S&P: Livingston International Inc. Outlook To Stable From Negative On Improved Liquidity; 'B' CCR Affirmed
S&P Global Ratings also affirmed its 'B' issue-level rating on the company's first-lien debt and its 'CCC+' issue-level rating on Livingston's second-lien debt. The respective recovery ratings on the debt are unchanged at '4', indicating average (30%-50%; higher end of range) recovery, and '6', indicating negligible (0%-10%) recovery in default.
"The outlook revision our expectation that, post-transaction, Livingston will maintain adequate liquidity, with adjusted FFO-to-interest coverage exceeding 2x and a sustained covenant cushion of at least 15%," said S&P Global Ratings credit analyst Aniki Saha-Yannopoulos.
Livingston is a pure play customs broker, providing services to both U. S. and Canadian customers.
Our weak business risk profile assessment on Livingston reflects the company's dependence on the volume of crossborder trade between Canada and the U. S., which is highly correlated to the economic health of these countries. Canada's GDP growth has been sluggish, which has contributed to a reduction in our revenue growth estimates for this year. The weak Canadian dollar relative to the U. S. dollar is also expected to contribute to softer demand for Livingston's services, which could pressure profitability. With the acquisition, we expect Livingston's market share in Canada will improve by 5%-7% but not enough to revise the company's business risk profile.
North American customs brokerage is a highly fragmented market, with more than 2,000 customs brokerage firms in the U. S. and Canada, exposing the company to strong competition; post-acquisition, we expect Livingston's Canadian market share to be in the high 20% area but the U. S. share to not change, in the mid-single digits. Although there are some barriers to entry, such as the integration of Livingston's IT system with its customers, we believe the company must actively work to maintain its customer base to retain market share. This risk, however, is partially offset by the company's leading position in this fragmented industry and Livingston's diversity as the company supports a number of different end markets and continues to expand within the U. S. Furthermore, Livingston has long-standing relationships with its clients. The average tenure of the company's top 100 customs brokerage clients in Canada is 23 years and an average of 13 years across its top 100 U. S. customs brokerage clients. Despite the cyclical nature of Livingston's business, the company has produced what we view as relatively stable EBITDA margins due to a flexible cost structure. The scalable, non-asset-based business model allows Livingston to adjust for volume changes relatively quickly with minimal additional investment and expense.
The stable outlook reflects S&P Global Ratings' expectation that Livingston will successfully integrate Affiliated's operations and see steady cash flow despite the effect of the weakening Canadian dollar and some weakness in the Canadian brokerage business. It also incorporates our expectation that the company will maintain its operating efficiency, as well as its current level of profitability, over our forecast period. Under these parameters, we expect Livingston's adjusted debt-to-EBITDA ratio will improve from current levels and be around 7x.
We could consider a downgrade should adjusted FFO to interest drop below 2x, with limited prospects for improvement, and if both liquidity and covenant cushions tighten. This could result from deteriorating economic activity, debt-financed acquisitions, or operational missteps, leading to weaker trade volumes.
We believe an upgrade is unlikely as the ratings are constrained by Livingston's financial risk profile, as reflected in our forecast leverage in the next two years; however, an upgrade is possible should the company sustain adjusted leverage below 5x.