ֳ

Non-Rating Action Commentary

Negative Rating Action on Equipment Rental Companies Due to Lockdown

Fri 03 Apr, 2020 - 5:48 AM ET

ֳ-London/Frankfurt-03 April 2020: ֳ has assessed the impact of the coronavirus pandemic on three European equipment rental companies' financial profile metrics and operating environments, and completed a rating review of the companies. Rating actions are as follows:

- Ashtead Group plc (Ashtead): Long-Term Issuer Default Rating (IDR) of 'BBB', placed on Rating Watch Negative (RWN)
- Boels Topholding B.V. (Boels): Long-Term IDR of 'BB-', placed on RWN
- Algeco Investments 2 S.a.r.l. (Algeco): Long-Term IDR of 'B', placed on RWN.

The rating actions reflect the sharp decline in equipment rental activity across a large number of markets. This is due to wide-ranging lockdown measures affecting a broad range of rental sectors, notably construction. ֳ expects the companies' financial metrics, particularly leverage (defined as gross debt/EBITDA), to come under pressure as a result of the decline in rental activity, which could lead to ratings downgrades over the next three to six months.

A reduction in rental demand, particularly in the construction sector, usually lags the broader economic cycle by between 12 and 24 months, giving equipment rental companies time to balance future capital expenditures to projected economic activity. However, the coronavirus pandemic has led to a sudden stop in rental demand across most sectors which, in ֳ's view, will lead to a sharp reduction in equipment fleet utilisation rates and a corresponding reduction in rental revenue and ultimately EBITDA.

In some of the most severely affected markets, rental activity since mid-March 2020 is 10% or less of expected normal rental demand. In its most recent Global Economic Outlook (published 2 April 2020), ֳ forecasts a 2020 GDP contraction in all relevant markets, ranging from -3.3% in the US (where Ashtead operates) to -4.7% in Italy. ֳ also forecasts a partial and gradual recovery in 2021, of +3.8% in the US and +2.3% in Italy.

ֳ believes that the companies' performances during the 2008/2009 financial crisis are an imperfect indicator for the firms' performances in 2020 and beyond. For instance, Ashtead's EBITDA dropped by around 28% year-on-year (yoy) between 2008 and 2009, although operating and free cash flow improved markedly yoy. This was largely due to moderately lower utilisation rates of -2% yoy in the US and -6% yoy in the UK, and pressure on rental yields at -5% in the US and -8% in the UK. Based on the drop in rental activity observed to date, ֳ expects both the reduction in utilisation rates and rental yields to exceed those observed in 2009, at least in the short-term.

Under ֳ's base case, a sharp reduction in rental revenue for a period of three months is assumed across all markets (ranging between -40% and -80% compared to 2019 rental revenue depending on the country), as is a linear recovery back to 2019 rental revenue levels in the six months thereafter. We have also assumed no net gains from equipment sales and no ancillary non-rental revenue in 2020. In ֳ's base case, leverage ratios of all three rated companies increase sharply to a level no longer commensurate with their respective rating levels.

ֳ has placed the companies' Long-Term IDRs on RWN rather than downgrading the ratings because all three firms have long-term funding profiles and negligible wholesale debt maturities in 2020 and 2021. This mitigates any material refinancing risks and could allow them to temporarily operate with elevated leverage without incurring materially higher funding costs. Additionally, capital expenditure (capex) - which is typically sizeable - can be adjusted quickly (both replacement and growth capex), given generally short order periods which support operating cash flows. Once lockdown measures are eased, rental activity should also benefit from pent-up demand and recovering GDP growth across most markets in 2021.

Rental activity could also be partly supported by government support measures aimed at corporates and small or mid-sized enterprises, mostly in Western Europe, and by continued demand from core government clients such as healthcare, utilities and infrastructure entities. ֳ also notes that, due to their short-term asset exposure, equipment rental companies are well positioned to benefit from a resumption of economic activity, which could allow them to reduce leverage ratios quicker than, for instance, operating lessors with longer lease periods and generally longer asset order periods.

ֳ will resolve the RWNs, probably within the next three months, once it has more clarity about the projected impact and effectiveness of management measures, such as reduction in capex and operating expenses, and government support measures on the companies' leverage positions. ֳ would downgrade the companies' Long-Term IDRs by at least one notch should the lockdown-related negative impact on rental activity exceed three months and management actions be insufficient to materially offset the impact. Conversely, should rental activity recover more quickly than assumed by ֳ then ֳ could affirm the Long-Term IDRs at current levels, assuming the companies' leverage ratios and other financial metrics remain commensurate with their respective rating levels.



Contact:

Christian Kuendig
Senior Director
+44 20 3530 1399
ֳ Limited
30 North Colonnade
London E14 5GN

David Pierce
Director
+44 20 3530 1014

Benjamin Schmidt
Director
+49 69 768076 115

Luca Vanzini
Senior Analyst
+49 69 768076 143

Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: adrian.simpson@thefitchgroup.com

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