S&P: France-Based Debt Purchaser Promontoria MCS Assigned 'BB-' Rating; Outlook Stable
We also assigned our 'BB-' issue rating to the company's proposed €200 million senior secured notes maturing in 2021. The recovery rating on the proposed notes is '3', reflecting our view of recovery prospects in the higher half of the 50%-70% range. It incorporates our view that the larger portion of the remaining proceeds of the notes issuance will be used to purchase portfolios.
Our 'BB-' rating on MCS reflects the creditworthiness of the consolidated group.
Our assessment of MCS' business risk profile balances the company's leading position in the French distressed debt purchase market against its niche positioning and concentrated focus on collections from owned portfolios in France. MCS is the main debt purchaser in France, focused mostly on large ticket claims, with most competitors handling claims below €10,000. We believe that MCS benefits from solid barriers to entry because:
The absence of credit bureau data protects incumbents such as MCS from new players and makes MCS' data generation on French debtors over 30 years a distinctive competitive asset. The focus on large claims implies a strong and legally skilled workforce that takes time to build up. We believe that MCS will likely consolidate its position as the French distressed debt purchase market matures.
We assess MCS' revenue diversification as low because the company operates in a niche market, both in terms of industry and geography. MCS focuses mostly on the French market and to a far lesser extent on the Belgian, Swiss, and Luxembourg markets (it generates approximately 1% of revenues outside of France). We understand MCS has no plans to aggressively grow its activities outside of France.
MCS' revenues are highly concentrated because 93% of its revenues are derived from asset purchasing, while 7% come from asset servicing. We believe that a greater balance between asset purchasing and asset servicing can enhance the resiliency of a revenue profile given the potential changes in the pricing or supply of debt portfolios. MCS also focuses on two claims categories, performing and nonperforming; however, 96% of its revenues come from the latter.
We consider the company's risk control framework to be sound, evidenced by a long track record of disciplined underwriting policy through cycles.
We do not consider regulatory risk to be as high as in the U. K., for example. While the "light-touch" regulation in France remains effective, we believe that MCS' future business prospects and operating model will continue to be relatively predictable.
Our assessment of MCS' financial risk profile reflects the company's increasing leverage and debt-service metrics in 2016, even if its debt ratios are highly influenced by the proposed point-in-time issuance of the €200 million senior secured notes. We believe that MCS' organic growth will increase the company's earnings capacity over the next year. We therefore expect these metrics will improve from 2017, after the proposed €200 million bond issuance. Our central expectation is a decrease in leverage in 2017.
Despite this projected deleveraging trend, we believe that our weighted-average leverage and credit metrics will remain in line with the current significant financial risk profile, and we see little upside to this assessment.
In our base case, we expect the following credit metrics for MCS:A ratio of gross debt to adjusted EBITDA in the range of 3x-4x;A ratio of funds from operations to debt evolving around 20%; andA ratio of adjusted EBITDA to interest in the range of 4x-5x. When calculating our weighted-average ratios for MCS, we apply a 20% weight to our projections for year-end 2015 and 40% weights to both year-end 2016 and year-end 2017 projections.
Our projections are based on the following assumptions:We anticipate a steady increase in the company's earnings capacity through a growing back book of debt portfolios and new initiatives. We expect no significant rise in capital expenditures or working capital in 2016, relative to previous years. Our current base-case forecast incorporates our expectation that MCS' organic growth of its back book of debt portfolios and acquisition by Cerberus PE fund will translate into an increase in the company's earnings capacity.
We apply a one-notch negative adjustment to our 'bb' anchor as a combination of three factors. First, we take into account MCS relative to its peers, including U. K.-based Cabot, Arrow Global, or Garfunkelux, which enjoy a larger size and a more diversified portfolio/earnings base. Second, despite a good track record of two years since the Cerberus acquisition, we reflect the uncertainty related to Cerberus' private equity ownership, namely in terms of leverage and future financial policy as MCS continues to grow. Third, we incorporate in our adjustment our perception of the maturing trend of the French debt purchasing industry, which might affect competitive dynamics and future pricing of debt portfolios.
The stable outlook on MCS reflects our view that the company's leverage and debt-service metrics will remain within the current financial risk profile category over the outlook horizon of one year. It also reflects our opinion that although MCS may continue to consolidate its strong position in the French market, upside to its business risk profile will remain constrained by its concentrated revenue profile relative to rated peers and that debt metrics will not deteriorate in 2017 compared with 2016.
We could lower the ratings if we saw a material increase in shareholders' leverage tolerance, a failure in MCS' control framework, or adverse changes in the French regulatory environment for debt purchasers that leads to negative changes in its business model or an erosion in the company's high-margin earnings. We believe the room to absorb further leverage at the current rating levels, which is not our central scenario, is limited.
We consider an upgrade unlikely within the next year. We could raise our ratings on MCS if the company appears set to sustainably lower its debt metrics, which will spike in 2016 as a result of the proposed €200 million bond issuance. Although less likely at this stage, we could also raise the ratings if we saw greater diversification in the franchise supporting the future stability of earnings, for instance with a material increase in fee income generated in collection services for third parties.