VM Consolidated, Inc. — Moody’s affirms Verra Mobility’s CFR at B2 on proposed refinancing; outlook is stable
Rating Action: Moody’s affirms Verra Mobility’s CFR at B2 on proposed refinancing; outlook is stableGlobal Credit Research – 15 Mar 2021Approximately $1.0 billion of new rated debt affectedNew York, March 15, 2021 — Moody’s Investors Service, (“Moody’s”) affirmed VM Consolidated, Inc.’s (“Verra Mobility”) corporate family rating (CFR) and probability of default rating (PDR) at B2 and B2-PD, respectively. At the same time, Moody’s assigned a B1 rating to the company’s proposed amended and extended $650 million senior secured first lien term loan due 2028 and a Caa1 rating to the proposed $350 million senior unsecured notes due 2029. The company’s current $75 million asset based lending (ABL) facility maturing 2023 will remain in place. Proceeds from the transaction will be used to acquire Redflex Holdings Limited (“Redflex”), an Australian domiciled manufacturer and service provider for traffic management products with a large US footprint, for approximately $128 million, repay its $866 million existing term loan due 2025, add $6 million of cash to the balance sheet, and pay related fees & expenses. The company was also assigned a SGL-1 speculative grade liquidity (SGL) rating. The rating outlook is stable.”We view Verra Mobility’s acquisition of Redflex as financially aggressive given modestly higher debt levels pro forma the acquisition at a time where the company’s credit metrics have weakened following reduced demand for rental cars amid the coronavirus pandemic,” said Moody’s AVP-Analyst Andrew MacDonald. “The commercial services business is expected to remain pressured until roughly 2023 when global air travel traffic returns to pre-pandemic volumes; however, we believe Verra Mobility will maintain good liquidity provisions and return to year-over-year revenue growth by the second quarter of 2021. The addition of Redflex also increases the company’s size within its core market in the US and provides opportunity for international growth longer term.”Affirmations:..Issuer: VM Consolidated, Inc….. Corporate Family Rating, Affirmed B2…. Probability of Default Rating, Affirmed B2-PDAssignments:..Issuer: VM Consolidated, Inc…..Gtd Senior Secured 1st Lien Term Loan, Assigned B1 (LGD3)….Senior Unsecured Regular Bond/Debenture, Assigned Caa1 (LGD5)…. Speculative Grade Liquidity Rating, Assigned SGL-1Outlook Actions:..Issuer: VM Consolidated, Inc…..Outlook, Remains StableThe assignment of ratings remain subject to Moody’s review of the final terms and conditions of the proposed financing transaction that is expected to close around May 2021.RATINGS RATIONALEVerra Mobility’s B2 CFR reflects the company’s small revenue scale, with about $474 million of revenue for the year ended 31 December 2020 (including the Redflex acquisition), high Moody’s adjusted debt-to-EBITDA leverage of 5.8x at pro forma at close that is expected to improve to 5x by early 2022. The company will experience ongoing structural weakness in the global travel industry that will weigh on the company’s earnings through at least 2022. The company has solid EBITDA margins of roughly 46% and high free cash flow conversion which should generate about $100 million of free cash flow in 2021. The company also has over $126 million of cash as of 31 December 2020 pro forma for the transaction. If cash is used towards profitable acquisitions, which Moody’s expects management will prioritize, leverage would decline. Moody’s expects leverage will modestly increase in the first quarter of 2021 due to a difficult pre-pandemic comparable; however, it should improve steadily thereafter driven by the gradual recovery in global travel in 2021 from increased discretionary consumer spending.All financial metrics cited reflect Moody’s standard adjustments. In addition, Moody’s reclassifies Verra Mobility’s capitalized software costs of approximately $5 million in 2020 as an expense.Verra Mobility is well positioned within its two niche markets, tolling solutions and safety cameras, the latter of which will increase with the addition of Redflex (approximately $80 million or 17% of total revenue). The company’s competitive position benefits from existing connectivity with over 50 tolling authorities that cover a large portion of toll roads in the US and direct integration with hundreds of ticket issuing authorities. The safety segment is less susceptible to macroeconomic conditions, but is subject to legislation changes in allowing for photo enforcement. The company has high customer concentration with its top three customers in the commercial services business representing 32.8% of 2020 revenue. Its top municipal and largest overall customer is the City of New York Department of Transportation (NYCDOT) at 31.3%. Verra Mobility has an open receivable of $98.9 million as of FY 2020 with NYCDOT across two contracts on which payment has been delayed due to administrative and investigative overhang with the City of New York. While Moody’s does not currently expect the conclusion of the investigation will materially impact the business, the ability of Verra Mobility to maintain NYCDOT as a client is a key underpinning of the rating. Customer concentration is partially mitigated by multi-year contracts and the embedded nature of its devices and services in the operations of its customers.Verra Mobility’s SGL-1 rating reflects the company’s very good liquidity profile supported by its ample cash balance of $126 million pro forma for the transaction and expectations for a free cash flow-to-debt rate in the high single digits. The company’s $75 million ABL facility due 2023 is currently undrawn, although its borrowing base capacity is $48.8 million net of $6.3 million outstanding letters of credit due to ineligibility of certain NYCDOT receivables. Moody’s expects the company to generate free cash flow of around $100 million during the next 12 months, which combined with its existing cash balance should support ongoing working capital needs, capital expenditures and mandatory term loam amortization of 1% or $6.5 million. The sole financial covenant in the credit facility is springing minimum fixed charge coverage ratio of 1.0x, which is only tested if the availability under the ABL facility falls below 10% ($7.5 million). The covenant is not expected to be triggered over next 12 months and, if it was triggered, the company would be able to comply with a reasonable cushion.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable rating outlook reflects Moody’s expectation for revenue and EBITDA improvement by mid-2021 as global air travel volumes gradually recover with debt-to-EBITDA approaching the low 5x range, EBITA-to-interest at 3x, and free cash flow-to-debt rates sustained in the high-single digits during the next 12 to 18 months.Factors that could support an upgrade include debt-to-EBITDA sustained below 4x, free cash flow to debt sustained in the high single digits, successful integration of acquisitions, and further customer diversification.Factors that could result in a downgrade include debt-to-EBITDA above 6x, EBITA-to-interest approaching 1.25x, loss of a significant customer, deterioration in liquidity, or debt-funded acquisitions or dividends.Verra Mobility Corporation (Verra Mobility), headquartered in Mesa, Arizona, is a technology-enabled services company providing toll, violation management, and title and registration services for rental car and fleet management companies and road safety cameras for municipalities. Reported revenues were $394 million for the year ended 31 December 2020.The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Andrew MacDonald Asst Vice President – Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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