PRESS RELEASE: Fitch Revises FirstGroup's Outlook to Stable; Affirms IDR at 'BBB'

15th Jun 2010 11:37

Fitch Ratings-London-15 June 2010: Fitch Ratings has today revised UK- and US-based bus and rail group FirstGroup plc's (FirstGroup) Outlook to Stable from Negative. Fitch has additionally affirmed FirstGroup's Long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB' and affirmed its Short-term IDR at 'F3'. The revision of FirstGroup's Outlook to Stable reflects Fitch's expectation that the company's rating is now less likely to be downgraded despite its progress in reducing leverage being somewhat slower than anticipated in April 2008 when the Negative Outlook was originally assigned. The slower de-leveraging is a result of several external factors including the economic recession in the UK and US, foreign exchange fluctuations, and, more recently, 2010's severe winter. De-leveraging has also been slowed by the retention of Greyhound as proceeds would have been partially used to reduce debt. Fitch expects that lease-adjusted net debt, excluding restricted cash, to EBITDAR will be above 3x as of end-March 2011 (FY11). This is high for the current rating, but Fitch anticipates the ratio to decrease to a level more commensurate with the rating over the near-term as the company continues to de-leverage. Additionally, management remains committed to reducing the group's leverage. As well as improved leverage, Fitch expects FirstGroup's post-capex cashflow generation to improve, to around GBP150m-180m p.a., despite an increase in future capex. FirstGroup has also been successful at lengthening its debt maturity profile which is another factor that had previously constrained the rating Outlook. The company has accessed the sterling bond market three times since September 2008, raising a total GBP850m. This, combined with bank loan refinancing, increased FirstGroup's debt maturity profile to 6.3 years as of 2010 from 3.5 years as of 2008. Liquidity is adequate with GBP1bn in undrawn committed credit lines and GBP76m of unrestricted cash as of FYE10. These amounts are more than sufficient to cover short-term maturities of around GBP110m, although the latter is expected to be met from free cash flow. FirstGroup has no major refinancing need until 2011, before its GBP505m and USD1,500m bank facilities become due in February 2012. Fitch assumes that the company will need to refinance only a part of these amounts. The Stable Outlook is also supported by management actions to partly address the negative effects of the economic slowdown, including a cost cutting exercise of GBP228m that helped protect the EBITDA margin for FY10 at 12.2% (FY09: 12.5%), a reduction in dividend growth to 7% from 10%, and lower capex (FY10: GBP202m, FY09: GBP359m). These measures contributed to post-capex cashflow of GBP136m for FY10. Fitch does not anticipate a negative business impact from the reduced capex in FY10 as a return to previous levels is expected from FY11. The agency expects further debt reduction to be helped by improvement in internal cash flow generation, disposals, for example GB Railfreight Ltd for GBP31m announced on 1 June 2010, and working capital optimisation. A failure to continue to reduce leverage due to, for example, increased dividend growth, M&A and/or a disappointing business recovery would be negative for the rating. A stronger-than-expected margin and cash flow recovery would be viewed positively. FirstGroup's ratings derive their strength from the earnings stability and geographical diversity of its operations in UK Bus (26% of FY10 EBITDA), UK Rail (19%), US Schoolbus (40%) and US Transit (8%). Despite its operational flexibility Greyhound (7%) is regarded by Fitch as having a comparatively higher business risk profile. UK Bus and US Schoolbus enjoy higher profit margins than the other businesses. Applicable criteria, "Corporate Rating Methodology", dated 24 November 2009, are available at www.fitchratings.com. Contact: Josef Pospisil, London, Tel: +44 (0) 20 7682 7339; Apostolos Bantis, +44 (0) 20 7682 7416. Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: [email protected]. Additional information is available at www.fitchratings.com. Related Research: Corporate Rating Methodologyhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. (END) Dow Jones Newswires June 15, 2010 06:37 ET (10:37 GMT)