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BLITZ 20-486 GMBH -- Moody's assigns B2 ratings to Apleona Group. Outlook is stable

·16 min read

Rating Action: Moody's assigns B2 ratings to Apleona Group. Outlook is stableGlobal Credit Research - 01 Feb 2021Frankfurt am Main, February 01, 2021 -- Moody's Investors Service ("Moody's") has assigned a first time B2 corporate family rating (CFR) and a B2-PD probability of default rating to BLITZ 20-486 GMBH. The outlook is stable. Concurrently, Moody's assigned B2 ratings on the proposed E740 million guaranteed senior secured Term Loan B1 (maturing in 2028), the E145 million guaranteed multi-currency senior secured Revolving Credit Facility and the E 230 million multi-currency senior secured Bonding Facility (both maturing 2027), borrowed by BLITZ 20-487 GMBH and guaranteed by its parent company BLITZ 20-486 GMBH, to finance the acquisition of Apleona Group, by PAI Partners SAS. Apleona Group will be merged into BLITZ 20-487 GMBH during the post-closing reorganization. The outlook on both entities is stable."The B2 CFR recognizes Apleona group's resilient operating performance, backed by its strong market position and the implemented digitalization and efficiency measures, that will support the strengthening of the company's credit metrics over the next 12 to 18 months", says Ana Luz Silva, Moody's lead analyst for Apleona Group. "However, the high financial leverage post-transaction appears aggressive in the context of a fragile economic recovery and will position the company's rating weakly in the current category. This is only mitigated by the solid business profile supporting deleveraging prospects and our expectation that Moody's adjusted leverage will be below 6.0x by the end of 2021." adds Ms. Silva.RATINGS RATIONALEApleona Group's B2 corporate family rating (CFR), assigned to BLITZ 20-486 GMBH, is supported by (1) good earnings visibility because of medium-term contracts with a long-established, good credit quality and diversified client base, coupled with a strong track record of contracts being renewed before or upon expiry; (2) the company's focus on technical facility management services, a market that has shown little cyclicality and is likely to grow moderately over the next few years; (3) its integrated approach, through which it offers a comprehensive range of building and technical facility services, providing a competitive advantage compared to the more specialised and smaller competitors; and (4) the company's high cash conversion rate as measured by funds from operations (FFO) to EBITDA (Moody's adjusted) at around 60%.The rating is constrained by (1) Apleona Group's high financial leverage with debt/EBITDA around 6.6x pro-forma for the transaction, though we expect it to decline to below 6.0x by year-end 2021; (2) the competitive and fragmented nature of the building and facility services markets, which constrains operating margins and increases event risk; (3) the company's limited size and regional concentration, though this is counterbalanced by its leading position in the GAS (Germany-Austria-Switzerland) region; and (5) moderate Moody's-adjusted EBITA margin of around 6%, though expected to improve now that the company has completed its own information technology (IT) infrastructure, efficiency initiatives as well as other restructuring measures.RATING OUTLOOKThe stable outlook reflects Moody's expectation of a fast pace of deleveraging towards below 6x by year-end 2021, supported by the high visibility into earnings from the existing backlog, coupled with the company's track-record of delivering the expected operational results and its proven strong cash conversion.Our stable outlook also incorporates our expectation of sustained improvement in operating margins coupled with a disciplined capital allocation until the company operates within a more comfortable leverage level for the current rating category.If contrary to our expectations, operating margins will stall or deteriorate from year-end 2020 levels; or if the company would make aggressively financed acquisitions, this would result in a negative rating action.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWHAT COULD CHANGE THE RATING - DOWNWe might downgrade Apleona Group if (1) its financial leverage remained above 6.0x debt/EBITDA (Moody's adjusted) beyond 2021; (2) its Moody's-adjusted EBITA margin narrowed unexpectedly to a low single-digit percentage; (3) it made aggressively financed acquisitions; (4) its free cash flow generation turned negative; or (5) its liquidity became weak.WHAT COULD CHANGE THE RATING -- UPA rating upgrade is unlikely because of the weak rating positioning. However, we might upgrade Apleona Group if it (1) sustainably reduces leverage to well below 5.0x debt/EBITDA (Moody's adjusted); (2) increased its Moody's-adjusted EBITA margin to well above 6% on an at least moderately growing revenue base; and (3) maintained solid liquidity.LIQUIDITYApleona Group's liquidity is adequate, comprising around E48 million in cash, pro-forma for the transaction and a fully available E145 million revolving credit facility (RCF) maturing in 2027. We expect the company to generate positive free cash flow supported by strong EBITDA cash conversion, limited working capital needs and low capital intensity with maintenance capital spending of no more than 2% of revenue.In addition, the company's liquidity will benefit from a long-term maturity of its new E740 million Term Loan, due in 2028. However, the company is subject to seasonal swing in working capital, which normally reaches peak in the first quarter and improves throughout the rest of the year, especially in the fourth quarter.The company will be subject to one springing covenant of net debt/EBITDA which is tested when more than 40% of RCF is drawn. The covenant is set at 7.72:1. We expect the company to maintain comfortable headroom under the covenant for the next 12-18 months.STRUCTURAL CONSIDERATIONSThe B2 instrument ratings on the senior secured facilities, comprising a new E740m 7-year Term Loan and the E145m 6.5-year Revolving Credit Facility, reflects the first lien pari passu ranking of the instruments.The Term Loan will be borrowed by BLITZ 20-487 GMBH, guaranteed by BLITZ 20-486 GMBH and other material subsidiaries. Guarantor coverage is at least 80% of group's EBITDA. Security package consists of shares, intra-group receivables, bank accounts.Apleona Group will be merged into BLITZ 20-487 GMBH during the post-closing reorganization.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSApleona Group's ratings factor in its private equity ownership and the associated aggressive financial policy to that, which is tolerant of high leverage, debt-funded M&A and recapitalisation measures. As such the envisaged refinancing transaction is credit negative, positioning the company's debt metrics weakly in the current rating category in a challenging economic environment.Despite the economic activity disruption caused by Covid-19, Apleona Group has demonstrated its ability to maintain earnings stability supported by its strong market positioning, the recurring nature of its technical facility management services, the long-term nature of its contracts and a flexible cost base. The company's good liquidity further supports the company's capacity to navigate through the expected tougher economic climate. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Neu-Isenburg, Germany, Apleona Group is a renowned and leading provider of facility services mainly active in GAS region (Germany, Austria, Switzerland) which generated revenues of E1.9 billion as per year-end 2020.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. 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