Rating Assigned To U.K. Corporate Securitization RAC Bond Co.#s Class B1 Outstanding Ratings Affirmed

Stocks and Financial Services Press Releases Friday July 14, 2017 16:55
LONDON--14 Jul--S&P Global Ratings

LONDON (S&P Global Ratings) July 14, 2017--S&P Global Ratings today assigned its 'B (sf)' credit rating to RAC Bond Co. PLC's £275 million fixed-rate class B1-Dfrd notes. At the same time, we have affirmed our 'BBB- (sf)' ratings on the outstanding class A notes (see list below).

Upon publishing our revised criteria for rating corporate securitizations, we placed those ratings that could potentially be affected "under criteria observation" (see "Global Methodology And Assumptions For Corporate Securitizations," and "European Corporate Securitization Ratings Placed Under Criteria Observation," both published on June 22, 2017). Following our review of this transaction, our ratings that could potentially be affected are no longer under criteria observation.

RAC Bond Co.'s financing structure blends a corporate securitization of the operating business of the RAC Bidco Ltd. (the Holdco) with a subordinated high-yield issuance.

We have applied our corporate securitization criteria as part of our rating analysis on the senior notes in this transaction. As part of our analysis, we assess the ability of the cash flow generated by the borrower and the entities that cross guarantee its liabilities (together, the borrowing group) to make the payments required under the class A notes' loan agreements using a long-term debt service coverage ratio (DSCR) analysis under a base case and a downside scenario. Our view of the cash flows generation potential of the borrowing group is informed by our base-case operating cash flow projection and our assessment of its business risk profile (BRP), which are derived using our corporate methodology (see "Corporate Methodology," published on Nov. 19, 2013).

We continue to view the BRP of the borrowing group as satisfactory (see "U.K.-Based RAC Bidco Downgraded To 'B' On Proposed £275 Million Dividend Recapitalization; Outlook Stable," published on July 6, 2017)


RAC Bond Co.'s primary sources of funds for principal and interest payments on the class A1 and A2 notes are the loan interest and principal payments from the borrower and amounts available from the liquidity facility (which is shared with the borrower to service the senior term loan).

The transaction does not amortize before the expected maturity date (May 2026 for the class A1 notes). If the senior term loan is not repaid on its maturity date or the class A1 notes do not redeem on their expected maturity date, a full cash sweep would be applied pro rata until the notes redeem. While such a cash sweep is in operation, the notes would prepay at par and there would be no costs for the issuer.

We do not assume the borrowing group is able to repay the intercompany loans, either through the use of cash on balance sheet or by raising new debt, associated with each class of notes on their respective maturity dates. Rather, given that the transaction implements a cash sweep mechanism where all excess cash would be trapped once a given class of notes reaches its expected maturity date and is not repaid, we assumed a benchmark principal amortization profile where the debt is repaid over 15 years following its expected maturity date based on an annuity payment that we include in our calculated debt service coverage ratios (DSCRs).

Our cash flow analysis serves to both assess whether cash flows will be sufficient to service debt through the transaction's life and to project minimum DSCRs in base case and a downside scenarios. We base our base-case operating cash flow projection for the securitized assets and the company's satisfactory BRP on our corporate methodology.

Taking into account the satisfactory BRP of the borrower and the minimum DSCR achieved in our base-case scenario, which considers only operating-level cash flows and does not give credit to issuer-level structural features (such as liquidity), we derived a 'bb+' anchor for the class A notes.

Our downside DSCR analysis tests whether the issuer-level structural enhancements improve the resilience of the transaction under a stress scenario. RAC Bidco falls within the consumer services industry, for which we apply a 30% decline in EBITDA relative to the base case at the point where we believe the stress on debt service would be greatest. This resulted in downside DSCR commensurate with a strong resilience score, from which we derived a resilience-adjusted anchor of 'bbb'.

The class A2 notes, which rank pari passu with all other senior notes, have an expected maturity date in May 2026, beyond the seven-year repayment window we consider under our corporate securitization criteria. We have consequently lowered the resilience-adjusted anchor by one notch to account for the long tenor of the expected maturity date.

We have therefore affirmed our 'BBB- (sf)' ratings on the class A1 and A2 notes.

Our ratings on the class A1 and A2 notes are not currently constrained by the issuer credit ratings on any of the counterparties, including the liquidity facility, derivatives, and bank account providers. We note, however, that 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-'.

The class B1-Dfrd notes, totaling £275 million, are contractually subordinated to the class A1 and A2 notes and to the liabilities incurred by the borrower, including the outstanding senior term and revolving credit facilities. The class B1-Dfrd notes bear a fixed interest rate of 5.00%, which will step down to 4.50% following their expected maturity date on Nov. 22, 2022. Our rating on the class B1-Dfrd notes addresses the ultimate payment of principal and the ultimate payment of interest.

We estimate that this new issuance will result in a class B1-Dfrd notes leverage ratio of about 8.0:1, based on fiscal year 2016 reported EBITDA of £183 million, excluding cash available at the borrower level and considering that the revolving credit facility is not drawn.

The class B1-Dfrd notes are structured as soft-bullet notes due in 2046, but with interest and principal due and payable to the extent received under the B1-Dfrd loans. Under the terms and conditions of the class B1-Dfrd loan, if the loan is not repaid on its expected maturity date, interest will no longer be due and will be deferred. The deferred interest, and the interest accrued thereafter, becomes due and payable on the final maturity date of the class B1-Dfrd notes in May 6, 2046. Our analysis focuses on scenarios in which the loans underlying the transaction are not refinanced at their expected maturity dates. We therefore consider the class B1-Dfrd notes as deferring, accruing interest following the class A term loan's expected maturity date, and receiving no further payments until all of the class A debt is fully repaid.

Moreover, under the terms and conditions, further issuances of class A notes are permitted without consideration given to any potential effect on the then current rating on the outstanding class B1-Dfrd notes.

Both the extension risk, which we view as highly sensitive to the future performance of the borrowing group given its deferability, and the ability to issue more senior debt without consideration given to the rating on the class B1-Dfrd notes, may adversely affect the issuer's ability to repay the class B1-Dfrd notes. As a result, the uplift above the borrowing group's creditworthiness reflected in our rating is limited. Consequently, we have assigned our 'B (sf)' rating to the class B1-Dfrd notes.

The class B1-Dfrd notes' issuance proceeds were advanced by RAC Bond Co. (the issuer) to RAC Ltd. (the borrower) under a new class B1 issuer borrower loan agreement (IBLA). The borrower used the B1 loan issuance proceeds, less transaction costs, to pay a dividend to RAC Midco II Ltd., the entity directly outside the securitization group, and transaction fees.

Operating cash flows from Holdco and its subsidiaries (the obligors), which include the borrower, are available to service the borrower's financial obligations. In our analysis, we have excluded any projected cash flows from RAC Insurance, which has not granted security due to regulatory considerations. The obligors jointly and severally guarantee each other's obligations.

A corresponding class B issuer/borrower loan was established and a loan agreement is in place, containing covenants that are more in keeping with covenant-light high-yield standards. However, those covenants will only become effective if both the class A debt is fully repaid, and a rating agency confirmation is received on the outstanding rating on the class B1-Dfrd notes.

Therefore, our rating does not reflect the covenant package available to the class B1-Dfrd noteholders under the class B IBLA. Instead, it considers the strength of the covenants made in the class A IBLA. That said, the covenant

package allows for various forms of permitted indebtedness (e.g., leases obligations, credit facilities, debt, etc.), investments, and liens that may be related to "similar businesses," which the agreement defines fairly broadly and whose contributions to the obligor group are unclear. In addition, the class B1-Dfrd notes' covenant package permits the establishment of a receivables financing program. Lastly, it is our understanding that the change of control provisions and the associated rights granted to the class B1-Dfrd noteholders following a change of control may contain a carve-out that limits the determination to instances where a downgrade has occurred within 60 days of the change of control event itself.

RAC Bond Co. is a corporate securitization of the obligors' (RAC Bidco [Holdco] and its subsidiaries, excluding RAC Insurance Ltd. and RACMS (Ireland) Ltd.) operating businesses, which include roadside services, insurance brokering, motoring services, and telematics and data services.

A change in our assessment of the company's BRP would likely lead to a rating action on the class A1 and A2 notes. We would require higher/lower DSCRs for a weaker/stronger BRP to achieve the same anchor.
We do not currently see a scenario that would lead us to raising our   assessment of RAC Bidco's business risk profile or our ratings on the notes.

We could lower our ratings on the class A1 and A2 notes if the business' minimum projected DSCR falls below 1.30:1 in our base-case DSCR analysis or 1.80:1 in our downside analysis--falling below 1.80:1 would change the

resilience score from strong to satisfactory and affect the maximum achievable resilience-adjusted anchor. This could happen if the group faces significant customer losses, lower revenue per customer, structural changes in its key segment due to significant technology changes, or if there is a significant increase in pension liability, which could, in our view, reduce cash flows available to the borrowing group to service its rated debt.

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