OREANDA-NEWS. S&P Global Ratings today raised its long-term corporate credit rating on German classified ads operator Scout24 AG to 'BB-' from 'B+'. The outlook is stable.

We also raised to 'BB-' from 'B+' our issue rating on Scout24's senior secured debt, comprising a €46 million senior secured revolving credit facility (RCF) due 2021, €324 million outstanding under the senior secured term loan B due in 2021, and €357 million outstanding under the senior secured term loan C due 2022. The recovery rating remains at '3', now reflecting our expectation of recovery in the higher half of the 50%-70% range in the event of default.

The upgrade reflects our expectation that Scout24's financial risk profile will strengthen thanks to a less aggressive financial policy following a recent change in its shareholder structure. As such, we now net the company's cash position to calculate its debt. The rating action also takes into account our assumption that Scout24 will continue to see earnings growth on the back of strong results in the first half of 2016.

At the end of September 2016, Scout24's shareholder structure changed after Blackstone, the company's second-largest private equity owner, sold its 13% shareholding in Scout24 to the market. Hellmann & Friedman, with a roughly 27% stake in Scout24, is the only remaining financial sponsor. Because we define a financial sponsor owner as having at least a 40% shareholding, we no longer classify Scout24 as being a financial sponsor-controlled company and now include the company's cash position in our calculation of its debt figures. Following Blackstone's departure from Scout24's shareholder structure, we think that Scout24's financial policy is likely to become more predictable. We also anticipate that it's financial policy will be driven by bolt-on acquisitions and dividend payments, which we do not expect for 2016, however.

In addition, Scout24 increased its revenues and EBITDA (as reported, ordinary adjusted EBITDA, pre-exceptional items, and restructuring costs), respectively, by almost 14% and 15% in the first six months of 2016 compared with the same period in 2015. The company continued to benefit from supportive market conditions, including a shift in advertising toward digital media from print, and from its leading market position in the real estate classifieds business. Furthermore, since 2015, Scout24 has gradually reduced the gap between its market position and its larger competitor mobile. de in the car classifieds business.

These supporting factors lead us to see an improvement in Scout24's financial risk profile, including our base-case estimate that Scout24's adjusted debt to EBITDA will decline to 3.6x-4.0x in 2016 from 4.9x in 2015. We also project that the company's funds from operations (FFO) to debt will improve to 16.0%-18.0% in 2016 versus 10.5% in 2015.

In our view, Scout24's business risk profile continues to benefit from its well-known brands and dominant market position in the online real estate classifieds market through ImmobilienScout24. The company also enjoys favorable market trends, such as the trend in advertising to use online platforms versus print media. This enables Scout24 to generate EBITDA margins markedly above an industry average for the media industry. However, we believe that Scout24's strengths are offset by AutoScout24's weaker value proposition in the German online automobile classifieds market. In our opinion, the company's business risk profile is constrained by its relatively small scale of business and limited geographic and product diversification because the majority of revenues and EBITDA generated in Germany stem from its two main platforms, ImmobilienScout24 and AutoScout24. Additional constraining factors are the relatively strong competition in the online classifieds market and a potential threat from new real estate platforms, given the company's exposure to risks related to the fast-moving technological environment.

The stable outlook reflects our expectations that Scout24 will continue to perform solidly, with sustained revenue and EBITDA growth and robust free operating cash flow generation. We also expect that, following the recent reduction of the private equity sponsors' shareholding in Scout24 to about 27% of economic rights, the company will continue to deleverage.

We could downgrade Scout24 if the company is unable to execute its growth strategy, experiences operating setbacks, or undergoes an unexpected weakening of its market position because of disruptive competition that could erode the company's operating margins. We could also lower the rating if the company's financial policy were to become more aggressive, for example, because of releveraging driven by large shareholder remunerations or acquisitions beyond our base-case assumptions. If one of these scenarios or a combination of them prompted the adjusted debt-to-EBITDA ratio to exceed 4.5x or FFO to debt ratio to decline below 15%, the rating would come under pressure. Additionally, we would downgrade Scout24 if we negatively reassessed the company's liquidity position.

We currently view an upgrade as unlikely, given our opinion of Scout24's business risk profile, which we believe is limited by the company's scale of operations, its geographic and product concentration (in the real estate and auto industries), competitive landscape, and technological risks. However, we could upgrade Scout24 if the gradual improvement of the company's business risk profile and our anticipation of further deleveraging translates into debt to EBITDA trending toward 3.5x or lower and FFO to debt above 20% on a sustainable basis and Scout24 established and maintained a predictable financial policy that targets these metrics.