Rating Action Overview

• New Zealand-based online classifieds company Trade Me Group's first quarter and year-to-date results were better than expected, with solid performance across its primary business segments and meaningful cost reductions supporting group margins.
• On Dec. 14, 2020, S&P Global Ratings revised its outlook on Trade Me to stable from negative and affirmed its 'B-' issuer credit and debt ratings on the company.
• The stable outlook reflects our view that Trade Me will maintain its leading market position in the online classifieds and online marketplace in New Zealand, underpinning its revenues and cash generation as the New Zealand economy recovers.

Rating Action Rationale

Trade Me Group Ltd.'s (Titan Acquisition Co. New Zealand Ltd.) operating performance and cash flows through the COVID-19 pandemic have been better than we expected. This is supported by the gradual economic recovery currently underway in New Zealand, following a sustained period of Level 1 restrictions with no major outbreaks since April 2020.

Trade Me's credit metrics reported were better than forecast. The company's fiscal 2020 S&P adjusted debt-to-EBITDA ratio was 8.5x, despite cash outflows during March and April 2020, compared to our previous expectations of above 12x. EBITDA interest cash coverage ratio was 1.9x, higher than our initial expectations of 1.5x. We forecast an adjusted debt-to-EBITDA ratio to be in the mid 8x range (inclusive of the company's shareholder loan) with EBITDA interest cash coverage ratio above 2x over the next 12 months. Excluding the shareholder loan, we expect the company's debt-to-EBITDA ratio to be in the low-to-mid 6x range. Still, we believe Trade Me's highly leveraged capital structure exposes it to a sudden earnings shock and limits its ability to reduce debt.

Trade Me's first quarter fiscal 2021 results revealed a solid improvement in operating and trading conditions. In particular, the company's Property and Marketplace divisions posted solid revenue growth of 27% and 18%, respectively, as consumers took advantage of low interest rates, and supportive lending policies to refinance and to buy property. In addition, returning expatriate New Zealanders have bolstered the demand for property. Further, consumers have opted to purchase more goods and services through Trade Me's online marketplace platform, with general bricks and mortar retail remaining subdued despite the easement of restrictions to Alert Level 1 on June 8, 2020. We note that the Jobs division remains weak, and new job listings are lower following the COVID-19 pandemic. The Motors division's revenue is relatively flat with 1% growth on previous comparable periods.

In our view, management's liquidity and cash preservation initiatives have supported Trade Me's resiliency and margins through the COVID-19 pandemic. The company reduced operating costs by 9% driven by lower promotion expenses, low company travel and office expenses, and reduced employee expenses by about 8% following the group's restructure. As a result, the company reported an S&P adjusted EBITDA margin of about 67% in fiscal 2020. We expect margins to remain in the mid to high 60% range over the next 12 months, following an improvement in trading conditions.

In our view, Trade Me remains exposed to fickle discretionary consumer spending patterns. We anticipate discretionary consumer spend to slowly pick up as the economy gradually returns to normalized levels across 2021 and 2022. We forecast a real GDP growth decline in New Zealand of 4.9% in calendar 2020, followed by growth of 4.3% in 2021, and 2.9% in 2022 and 2023.

Our analysis does not incorporate parental support during periods of financial stress. Our rating analysis focuses on the ongoing sustainability of the stand-alone business. We believe Trade Me's shareholder APAX Partners continues to be supportive given that the parent purchased the business early last year. However, we do not ascribe any equity support into the rating.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Outlook

The stable outlook reflects our view that Trade Me will maintain its leading market position in the online classifieds and online marketplace in New Zealand, underpinning its revenue and cash generation as the New Zealand economy recovers.

Upside scenario

We could upgrade the company if Trade Me can successfully navigate the ongoing operating challenges associated with the COVID-19 pandemic and continue to grow revenue and earnings commensurate with credit metrics that are supportive at the 'B' rating level. Specifically, adjusted debt to EBITDA sustained below 8.5x including the shareholder loan (debt to EBITDA sustained below 6.5x excluding the shareholder loan) and positive free operating cash flows.

Downside scenario

We could lower the rating if we viewed the company's capital structure as unsustainable or if the company faced heightened liquidity and covenant pressures. This could occur if there is a:

• Weaker earnings recovery than we expect, without a commensurate reduction in operating expenses, such that the company faced liquidity and debt covenant pressures;
• A material acceleration in customer churn or reduction in new sales due to a deterioration in the company's market position such that free cash flow was impaired; or a
• Prolonged reinstatement of COVID-19 restrictions impairing revenues and cash generation.

Company Description

Established in 1999, Trade Me operates and manages New Zealand's leading online classifieds across jobs, property, and autos, and an online marketplace platform. The company also provides ancillary services through payment processing, and general advertisements. The company reported revenues of NZ$263 million and an S&P Global Ratings-adjusted EBITDA of about NZ$176 million in the year ended June 30, 2020

Our Base-Case Scenario

• Real GDP growth decline in New Zealand of 4.9% in calendar 2020, followed by growth of 4.3% in 2021, and 2.9% in 2022 and 2023;
• Recovering domestic market conditions and cautious increase in consumer discretionary spending;
• Single digit growth in listing volumes and revenues across Trade Me's business segments including its online classified of Motors, Property, Jobs and its online Marketplace over the next 12 months;
• EBITDA margins in the mid to high 60% range, supported by improving listing volumes and restructuring initiatives;
• Capital expenditures of around NZ$20 million-NZ$30 million over the next 12 months;
• Term loan debt amortization of about NZ$9 million per year;
• No discretionary dividends to shareholders or additional large, debt-funded acquisitions; and
• Given Trade Me's financial sponsor ownership, we do not deduct any surplus cash from forecast debt balances.

Based on these assumptions, we arrive at the following adjusted credit measures for the year ending June 30, 2021 and 2022;

• Adjusted debt to EBITDA of about 8.5x (including the shareholder loan) and about 6.5x (excluding the shareholder loan); and
• EBITDA to cash interest coverage ratio of above 2x.

Liquidity

We consider Trade Me to have adequate liquidity. We forecast the company's sources of liquidity, including cash, will exceed its uses by more than 1.2x over the next six to 12 months, and we expect net sources to remain positive, even if EBITDA declines 15%.

The first-lien and second-lien senior secured loans were the company's first issuance in the debt capital markets, with the company recently refinancing on more favorable interest rate terms. However, we believe the firm would not be able to absorb a high-impact, low-probability event without refinancing, and we expect the company's financial sponsor owners to distribute surplus capital from the business over time.

Principal Liquidity Sources

• Cash of about NZ$37 million as of June 30, 2020;
• Undrawn NZ$88 million senior secured first-lien revolving credit facility; and
• Cash FFO of about NZ$99 million.

Principal Liquidity Uses

• Mandatory term loan debt amortization of about NZ$9 million; and
• Capital expenditure of between NZ$20 million and NZ$30 million.

Debt maturities

As of Sept. 30, 2020, Trade Me's debt maturities were as follows:

• 2020: nil.
• 2021: nil.
• 2022: nil.
• 2023: nil.
• 2024: nil

Thereafter: NZ$1,162 million

Covenants

We anticipate Trade Me to operate with adequate headroom under its revolving credit facility (RCF). The first-lien credit facility is governed by a 7.3x first-lien gross debt to EBITDA financial covenant that springs when the company draws at least 35% of the facility's commitment.

Issue Ratings - Subordination Risk Analysis

Capital structure

The capital structure consists of the following:

• NZ$88 million senior secured first-lien revolving credit facility;
• A seven-year US$605 million senior secured first-lien term loan that ranks pari passu with the RCF; and
• An eight-year NZ$276 million senior secured second-lien term loan.

Analytical conclusions

We rate the seven-year US$605 million senior secured first-lien term loan in line with the issuer credit rating of 'B-'. This is because all debt in the structure is secured and there is no risk of subordination present in the capital structure.

Ratings Score Snapshot

Issuer Credit Rating: B-/Stable/--

Business risk: Weak

• Country risk: Low
• Industry risk: Intermediate
• Competitive position: Weak

Financial risk: Highly leveraged

• Cash flow/Leverage: Highly leveraged

Anchor: b-

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Financial policy: FS-6 (no additional impact)
• Management and governance: Fair (no impact)
• Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile: b-

Related Criteria

• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | General: The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities, April 29, 2014
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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