Overview
- We have raised our ratings on RAC Bond Co.'s class A1, A2, and B1-Dfrd notes following our review of its performance under our criteria for rating corporate securitizations and the recent amendments to the transaction documents.
- RAC Bond Co.'s financing structure blends a corporate securitization of RAC's operating business in the U.K. with a subordinated high-yield issuance.
LONDON (S&P Global Ratings) April 21, 2021--S&P Global Ratings today raised to 'BBB (sf)' from 'BBB- (sf)' its credit ratings on RAC Bond Co. PLC's class A1 and A2 notes, and to 'B+ (sf)' from 'B (sf)' the rating on the class B1-Dfrd notes.
RAC Bond Co. PLC is a whole business securitization of RAC Bidco Ltd.'s (RAC) operating businesses. RAC Bond Co.'s financing structure blends a corporate securitization of RAC's operating business in the U.K. with a subordinated high-yield issuance. The transaction is backed by future cash flows generated by the operating businesses, which include roadside services and insurance and financial services, but exclude RAC Insurance Ltd. and RACMS (Ireland) Ltd.
The transaction features two classes of notes (A and B), the proceeds of which have been on-lent by the issuer to the borrower, via issuer-borrower loans. The operating cash flows generated by the borrowing group are available to repay its borrowings from the issuer which, in turn, uses those proceeds to service the notes.
The transaction will likely qualify for the appointment of an administrative receiver under the U.K. insolvency regime. An obligor default would allow the noteholders to gain substantial control over the charged assets prior to an administrator's appointment, without necessarily accelerating the secured debt, both at the issuer and at the borrower level.
Following our review of RAC's performance, we have raised our ratings on the class A and B notes.
Our base-case forecasts of cash flow available for debt service (CFADS) reflect our higher EBITDA expectation, driven by assumed organic revenue growth of 5.8% in fiscal year ending December 2021 (FY2021) and 5.5% to 4.5% in FY2022 and FY2023. Growth in the breakdown services segment is mostly driven by the business to consumer side, where we expect a steady retention rate coupled with membership growth, whereas in the business to business side we expect the company to retain all its key customers. We also expect the S&P adjusted margins to improve slightly to 33%-35% over our forecast horizon on the back of significant efficiency initiatives in operations, such as reduced reliance on third-party garage contractors.
Our higher EBITDA expectations are coupled with higher capital expenditures (capex) expectations (including customer acquisition costs) and a potential one-time cash settlement payment to HM Revenues & Customs. The net effect is modest reduction in our projected cash flow available for debt service in FY2021. Consequently, our minimum debt service coverage ratios (DSCRs) in our base-case, which is driven by the near-term CFADS, have decreased slightly. Looking into the long term, our higher EBITDA expectation translates to higher average DSCR ratios in both the base case and downside case scenarios. That said, they remain above the mid end of the range for a 'bbb' anchor in our base-case analysis, and above the breakpoint between a strong and a satisfactory resilience score in our downside analysis. Our satisfactory business risk profile remains unchanged.
Today's upgrades follow the implementation of our counterparty and eligible investments criteria for structured finance ratings and the transaction's updated performance (see "Related Criteria"). On March 10, 2021, the transaction documents were amended, and the relevant triggers related to minimum required ratings for the issuer bank account, borrower bank account, and liquidity facility provider were raised to 'BBB+' from 'BBB-'.
As noted in our previous review, the ratings on the class A notes were capped at 'BBB- (sf)' under our eligible investments criteria. As a result of the amendment and following the application of the criteria, the notes are now able to achieve a 'BBB (sf)' rating. We have therefore raised to 'BBB (sf)' from 'BBB- (sf)' our ratings on the class A1 and A2 notes.
Our ratings on the class A1 and A2 notes are not currently constrained by the long-term issuer credit ratings on any of the counterparties, including the liquidity facility, derivatives, and bank account providers.
Under the transaction documents, the counterparties are allowed to invest cash in short-term investments with a minimum required rating of 'BBB+'. Given the substantial reliance on excess cash flow as part of our analysis and the possibility that this could be invested in short-term investments, full reliance can be placed on excess cash flows only in rating scenarios up to 'BBB+' (see "Related Criteria").
We have also raised to 'B+ (sf)' from 'B (sf)' our rating on the class B1-Dfrd notes, driven by the deleveraging of the business coupled with our view of a more limited likelihood of re-leveraging to historical levels in future. The class B1-Dfrd notes were partially repurchased by £65 million in FY2020, using additional financial indebtedness under the £300 million senior term facility and £30 million of cash in hand.
S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing 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.
Related Criteria
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | ABS: Global Methodology And Assumptions For Corporate Securitizations, June 22, 2017
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- General Criteria: Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013
- Criteria | Structured Finance | General: Global Derivative Agreement Criteria, June 24, 2013
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Credit Conditions Europe Q2 2021: New Horizons, Old Risks, March 30, 2021
- U.K. Recovery: Delayed But Stronger, March 9, 2021
- European Economic Snapshots: Policy Is Keeping The Impact Of The Second COVID Wave At Bay, Dec. 16, 2020
- Credit Conditions Europe: Waiting For Relief, Dec. 3, 2020
- Credit Conditions Europe: Ill-Prepared For Winter, Sept. 29, 2020
- Transaction Update: RAC Bond Co. PLC, July 31, 2020
- Transaction Update: RAC Bond Co. PLC, July 29, 2019
- Credit Rating Model: Standard & Poor's Cash Flow Evaluator-Engine, June 21, 2019
- Rating Assigned To U.K. Corporate Securitization RAC Bond Co.'s Class B1 Notes; Outstanding Ratings Affirmed, July 14, 2017
- Preliminary Rating Assigned To U.K. Corporate Securitization RAC Bond Co.'s Class B1 Notes, July 6, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
| Primary Credit Analyst: | Ganesh A Rajwadkar, London + 44 20 7176 7614; ganesh.rajwadkar@spglobal.com |
| Secondary Contacts: | Terence O Smiyan, London + 44 20 7176 6304; terence.smiyan@spglobal.com |
| Divyata Ved, London + 44 20 7176 7637; divyata.ved@spglobal.com | |
| Joyce Kang, London + 44 20 7176 0621; joyce.kang@spglobal.com |
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