Rating Action Overview
- New Zealand-based online classifieds company Trade Me Group Ltd. is proposing to issue about NZ$1.55 billion of first-lien and second-lien term loans to refinance its debt and shareholder loan. At the same time the company is proposing to distribute a dividend to its financial-sponsor owner, APAX Partners, which we view as a shareholder friendly action.
- We expect that Trade Me will continue to generate solid free operating cash flow (FOCF), allowing it to delever, assisted by mandatory debt amortization. We are forecasting a S&P Global Ratings-adjusted debt-to-EBITDA ratio of between 7.5x–8.0x over the next 12 months.
- On Sept. 29, 2021, S&P Global Ratings affirmed our 'B-' long-term issuer credit rating on Trade Me and the 'B-' issue rating on its first-lien debt. We also assigned our 'B-' issue ratings on the new proposed first-lien term loan B issuance.
- 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 over the next 12 months, underpinning its revenues and cash flow as the country's economy recovers.
Rating Action Rationale
We affirmed the ratings on New Zealand-based online classifieds company Titan AcquisitionCo New Zealand Ltd. (Trade Me) to reflect the company's ability to undertake a refinancing of its capital structure. This affirmation also takes into account the distribution of approximately NZ$137 million cash dividend to the company's financial-sponsor owner, APAX Partners LLP, which we view as a credit negative. However, Trade Me's solid market position across its key online segments coupled with good revenue visibility can absorb the increased leverage and associated interest expense, in our assessment.
Trade Me is raising about NZ$1.55 billion of secured term loans via a first-lien US$775 million (NZ$1.09 billion equivalent) and a second-lien NZ$465 million term loan facility. The company will use the proceeds to refinance its existing first-and second-lien loans as well as its NZ$388 million payment-in-kind (PIK) shareholder loan. At the same time, it is proposing to distribute a NZ$137 million dividend to its shareholder, APAX Partners LLP. We note that the revolving credit facility (RCF) is undrawn and will remain available after this transaction.
We forecast a S&P Global Ratings-adjusted debt-to-EBITDA ratio of about 7.8x post-transaction, before deleveraging into the mid-7.0x range during fiscal 2023. We also forecast Trade Me to record an EBITDA interest coverage ratio of above 2.0x over fiscals 2022 and 2023. That said, the company's highly leveraged capital structure exposes it to a sudden exogenous earnings shock and could limit its ability to reduce debt.
The redemption of the group's existing PIK 5.4% shareholder loan eliminates an escalating debt obligation for the group, in our view. The proposed first-lien and second-lien term loan B issuance with mandatory 1% amortization and 50% excess cash-to-debt repayment sweep should, coupled with our forecast of earnings growth, support deleveraging over the medium term.
Given our forecast of positive FOCF generation, Trade Me should gradually deleverage over the next two to three years. This is supported by the company's good market position, high brand awareness and strong customer loyalty across its online business lines. The company's high EBITDA margins coupled with modest capital expenditure levels (at about 10% of group revenues), should support improving FOCF generation over the next 12 months. New Zealand's recovery from the pandemic amid vaccine rollouts is likely to support earnings growth across the company's online segments, including Property, Motors, Jobs and Marketplace classifieds.
We believe Trade Me can appropriately navigate through the COVID-19 restrictions in New Zealand. The company's online classifieds and marketplace businesses continue to operate under Alert Level 2 restrictions in New Zealand, with marketplace audience and listings remaining strong. In Auckland, Trade Me's online businesses have reduced trade due to Alert Level 3 restrictions, however, the company is seeing solid listing volumes under its Property and Jobs divisions. New Zealand was placed under full Alert Level 4 restrictions on Aug. 17, 2021, that restricted movement and trade to only the provision of essential services, weighing on the company's earnings. Further, management has responded to the current challenging operating environment after reducing the company's cost base in June 2020, with a view to improving and sustaining operating efficiencies.
Trade Me's fiscal 2021 results were much better than we expected and revealed a strong recovery in operating and trading conditions across the group's segments after the government eased pandemic-related restrictions. In particular, the company's Property and Marketplace divisions posted good revenue growth of 30% and 21%, respectively, for the third quarter of fiscal 2021. This was because consumers took advantage of low interest rates and high household savings to acquire and sell assets. That said, we believe Trade Me remains exposed to fickle patterns of discretionary consumer spending, which should pick up as the economy gradually returns to normalized levels across 2022 and 2023.
In our view, Trade Me has limited geographic diversity, a relatively small user base by global standards and exposure to a competitive and fast-moving technology-driven environment. Offsetting these weaknesses, are Trade Me's leading market positions and New Zealand-based incumbency in the online classified and online marketplace segments. The company benefits from a highly regarded brand in the New Zealand market with a high level of customer loyalty and revenue visibility across its business segments.
Our analysis does not incorporate parental support from the financial sponsor owner during periods of financial stress. Our rating analysis focuses on the ongoing sustainability of the stand-alone business, which is burdened by a highly leveraged balance sheet. Given that we treat APAX Partners as a financial sponsor, we expect Trade Me's financial policy will continue to exhibit a highly leveraged financial position.
Outlook
The stable outlook reflects our expectation that Trade Me will maintain its leading market position in online classifieds and its online marketplace in New Zealand over the next 12 months, underpinning its revenue and cash generation as the New Zealand economy recovers from pandemic-related disruptions.
We also expect the company to delever over the next two years, supported by satisfactory FOCF generation and mandatory amortization on the company's term loan issuances.
Upside scenario
We could upgrade Trade Me if the company can successfully navigate the ongoing operating challenges associated with COVID-19 and sustainably strengthen its balance sheet. In this regard, management would need to sustainably grow earnings and limit capital management activity to support positive free cash flow generation and allow its ratio of S&P Global Ratings-adjusted debt to EBITDA to be sustained comfortably below 7.5x.
Downside scenario
We could lower the rating if Trade Me generated sustained negative FOCF that results in heightened liquidity pressures, or undermines the sustainability of the group's capital structure. This could occur in the event of:
- A material acceleration in customer churn or reduction in new sales due to increasing competition that erodes the company's market position and cash flow; or
- Prolonged reinstatement of COVID-19 restrictions that limit consumer activity and impairs Trade Me's earnings 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 about NZ$299 million and EBITDA of about NZ$197 million in the year ended June 30, 2021.
Our Base-Case Scenario
- Real GDP growth in New Zealand of 4.2% during 2021 and 3.0% for 2022;
- Recovering domestic market conditions and increase in consumer discretionary spending with no prolonged duration of Alert Level 4 restrictions across New Zealand including Auckland of more than one fiscal quarter;
- Single-digit growth in listing volumes and revenues across Trade Me's online classified segments including 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;
- Minimal working capital outflows;
- Capital expenditures of about NZ$20 million-NZ$30 million over the next 12 months;
- Term loan debt amortization of about NZ$11 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, 2022, and 2023:
- Adjusted debt-to-EBITDA ratio of about 7.8x following transaction close, before deleveraging to about 7.5x over fiscal 2023;
- EBITDA to cash interest coverage ratio of more than 2x over the next two years.
Liquidity
We consider Trade Me to have adequate liquidity. The company's sources of liquidity, including cash, will exceed its uses by more than 1.2x over the next six to 12 months, in our assessment, and we expect net sources to remain positive, even if EBITDA were to decline 15%.
The first-lien and second-lien senior secured loans are the company's third issuance in debt capital markets, demonstrating good market access and supportive capital markets. However, we believe the company would not be able to absorb a high-impact, low-probability event without refinancing.
Principal Liquidity Sources
- Post-transaction cash balance of at least NZ$10 million;
- Undrawn NZ$150 million senior secured first-lien RCF; and
- Cash funds from operations of more than NZ$100 million.
Principal Liquidity Uses
- No debt maturities over the next 12 months;
- Mandatory term loan debt amortization of about NZ$11 million per year; and
- Capital expenditure of between NZ$20 million and NZ$30 million.
Debt Maturities
Post-recapitalization, Trade Me's debt maturities are as follows:
- 2021: nil.
- 2022: nil.
- 2023: nil.
- 2024: nil
- 2025: nil
Thereafter: approximately NZ$1.55 billion
Covenants
We anticipate Trade Me to operate with adequate headroom under its RCF. The first-lien credit facility is governed by an 8.75x first-lien gross debt to EBITDA financial covenant that springs when the company draws at least 40% of the RCF's commitment.
Issue Ratings - Subordination Risk Analysis
Capital structure
Trade Me's post recapitalization capital structure is to consist of the following:
- NZ$150 million senior secured first-lien RCF;
- A seven-year US$775 million senior secured first-lien term loan that ranks pari passu with the RCF; and
- An eight-year NZ$465 million senior secured second-lien term loan.
Analytical conclusions
We rate the seven-year US$775 million senior secured first-lien term loan in line with the issuer credit rating of 'B-'.
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
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, 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
Ratings List
| Ratings Affirmed | |
|---|---|
|
Titan AcquisitionCo New Zealand Ltd. |
|
|
Trade Me Group Ltd. |
|
| Issuer Credit Rating | B-/Stable/-- |
|
Titan AcquisitionCo New Zealand Ltd. |
|
| Senior Secured | B- |
| New Rating | |
|
Titan AcquisitionCo New Zealand Ltd. |
|
| Senior Secured | B- |
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| Primary Credit Analyst: | Joel Yap, Melbourne + 61 3 9631 2196; joel.yap@spglobal.com |
| Secondary Contact: | Craig W Parker, Melbourne + 61 3 9631 2073; craig.parker@spglobal.com |
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