OREANDA-NEWS. Fitch Ratings has revised the Outlook on RoadChef Issuer plc's (RoadChef) GBP96m class A2 notes and GBP42m class B notes to Positive from Stable. The notes' ratings have been affirmed at 'B+' and 'B-', respectively.

RoadChef is a whole business securitisation of 15 motorway service areas (MSAs) across the UK, operated by RoadChef plc.

The revision of the Outlook and affirmation reflects on-going improvements in the group's trading performance, stemming from extensive catering developments and site improvement in addition to the continuing economic recovery in the UK. Over the past six years, these factors have contributed to a reduction in leverage to 3.6x for the class A2 notes and 5.2x for the class B notes in April 2015 from 8.0x and 10.6x in April 2009 and debt service coverage improvement. However, Fitch's weaker assessments of the key rating drivers for operating environment and financial performance somewhat constrain the ratings.

Industry Profile: Midrange
Fitch views the operating environment as 'weaker'. The sector is mature but fuel sales have been volatile, and other typical revenue lines (food, retail) are exposed to discretionary spending risk. A slowdown in the broader economy also tends to lead to a reduction in motorway traffic volumes with a peak to trough decline of 2.4% during 2007-2010 (source: Department of Transport).

Despite often significant distances between MSAs, competition cannot be ruled out as road users can still choose between sites to some extent. MSAs also face significant exposure to food, energy and employment cost rises (particularly over the next few years in view of the government's living wage target), exacerbated by the regulatory requirement for MSAs to offer core services 24 hours a day, 365 days a year.

We view barriers to entry as 'stronger'. The regulatory environment has relaxed in the last few years, with the minimum required distance restriction reduced to three miles from 28 miles. However, barriers to entry are still perceived as high given high start-up costs and the requirement to prove the need for an MSA to the local council, which is responsible for granting planning permission. The operator of a potential new site must also evaluate expected returns in light of existing competition and prohibition from being a 'destination' site (e.g. out of town shopping).

Fitch views the sustainability of the sector as 'midrange'. The likelihood of industry fundamental changes is perceived as low over the life of the bonds. The UK population is forecast to grow at a CAGR of 0.6% from 2015 to 2035 (source: ONS), which should contribute to demand growth.

Company Profile: Midrange
Fitch views financial performance as 'weaker'. Historically, Roadchef's performance has been volatile. However, revenue and EBITDA have grown steadily, albeit from a weak base, over the past six years due to both a strong development of a varied catering offer and reduced exposure to volatile fuel sales, with 14 out of 20 securitised group forecourts under rental agreements with BP and Shell (with an extra one planned during 2017). However, the fairly high operating leverage suggests that performance could still be volatile in a downturn despite the modified and improved business model. The business also still has a weak cash position, with the overdraft facility remaining fully drawn at GBP13.4m and the latest pension deficit funding requirement of GBP910,000 for the 12 months from 1Q15 (at around 3.4% of EBITDA) adds to fixed costs.

The company's operations are viewed as 'midrange'. The CEO position has been stable, unlike the CFO, which has recently changed as a result of the change in ownership to Antin Infrastructure Partners from Delek. The product range is moderately diversified relative to other WBS sectors, including food, drinks, gaming, hotels, some fuel and miscellaneous retail, and some strong retail brands onsite. Roadchef is a mid-sized operator within the oligopolistic MSA industry and benefits from some economies of scale (buying power). Roadchef has continued to make progress with regard to its IT/accounting systems, which is expected to bring savings of around GBP1m per annum now that the accounting function is fully in house (the IBM contract expires in 2015).

Fitch views transparency as 'midrange'. The business is largely self-operated, and provides reasonable insight into underlying profitability but little into individual catering revenue streams.

Dependence on operator is viewed as 'midrange'. Other operators are likely to be available, and operator replacement should be possible within a reasonable period of time. However, given the oligopolistic nature of the industry, it may be subject to OFT approval. Operational and financial commingling with the non-securitised group are both assessed as midrange (e.g. common supply contracts, pension schemes).

Asset quality is viewed as 'midrange'. The assets are viewed as being reasonably well maintained (capex averages 4.0% (GBP6.2m) of sales in the previous five years, although there is no minimum maintenance capex covenant) and well-located, being well distributed throughout England and Scotland with a high proportion of freehold or long leasehold.

The secondary market is viewed as fairly illiquid and there is no real alternative use value. Management plans to invest around GBP45m (expected to be funded via equity contributions from the new owners in addition to excess cash if and when possible) over the next five years. This should result in further catering roll-out, some energy savings in addition to further rollout of the Spar grocery offer.

Debt Structure Class A: Midrange; Class B: Weaker
Fitch views the debt profile (the first component of Debt Structure) as 'stronger' for the class A notes and 'midrange' for the class B notes. The class A2 notes are fully amortising on a fixed schedule and the amortisation profile is aligned with the industry and company risk profiles. There are no interest-only periods or concurrent amortisation with the subordinated debt (which is deferrable). The notes are also fixed-rate.

The class B notes are also fully amortising but their amortisation is back-ended (from 2024 and in three years). On the positive side, they are also fixed rate.

The security package is viewed as 'midrange' for the class A notes and 'weaker' for the class B notes. The security package comprises fixed and floating charges over the assets of the borrower, which is standard for UK WBS transactions and the class A noteholders are senior-ranking controlling creditors. However, the non-orphan status of the SPV (owned by the borrower's parent, Roadchef Motorway Holdings Ltd.) is a negative. The class B notes benefit from the same security as the class A notes, but have a lower ranking.

The structural features are viewed as 'midrange' for both the class A and B notes. The covenant package as a whole is not comprehensive with the restricted payment conditions (RPC) and financial covenants based only on EBITDA DSCR calculations disregarding other cash-flow items (eg, capex). The cure rights are also not restricted and viewed as generous, with the transaction having previously avoided borrower event of default, due to past cash injections (added directly to EBITDA for calculation purposes). Both the RPC and financial covenant levels are less than optimal with EBITDA DSCR thresholds at 1.5x and 1.25x, respectively, leaving little scope for underperformance. However, no cash leakage has yet been observed while the transaction was in cash lock-up. The size of the liquidity facility is viewed as 'midrange' at GBP25m (around 16 months of peak debt service). Barclays Bank as key financial counterparty is viewed as strong.

Peer Group
Roadchef is the only MSA transaction in the WBS portfolio. Roadchef is generally well aligned with other WBS transactions (e.g. pubs) after adjusting for differences in industry and company characteristics.

Positive - Significant improvement in Fitch's base case (projected) free cash flow (FCF) DSCR metrics to sustainably above 1.5x for the class A notes and 1.3x for the class B notes could result in an upgrade.

Negative - Deterioration in Fitch's base case FCF DSCR metrics to below around 1.2x for the class A notes and 1.0x for the class B notes could result in negative rating action.

Trailing 12 months (TTM) EBITDA grew 2.0% yoy to GBP27.2m (helped by the additional week in the accounting period - EBITDA was flat on a 52 week basis). Growth in non-fuel revenues was driven by continuing growth in catering revenues (6-year CAGR 7.7%) as the roll-out of McDonalds restaurants (26 now opened), Costa Coffee outlets and general refurbishments of the sites continued according to plan during the year. These results were also helped by the completion of the major M25 roadworks previously affecting the Clacket Lane site in 2014 (with management's estimated EBITDA impact of around GBP500,000 per annum), and improved motorway traffic volumes in 2014 (up 1.6% yoy - source: Department of Transport) for the fourth year running as the UK economy continues to grow.

EBITDA has grown by a six-year CAGR of 8.2% (52 week basis) since 2009. However, Roadchef's EBITDA volatility is symptomatic of its exposure to the UK economy, high proportion of fixed costs, as well as of a medium-sized and still under-invested estate. With debt service constant throughout this period, EBITDA DSCR improved markedly to 1.42x at the quarter to April 2015 from a low of 0.78x in 2009 (when repeated equity injections were required to prevent the transaction from defaulting).

The updated Fitch base case cash flow results in median FCF DSCRs to legal maturity of 1.47x for the class A2 notes and 1.24x for the class B notes, (vs. previous review's 1.44x and 1.21x respectively). In the medium to long term, important factors impacting Roadchef's performance remain the UK economy and the company's ability to invest in the estate. The UK economy is continuing to improve (translating into four years of modest motorway traffic growth) but the outlook for longer-term GDP growth is still uncertain. However, Fitch expects growth of 2.5%, 2.3% and 2.1% in 2015, 2016 and 2017, respectively. The planned catering developments and refurbishment programme are credit positives but carry some execution risk while the returns are offset by the loss of EBITDA from the sale of the Annandale site.

Antin Infrastructure's recent acquisition of Roadchef may benefit the company's growth prospects if the planned capex of around GBP45m (over the next five years) is executed and fully funded by equity contributions and excess cash.