit sales growth in 2013 in line with recent historical trends. In addition, we think that, due to its established presence in the VAT refund services business and its focus on growth, the company’s operations should be in a position to benefit from increasing air travel demand. We therefore see the company’s reported EBITDA margin over the next two years remaining at the 35% range. We think that Global Blue’s ability to manage costs and grow its presence should mitigate the impact of any unexpected external shocks adversely impacting international travel.
S&P base-case cash flow and capital-structure scenario
In our base-case scenario at the end of fiscal 2013 (the year ending March 31, 2013), we forecast Standard & Poor‘s-adjusted financial metrics (including convertible preferred equity certificates (CPECs) of approximately 10x debt to EBITDA, 2x EBITDA interest cover, and free operating cash flow to debt of about 3%. When excluding the CPECs, this corresponds to a level of approximately 4x adjusted debt to EBITDA, 4x adjusted EBITDA interest cover, and adjusted free operating cash flow to debt of about 7%.
We assess Global Blue’s liquidity as “adequate,” according to our liquidity criteria. We expect the company’s liquidity sources--including cash, funds from operations (FFO), and available credit facilities--to amply exceed uses by more than 1.2x over the next 12 months, even in the event of a moderate unforeseen decline in EBITDA. While the business is not capital intensive, its seasonal cycle and the potential for downside swings, owing to the risk of travel disruption, require a certain cushion of liquidity sources and headroom under financial covenants.
Our liquidity assessment is based on the following factors and assumptions:
-- Liquidity sources mainly include a nominal cash balance of EUR58 million at the end of October 2012.
-- The company’s liquidity is also supported by a EUR65 million revolving credit facility (RCF), of which EUR20 million drawn as of Oct. 31, 2012. We understand that the remaining EUR20 million of RCF still drawn has been repaid in November making the facility fully available. The RCF will fall due in 2017.
-- We anticipate that Global Blue will generate about EUR60 million of FFO in fiscal 2013 that comfortably covers the company’s obligation to repay the initial revolver drawing.
-- Liquidity uses for the fiscal year 2013 mainly include our assumptions of EUR20 million in working capital needs and EUR10 million of capital expenditures (capex). We do not expect any dividend payments over the next 12 months.
-- The company has a favorable debt maturity profile with a manageable annual amortization until 2018 when the EUR277.5 million term loan B will become available.
-- We anticipate that the company will have adequate headroom (at least 25%) under its financial maintenance covenants.
The senior secured credit facilities comprising a EUR65 million RCF, EUR120 million term loan A, and EUR277.5 million term loan B borrowed by Global Blue are rated ‘B+', in line with the corporate credit rating. The recovery rating of ‘3’ indicates our expectation of meaningful (50%-70%) recovery for senior secured debtholders in the event of a payment default.
The senior secured debtholders benefit from the security package, which include share pledges over all the issuers’ and guarantors’ outstanding shares, security over bank accounts, and security over certain intercompany loans.
The senior secured facility agreement benefits from a typical package of four maintenance covenants, including maximum leverage, minimum interest cover, minimum cash flow cover, and maximum capex amount. The documentation also includes nonfinancial covenants with typical carve-outs.
Under our hypothetical default scenario, we contemplate a payment default in calendar-year 2015, triggered by the group’s inability to meet interest payments and scheduled amortization payments. At the point of default, we anticipate that EBITDA will have declined to about EUR60 million.
We use a market multiple methodology to determine Global Blue’s stressed enterprise value. We use a multiple of 5.5x, taking into account the group’s business risk profile and its similarly rated peers. We therefore arrive at a stressed gross enterprise value of EUR330 million. From this, we deduct 7% enforcement costs, 50% of pension deficit, and local working capital facilities. This yields a net stressed enterprise value of approximately EUR294 million.
At default, we project that there would be about EUR450 million of senior secured facilities and associated six-months’ prepetition interest outstanding. Therefore, based on the above valuation, we believe that senior secured debtholders could receive recovery in the 50%-70% range.
The stable outlook reflects our view that the company should be able to sustain at least low-double-digit revenue growth and EBITDA margin of at least 35%, based on favorable dynamics of its business model and international travel trends. The ratings do not leave any headroom for additional debt or the refinancing of the CPECs by more senior and cash-paying debt.
We could lower the rating if Global Blue’s credit metrics fail to improve owing to unexpected adverse business trends caused by declining travel, regulatory change, or operating setbacks. If Global Blue opts for a more aggressive financial policy on the back of dividend payments, or if it chooses to replace the CPECs with a pure debt-like instrument, we would also consider a downgrade. In particular, downward rating pressure could arise if Global Blue’s adjusted EBITDA interest cover ratio falls below 1.0x (3.0x when excluding non-cash interest elements) or if its free cash flow generation turns negative.
At this stage, a positive rating action over the next 12 months is unlikely in our view, given our expectation of high adjusted total leverage (including CPECs) during the period and the revenue growth assumptions that we have already factored into our base-case scenario.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009