Germany-Based Car Park Operator APCOA Group GmbH 'B' Rating Affirmed On Debt Refinancing; Outlook Stable
- Germany-based car park operator and parking infrastructure services provider APCOA Group GmbH is raising €685 million of new notes due 2031 to refinance its existing €685 million senior secured debt due 2027. The transaction is leverage neutral for the company. In addition, the company plans to upsize its revolving credit facility (RCF) to €110 million from €80 million while extending its maturity to 2031.
- After a temporary spike in leverage in 2024, due mostly to one-off expenses following the acquisition of APCOA by Strategic Value Partners LLC (SVP), we forecast deleveraging to S&P Global Ratings-adjusted debt to EBITDA of 6.2x and funds from operations (FFO) to debt of 9.4% in 2025. We also forecast increasing S&P Global Ratings-adjusted free operating cash flows (FOCF), to about €130 million in 2025, underpinned by revenue growth and recovery in profitability as the company benefits from pricing and cost initiatives.
- We therefore affirmed our 'B' long-term issuer credit rating on APCOA Group GmbH. We also assigned our 'B' issue level and '3' recovery rating to the proposed €685 million senior secured notes. The recovery rating of '3' reflects our expectation of a meaningful recovery (50%-70%; rounded estimate: 50%) in the event of a payment default.
- The stable outlook indicates that we expect APCOA will deliver solid revenue growth of 5%-7% in 2024 and 2025 along with profitability enhancement from higher volumes, pricing initiatives, and cost savings. This will drive a reduction in leverage, absent material debt-funded acquisitions or shareholder returns, and growing FOCF.
FRANKFURT (S&P Global Ratings) Sept. 23, 2024-S&P Global Ratings today took the rating actions listed above.
The affirmation reflects the leverage neutral refinancing transaction and our expectation of solid revenue growth and improvement in profitability that will support deleveraging and cash flow generation. APCOA Group GmbH is raising €685 million of new notes due 2031 to refinance its existing €685 million senior secured debt due 2027. The transaction is leverage neutral for the company. We expect APCOA to delever in 2025 with debt to EBITDA of about 6.2x and FFO to debt of about 9.0%, after a spike in 2024 to debt to EBITDA of 7.2x and FFO to debt of about 7.0% primarily due to nonrecurring expenses. We forecast a growth in FOCF to about €130 million in 2025, from €85 million in 2024, due to EBITDA growth, stable capital expenditure (capex) of €35 million-€40 million, and structurally negative working capital. APCOA has meaningful lease payments, however, that we forecast about €185 million-€195 million in 2024-2025. In our base case, FOCF after leases is negative until 2025, before turning mildly positive as revenue maximization and cost optimization initiatives bear fruit. This constrains the rating.
We expect healthy revenue growth in 2024 and 2025. We forecast revenue growth of 7.6% in 2024 and 5.4% in 2025. Continued, albeit declining, inflation-driven price increases across all markets will underpin this, along with increasing contributions from new initiatives like Urban Hubs, the continued rollout of automatic number plate recognition (ANPR) systems, electronic vehicle (EV) charging stations, and new contracts, mostly from first-time outsourcing. Several initiatives--like using analytics to deploy new pricing tariffs, dynamic pricing, and introducing short-term parking fees in the currently managed unpaid car parks--will also support revenue growth in 2025.
We forecast EBITDA margin growth from a low point in 2024. APCOA's profitability has eroded in recent years due to inflationary pressures on its cost base. In the first half of 2024, APCOA's reported EBITDA margin declined to 23.9% from 27.9% in the same period in 2023. This was mainly due to several one-off costs associated with the acquisition by SVP including reorganization and restructuring; hiring external advisors; investment in IT and digitalization; consulting and legal fees related to sale of operations in Belgium and other investments in business totaling about €12 million; and increasing personal costs to a smaller extent. For 2024, we forecast an S&P Global Ratings-adjusted EBITDA margin of 24.6%, somewhat higher than in the first half due to the seasonality of the business. We forecast the one-off costs to reduce meaningfully in 2025 to about €4 million (compared to about €22 million in 2024) resulting in margins recovering to 27.4% in 2025. EBITDA margin expansion will also be underpinned by an easing of inflationary pressures and various costs saving measures such as material procurement and centralization of certain back-office functions. The roll out of ANPR across all markets will support revenue growth along with reduction in costs.
The rating considers APCOA's private-equity ownership by SVP and its tolerance for high leverage. As part of the transaction, the size of the RCF has been increased to €110 million from €80 million, providing additional liquidity and flexibility to pursue bolt-on acquisitions. While we think that, under SVP's ownership, the company will likely make acquisitions, we understand that the financial sponsor's intention is not to exceed the opening leverage of 6.1x (as defined by the company). We have not factored any additional dividend payments or merger and acquisition activity into our base case.
The stable outlook indicates that we expect APCOA will deliver solid revenue growth of 5%-7% in 2024 and 2025 along with margins recovery to about 27% from higher volumes, pricing initiatives, and cost savings. This will drive a reduction in leverage, absent material debt-funded acquisitions or shareholder returns, and increasing FOCF.
We could lower the rating if the company's operating performance deteriorates due to competitive pressures or volume declines, and cost saving initiatives do not mitigate this, or if it adopts a more aggressive financial policy with material debt-funded acquisitions or shareholder returns, such that:
- S&P Global Ratings-adjusted FOCF turns negative for a sustained period;
- The liquidity position tightens, and covenant headroom reduces; or
- The company's leverage deteriorates significantly.
We could consider an upgrade if the company strengthens its revenue and EBITDA margins such that leverage declines to about 6.5x, FFO to debt approaches 10%, the company generates positive FOCF after leases along with company and shareholders' financial policy that supports those credit metrics over time.
Governance is a moderately negative consideration. Our assessment of the company's financial risk profile as highly leveraged reflects corporate decision-making that prioritizes the interests of the controlling owners, in line with our view of the majority of rated entities owned by private-equity sponsors. Our assessment also reflects generally finite holding periods and a focus on maximizing shareholder returns. Environmental factors are neutral for our rating analysis. The company is taking advantage of the decarbonization opportunities and had about 3,000 operational alternating current (AC) chargers as of March 31, 2024, with signed contracts for another 1,000 chargers. We think that the move toward decarbonization could also pose a risk to carparks if restrictions on certain cars parking in city centers and governments' promotion of public transport were to materially reduce overall carpark volumes.
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