Moody's Places Brink's (BCO) Under Review for Downgrade; Core CIT Profitability in N.A., Europe Still Floundering

Moody's Investors Service placed the Baa3 rating of The Brink's Company's (NYSE: BCO) $480 million revolving credit facility and the Ba1 rating on $43 million of Dominion Terminal Associates bonds guaranteed by Brink's under review for downgrade.

Brink's has faced challenges to improve profitability in its core cash-in-transit business in North America and Europe for several years. However, it has continued with more profitable operations in other regions, particularly in Latin America. The announcement on April 14 of an expected first quarter re-measurement charge on net monetary assets in the company's Venezuelan subsidiary and the application of a significantly lower exchange rate to translate future Venezuelan results signifies a reduction in the capacity of the more profitable international operations to offset weaker results in developed regions. Going forward the company will begin to use a floating exchange rate which was approximately 50 Venezuelan bolivars to the US dollar on March 31, 2014, to translate the financial statements of its Venezuelan subsidiary compared to the previous 6.3 official rate. The development will add pressure on Brink's ratings which have been subject to a negative outlook since February 22, 2013.

RATINGS RATIONALE

The exchange rate change will impact Brink's standing in several ways: 1). if applied retroactively to Brink's December 31, 2013 balance sheet it would reduce the dollar equivalent of the subsidiary's cash holdings at the end of December by some $82 million, thereby lowering Brink's liquidity and consolidated cash position by nearly a third; 2). If applied retroactively to Brink's 2013 revenue, a reduction of close to $392 million or around 10% would result and non-GAAP measures of segment profitability would decline by some $75 million or slightly more than 25%. This would trim Brink's scale while its debt burden would essentially be unchanged; 3). Unless offset by improvements elsewhere, the value of the Venezuelan subsidiary's contributions to future earnings will decline, potentially, causing Brink's EBITDA and EBIT to be lower than previous expectations. This could elevate leverage and reduce interest and free cash flow coverage metrics; and 4). Not only do the developments reflect the extent that contributions from the Venezuelan subsidiary had on Brink's financial profile but highlight the weak performance of its North American operations which accounted for only 7% of non-GAAP consolidated 2013 operating profit. In turn, unless domestic profitability trends improve, additional valuation allowances to deferred tax assets may be required.

Still, following changes in Venezuela's currency controls, Brink's should be free to repatriate more, if not all, of its future profits earned in that country (recent requests to repatriate earnings at higher exchange rates had been denied). However, their value will be smaller than would have been the case if the bolivar were stronger. In addition, the lower value of the bolivar will reduce future expenses related to non-controlling interests as the Venezuelan subsidiary is not wholly-owned.

The review will consider the ability of profits and cash flows earned at other international operations to offset lower contributions anticipated from Venezuela, prospects for meaningful improvement in North American results, the resultant effects on key credit metrics, as well as liquidity.

The last rating action was on February 22, 2013 at which time a Baa3 rating on the company's unsecured revolving credit facility was affirmed but the outlook was revised to negative.

The principal methodology used in this rating was Global Business & Consumer Service Industry Rating Methodology published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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