S&P: U. K.-Based Cabot Financial 'B+' Rating Affirmed On Proposed Refinancing; Outlook Stable
At the same time, we assigned a 'B+' issue rating and a recovery rating of '3' to the proposed senior secured notes issued by Cabot Financial (Luxembourg) S. A. The rating on the proposed refinancing is subject to our review of the notes' final documentation.
We also affirmed our 'B+' issue ratings on the existing senior secured notes.
In our view, the proposed refinancing of Cabot's ?265 million senior secured notes does not affect our rating on the group or its financial risk profile. This reflects our view that the proposed transaction will lead to an incremental increase in debt and a modest reduction in the company's interest expense of the back of lower debt repayments. These expected changes to its credit metrics remain in line with our existing expectations, which are the following:Gross debt/S&P Global Ratings' adjusted-EBITDA of between 4x-5x (adjusted EBITDA is gross of portfolio amortization);Funds from operations (FFO) to total debt of between 12%-20%; and Adjusted EBITDA coverage of interest expense of between 3x-6x. Our base-case scenario assumes these metrics remain firmly within these ranges over our one-year outlook horizon. We note that Cabot's available liquidity and the tenor of its debt is supportive of its ambitions to continue expanding into mainland Europe, and focus on growing its third-party debt-servicing revenue. We therefore expect the company to continue to look for opportunities for growth, in particular through bolt-on acquisitions of smaller servicers. However, we do not believe that this will have a material impact on our business risk profile or financial risk profile assessments over our one-year outlook horizon.
Our forward-looking analysis of the company's financial risk profile applies a 20% weight to year-end 2015 and 40% weights to year-end projections for both 2016 and 2017.
The stable outlook reflects our expectation that the company's leverage and debt-servicing metrics will remain in line with our current assessment. This reflects our base-case scenario, which is predicated on an increase in Cabot's earnings capacity, continued growth in total collections, and the company not materially raising debt.
We could lower the rating if we believed that Cabot was unable to sustainably maintain stronger credit ratios. Such a scenario could unfold if we saw signs that Cabot was returning to a more aggressive financial policy, by, for example, raising additional debt to fund a large debt-financed acquisition. Specifically, we could lower the rating if Cabot's leverage or debt-servicing metrics breach the thresholds we ascribe to an aggressive financial risk profile, namely:A ratio of gross debt to adjusted EBITDA above 5x; A ratio of funds from operations (FFO) to gross debt less than 12%; orAn adjusted EBITDA coverage of gross cash interest expenses below 2x. We could also lower the rating if we observe material declines in total collections, or an unanticipated rise in costs, which leads to a reduction in the group's earnings capacity.
At this time, we consider an upgrade unlikely. We could consider raising the rating if Cabot demonstrates further significant deleveraging, substantially beyond our existing expectations. We could also raise the rating if Cabot establishes diverse geographical and business revenue streams, to the extent that reducing concentrations acts as a mitigating factor to the regulatory and operational risks present for a monoline company operating in the U. K.