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Moody's Assigns 'Ba3' Rating to Ritchie Bros. Auctioneers (RBA); Outlook Stable

December 2, 2016 11:31 AM EST

Moody's Investors Service ("Moody's") assigned first time corporate family and probability of default ratings of Ba3 and Ba3-PD, respectively, to Ritchie Bros. Auctioneers Incorporated (NYSE: RBA). Moody's also assigned Ba2 ratings to the senior secured credit facilities, a B2 rating to the senior unsecured notes and an SGL 2 speculative grade liquidity rating. The rating outlook is stable.

The proceeds from the i) $500 senior notes ("Notes"), ii) $675 million senior secured revolver ("Revolver") (of which about $59 million will be drawn at closing), iii) $325 million delayed draw senior secured term loan ("TL") (which can only be used to acquire IronPlanet), iv) about $92 million cash from the balance sheet and v) roll-over equity options will be used to i) purchase IronPlanet Holdings, Inc. ("IP") for about $784.3 million, ii) repay existing RBA debt of about $148 million and iii) leave about $81 million of cash on the balance sheet. RBA is expected to acquire IP (subject to regulatory approval) in the second half of 2017.

The assigned ratings are contingent upon the closing of the IP acquisition. If the IP transaction does not close, all the ratings will be withdrawn.

RATINGS RATIONALE

The ratings are supported by RBA's leading position in industrial auctions, in particular for its core business of live unreserved auctions, with good brand awareness and customer loyalty. It also reflects moderate pro forma leverage of about 3.8x (on a Moody's adjusted basis, at September 30, 2016), high 30% EBITDA margins and mid-single digit free cash flow ("FCF") to debt (measured after dividends). The acquisition of IronPlanet will substantially enhance RBA's online industrial auction presence, which is expected to be a strong revenue growth area, albeit off a small base currently. The rating also reflects exposure to multiple industry sectors for its auction products.

The Ba3 CFR is constrained by integration risks relating to the acquisition of IP (on top of other recent acquisitions), RBA's small scale relative to many Ba3 rated service companies, and the competitive and fragmented market place in which it operates. Profitability can fluctuate based on regional and global economic and construction activity. As a large portion of RBA's cost are fixed, profitability can fall substantially if revenue declines. Losses may occur too on RBA's guarantee and inventory contracts and advances to consignors.

The SGL-2 speculative grade liquidity rating reflects good based on a cash balance of about $81 million and approximately $615 million undrawn under the $675 million Revolver at closing. For 2017 we expect FCF of about $40 million or greater (measured after dividends) and significant availability to remain under the Revolver. Moody's anticipates adequate cushion under the financial covenants of the credit facilities. The TL is anticipated to amortize 5% / 5% / 10% / 10% / 10%, per annum over 5 years, respectively, with a bullet due at maturity.

Prior to RBA's proposed acquisition of IP the senior credit facilities are unsecured. Upon RBA's acquisition of IP the senior credit facilities become secured. However, following the acquisition of IP if RBA i) obtains an investment grade rating from Moody's or S&P or ii) gross leverage is less than or equal to 3x for 2 consecutive fiscal quarters, RBA (at its sole discretion) may permanently release the collateral securing the senior credit facilities ("Collateral Release Event" / "CRE"). If this occurs, financial covenants in the credit facility would require RBA to maintain gross leverage of no greater than 3.0x at all times.

The Ba2 rating on the senior secured credit facilities reflect the security package that will be in place upon closing of the IP acquisition. If a CRE were to occur, the capital structure would become unsecured and consequently both the bank credit facilities and the unsecured note ratings could migrate towards the level of the corporate family rating.

The debt instrument ratings were determined using Moody's Loss Given Default Methodology. The senior secured credit facilities are rated Ba2 (LGD 3), one notch up from the corporate family rating, while the senior unsecured note is rated B2 (LGD 5), two notches down from the corporate family rating. The notching is driven by the relative position and proportions of secured and unsecured debt in the capital structure.

The stable outlook reflects Moody's expectation of mid-single digit percentage revenue growth, EBITDA margins (on a Moody's adjusted basis) in the upper 30% and FCF to debt in the mid-single digit percentages over the next year. We also expect that debt to EBITDA (Moody's adjusted) will decline to about 3.2x over the next year. Additionally, the stable outlook reflects our expectation that the material weaknesses identified in IP's internal controls for its financial reporting in FY 2014 and FY 2015 will not complicate the integration.

The ratings could be upgraded if RBA is likely to sustain solid organic revenue growth and improving EBITDA margins, while achieving and sustaining adjusted debt to EBITDA around 2.5x and FCF to debt of about 15%. Also, a commitment from RBA to maintain conservative financial policies would be needed.

The ratings could be lowered if there is a deterioration in business fundamentals, evidenced by organic revenue declines, profitability declines or a change in financial policy, such that debt to EBITDA (Moody's adjusted) is sustained above 4x.

The following ratings were assigned:

Issuer -- Ritchie Bros. Auctioneers Incorporated

Corporate Family Rating -- Ba3

Probability of Default Rating -- Ba3-PD

Speculative Grade Liquidity Rating - SGL 2

Senior Secured Revolving Credit Facilities -- Ba2 (LGD 3)

Senior Secured Term Loan (delayed draw) -- Ba2 (LGD 3)

Senior Unsecured Notes - B2 (LGD 5)

Outlook -- Stable

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.



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