Onsite Rental Group Outlook Revised To Stable On Capital R #B-# Rating Affirmed, New Loan Rated #B-#

Stocks and Financial Services Press Releases Thursday November 2, 2017 17:02
MELBOURNE--2 Nov--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Nov. 2, 2017--S&P Global Ratings said today that it had revised its rating outlook to stable from negative on holding company Onsite Rental Group Pty Ltd. (Onsite Rental), and affirmed the 'B-' corporate credit rating on Onsite Rental. We also withdrew the 'B-' issue rating on the term loan issued by Onsite Rental.

At the same time, we assigned our 'B-' corporate credit rating on Onsite Rental Group Operations Pty Ltd. (Onsite Rental Operations). Onsite Rental Operations is the operating company of Onsite Rental group, an Australian equipment services provider. The rating outlook is stable.

We also assigned a 'B-' issue rating on Onsite Rental Operations' new, senior secured, term loan B due in 2022. The recovery rating on the term loan is '3', indicating our expectation for meaningful recovery of around 60% in the event of a payment default.

This rating action reflects our view this transaction has improved Onsite Rental Operations' financial flexibility given that it has removed the company's previous debt covenant pressures. The company is now able to invest in new equipment to capitalize on improving operating conditions in the equipment hire market. We expect Onsite Rental Operations' EBITDA to grow modestly in 2018 on the back of improving trading conditions and benefits from its acquisition of the equipment hire division of Global Construction Services Ltd. (GCS Hire).

The recent rebound in commodity prices and increasing infrastructure projects on the east coast of Australia have raised prospects for equipment rental demand. In addition, it has lifted the revenue outlook for capital goods companies such as Onsite Rental Operations over the next 12 to 24 months.

However, competition is still intense in the fragmented industry and some surplus equipment remains, despite some tightening over the past few months. We therefore believe equipment rental companies have restricted ability to significantly increase pricing and EBITDA margins over the next 12 months. However, companies' equipment utilization rates should improve, supporting modest revenue and earnings growth.

Onsite Rental Operations' exposure to the infrastructure sector has somewhat shielded the company from reducing demand for work in the resources sector. That said, the scale of some greenfield resources projects (such as those for liquefied natural gas [LNG]) is so large that it's not easy to find sizable projects in other sectors to replace revenue lost from the completion of LNG projects. Therefore, we expect the recovery in Onsite Rental Operations' earnings to be gradual.

Onsite Rental Operations is the second-largest business-to-business player in Australia in the general equipment rental category, behind Coates Hire. It has a relatively diversified end-market exposure to LNG, resources (in particular iron ore); nonresidential and residential construction and maintenance; and other sectors. Despite Onsite Rental Operations' position in Australia, we consider the company to be among the smaller equipment rental companies that we rate globally.

We view this recapitalization as opportunistic, and not as a distressed exchange. We believe in the absence of this transaction the company would not have faced a conventional default over the next 12 to 24 months. This recapitalization has occurred well before the maturity (2021) of the previous term loan B (TLB).

The new capital structure in Onsite Rental Operations consists of a first-lien senior secured term loan A maturing on March 30, 2022 and first-lien senior secured debtors' receivables facility; both of which rank ahead of a US$114.5 million (around A$148 million) senior secured TLB maturing on Sept. 30, 2022. After the capital restructure, the group is now 92.5% held by the former TLB and revolving credit facility (RCF) creditors and 7.5% held by existing shareholders including Next Capital, an Australian private equity firm.

Onsite Rental Operations' holding company has a loan (payment in kind [PIK]), of which 92.5% held by the former TLB and RCF creditors and 7.5% held by existing shareholders including Next Capital. However, this loan is not supported or cross guaranteed by Onsite Rental Operations. On a consolidated basis and including the holding company loan as debt, the group's (including both the operating and holding company) FFO to debt would be 8%-9% in 2018, and debt to EBITDA would be about 6.4x in 2018, before improving thereafter.

The stable outlook reflects Onsite Rental Operations new capital structure, which removes covenant pressure and improves its financial flexibility. We expect the company to grow its contract book and earnings on the back of improved operating conditions and recent GCS Hire acquisition. We forecast Onsite Rental Operations' debt to EBITDA will be low 3.0x. In addition, we expect the company to maintain adequate liquidity.

The consolidated group's debt to EBITDA will be about 6.5x if we include the holding company loan.

A downgrade could occur if Onsite Rental Operations' liquidity position weakens because of sustained negative free operating cash flows, such that we consider the company's capital structure to be unsustainable. This scenario could occur amid a reversal of improved industry trading conditions in the equipment rental industry, which could stem from weaker demand from the resources sector without an offsetting impact from increasing work from other sectors such as infrastructure.

The rating could also be under pressure if covenant pressure re-emerges because of decreasing fleet value.

An upgrade is less likely due to Onsite Rental Operations' relatively small scale. However, we could consider an upgrade if it materially improves its scale while maintaining more-conservative financial management, such as simplifying its ownership, governance, and capital structure.


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