(The following statement was released by the rating agency)
LONDON, July 05 (Fitch) Fitch Ratings has affirmed National Express Group Plc's
(NEX) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at
'BBB-'. The Outlook on the Long-term IDR is Stable.
NEX's ratings reflect its leading position in the UK coach segment and Spanish
coach and bus sector as well as its good geographical diversification relative
to peers. There has been a delay in the deleveraging of the company's balance
sheet, as forecasted by Fitch, which places some pressure on the current
ratings, particularly in light of our soft economic outlook, austerity measures,
and fuel price increases in 2012 and 2013. Revenue optimisation and cost savings
will be important for the ratings.
KEY RATING DRIVERS
Leading Market Position, Diversified Earnings
NEX's ratings reflect its leading position in the UK coach segment and the
Spanish coach and bus sector. Relative to some peers, NEX's earnings are more
geographically diversified with operations in the UK, Europe, and following the
recent Petermann acquisition, increased school bus earnings in the US, where
longer-term contracts provide greater earnings visibility. Despite recent
improvement in pricing on contract renewal, we remain cautious in our view of
the operating environment in the US. However, earnings from NEX's US school bus
business, will likely continue to alleviate the lower earnings generated in UK
rail and UK coach.
High Leverage Constrains Ratings
FFO adjusted net leverage is no longer likely to improve to 3.0x in FY13, from
pro-forma 3.9x in FY12, as previously forecast by Fitch. An increase in leverage
had been anticipated following the debt-funded Petermann acquisition in May
2012, but due to the weaker economic outlook and reduced earnings as highlighted
by the company last October, Fitch now only anticipates an improvement in
leverage to around 3.0x in FY14. This delay is mitigated to some extent by the
company's relatively strong FFO fixed charge cover, which is expected to remain
comfortably above guidelines, and the company's proven ability to generate
positive free cash flows. Management is committed to improving its net
debt/EBITDA leverage to 2.0x by 2014, comparable with Fitch's FFO adjusted net
leverage of 3.0x and in the event of weaker economic fundamentals, Fitch would
expect NEX to conserve cash, as it did following financial difficulties in FY09,
in order to adhere to rating guidelines. Further delays in deleveraging would
likely lead to negative rating action.
Weak Economic Outlook
Despite its value offering compared to other modes of transport, NEX's business
segments are dependent on economic conditions, which given our current economic
outlook and particularly austerity measures, will continue to pressure earnings.
The impact on performance following the withdrawal of the UK government's
discretionary scheme was material in FY12 and continued to impact Q113 revenue
in the UK coach segment, as did the reduction in fuel duty rebates, also in the
UK bus sector. Positively, the government did not announce further changes in
its recent spending review. Operations in Spain remain challenging. Inter-city
coach journeys have been impacted by lower discretionary spending. High fuel
costs are also expected to continue to dampen performance. Whilst NEX hedges its
fuel consumption, fuel prices in FY13 have been fixed at higher levels compared
with average fuel costs in FY12. Fuel hedges for FY14 and FY14 are flat or
Spanish Concession Renewals on Hold
The Spanish government's intercity concession renewal programme remains on hold.
This has delayed the expiry of a relatively large number of contracts due
between FY13 and FY15, amounting to around GBP200m and representing just over 3%
in terms of revenues over this period. Given NEX's past 100% retention rate,
market share and incumbent position, Fitch expects a large proportion of these
contracts to be renewed, but due to economic conditions and therefore pressures
on pricing, Fitch has forecasted a decrease in margins. Nevertheless, Fitch
recognises there is scope for NEX to offset pressures on margins through cost
efficiencies and the renegotiation of aspects included in their contracts, which
for example could allow for decreases in maintenance costs. Fitch understands
that the renewal process is likely to begin by the end of 2013 or early 2014
with initial outcomes expected in mid-2014.
Limited Exposure to UK Rail
The uncertainty in respect of the UK rail sector continues, but NEX has only one
remaining franchise representing around 5% of expected operating profit in FY13,
meaning that its exposure to an uncertain rail sector is lower relative to
peers. The franchise expires in September 2014 and despite its good performance
and shortlisting of NEX for the upcoming Crossrail franchise, it remains to be
seen if the company remains exposed to the segment. Recent contract wins in the
German regional rail sector, are positive. Revenue and guarantee risk are
expected to be lower than in the UK although meaningful cash flow is not
expected until after 2015.
Planned Operational Improvements Important
Management initiatives focused on route and contract optimisation, further
overhead savings (i.e. headcount and distribution) as well as efficiencies
driven by greater investment in technology, are expected to continue to
partially offset headwinds currently pressuring earnings. Initiatives introduced
in FY12 were relatively successful across NEX's divisions and have continued to
mitigate earning pressures in Q113. Synergies realised following the Petermann
school bus acquisition were in line with management's targets and new contract
wins are also expected to provide some relief to economic pressures.
As at end FY12 unrestricted cash and cash equivalents of GBP66m and undrawn
credit facilities of GBP419m were more than sufficient to cover short-term debt
obligations of GBP140m. The company has a healthy debt maturity profile with no
significant maturities until 2017 when its seven-year GBP350m bond falls due and
has also refinanced its GBP500m revolving credit facility, which was to mature
in 2014. The new facility will be GBP410m, reduced due to lower requirement by
the company, and mature in 2018. Free cash flow is expected to be positive in
the near-term, supporting NEX's current ratings.
Positive: Future developments that could lead to positive rating actions
- A positive rating action is currently unlikely due to forecast credit metrics
but possible should FFO adjusted net leverage be consistently below 2.5x, FFO
fixed charge cover consistently in excess of 3.0x and the company continues to
generate positive free cash flows.
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted net leverage consistently above 3.0x on account of weaker than
expected operational performance, further material acquisitions (not expected by
the management), material losses in respect of the company's intercity
concessions or increased shareholder remuneration that would counter the
expected strengthening in NEX's credit ratios from 2013.
- FFO fixed charge consistently below 2.5x.
- Consistently negative free cash flow.
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Fitch Ratings Limited
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London E14 5GN
+44 20 3530 1287
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
Additional information is available on www.fitchratings.com. For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are
Applicable Criteria and Related Research:
Corporate Rating Methodology
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