OREANDA-NEWS. S&P Global Ratings said today that it had placed its 'B' long-term corporate credit rating on Nordic payment processor Nassa Midco AS (Nets) on CreditWatch with positive implications.

At the same time, we affirmed our 'B' issue ratings on the senior secured loans and revolving credit facility issued by Nets. The recovery rating is unchanged at '4', reflecting our expectation of recovery in the higher half of the 30%-50% range in the event of a payment default.

We placed our rating on Nets on CreditWatch positive to reflect our expectation of stronger credit ratios if Nets completes the IPO in line with the announcement and the ensuing debt reduction results in better credit metrics. We understand Nets' gross debt could be reduced by Danish krone (DKK) 5 billion (about €672 million), after deducting DKK475 million in IPO-related costs from the gross proceeds. As a result, we expect our adjusted debt-to-EBITDA ratio to decline to 5.0x or below after the IPO, which is about 3.0x lower than in our previous expectation of about 8.0x at year-end 2016. This is based on the company's net leverage guidance of below 3.75x as of year-end 2016. In subsequent years, our adjusted debt-to-EBITDA ratio could decline further, given that Nets' future financial policy targets net leverage of 2.0x-2.5x. If the ownership from financial sponsors declines to less than 40%, it would lead us to apply our surplus cash adjustment to debt, in accordance with our methodology.

Furthermore, we think interest coverage ratios and free operating cash flow (FOCF) generation could also benefit from the announced refinancing of Nets' existing debt with new banking facilities, subject to the IPO, as we believe the banking facilities would carry a lower interest rate than the existing debt. This, combined with lower debt, could result in significantly lower annual interest expenses.

Our assessment of Nets' business risk profile continues to reflect the group's:Leading position in the Nordic payment system industry; High proportion of recurrent revenues, given that the majority of revenues are based on a fixed fee per payment transaction; Diversified product range and customer base; Solid barriers to entry; and Growth opportunities. These strengths are constrained by Nets' Limited scale and geographic diversification;Modest, albeit improving, profitability; Competition from international competitors; and Technology and regulatory risks. We aim to resolve the CreditWatch after the IPO has been completed, which we understand could take place over the next few months. We could raise the corporate credit rating by two or three notches depending on the ownership and capital structure after the IPO, including the residual share of Nets' stock owned by financial sponsors and their exit strategy.

A successful IPO, adjusted debt-to-EBITDA at or below 5x, and FOCF to debt between 5% and 10% could support a two–notch upgrade.

We may raise the rating by three notches if we believed that adjusted debt-to-EBITDA was likely to decline below 4.5x, with FOCF to debt comfortably above 10%.