S&P Assigns 'BB' Corp. Rating to Ritchie Bros. Auctioneers (RBA); Outlook is Stable
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S&P Global Ratings said it assigned its 'BB' long-term corporate credit rating to Ritchie Bros. Auctioneers Inc. (NYSE: RBA). The outlook is stable.
At the same time, S&P Global Ratings assigned its 'BBB-' issue-level rating and '1' recovery rating to the company's existing US$675 million revolving credit facility and US$325 million term loan. S&P Global Ratings also assigned its 'BB-' issue-level rating and '5' recovery rating (10%-30%, lower end of range) to the company's proposed US$500 million unsecured notes. Because the recovery on the notes is at the lower end of the range, if the unsecured notes are upsized above US$500 million, we could revise the recovery rating to '6' (0%-10%).
"We base our ratings on the expectation that the company will close the acquisition in the first half of 2017; Ritchie will use proceeds from the proposed issuance and term loan to fund the IronPlanet acquisition," said S&P Global Ratings credit analyst Aniki Saha-Yannopoulos. "Concurrent with the acquisition, the unsecured credit facilities will become secured by the assets of the combined Ritchie and IronPlanet entity," Ms. Saha-Yannopoulos added.
The recovery analysis is based on our expectation that the company's revolving facility and term loan will remain secured at the time of default. Based on the credit agreement, the facilities may release the security if the corporate credit rating is investment-grade or the consolidated leverage ratio is less than 3x for two consecutive quarters. We would need to reassess recovery in this scenario, which would likely have positive recovery implications for the proposed notes.
Ritchie is the world's largest industrial auctioneer focusing on the sale of heavy equipment. Its core business provides unreserved auction services to customers worldwide. The company plans to acquire IronPlanet for US$784.3 million and expects to close the acquisition in first-half 2017, subject to regulatory approvals. IronPlanet provides its auction services though online-only platforms, and complements Ritchie's end-user customer base.
The fair business risk profile assessment on Ritchie reflects our view of the company's operations in the highly fragmented and competitive used equipment reselling business, limited geographic diversity, and low barriers to entry. Also incorporated into our assessment is Ritchie's brand and reputation; its position as the largest industrial auctioneer; exposure to multiple sectors that should limit cash flow volatility; and the company's stable profitability, as evidenced by its EBITDA margins. Ritchie is the largest industrial auctioneer of capital equipment while IronPlanet provides the same service through an online-only platform. With the acquisition, we expect Ritchie to generate revenues through multiple sales channels (from live auctions to private listings) while expanding its customer base to corporate accounts, original equipment dealers, and government entities. Ritchie generates its revenues through the commission and fees on lots sold through its auction services.
The stable outlook on Ritchie reflects our view that the company will continue to generate revenues as it increase its gross auction proceeds and integrate the IronPlanet acquisition, and also maintain stable profitability, namely, EBITDA margin above 40%. The company's credit measures should improve somewhat with adjusted debt-to-EBITDA expected at about 2.5x over the following 12 months, post-closing IronPlanet, before Ritchie considers reinstating its share repurchase program.
Although we do not expect to raise our ratings in the next 12 months, we could consider a positive action if Ritchie is able to achieve and sustain adjusted debt-to-EBITDA below 2x and discretionary cash flow-to-debt above 30%. In this scenario, we would anticipate higher-than-expected revenues and EBITDA margins (at least 30% and 4% higher, respectively) following the integration of IronPlanet.
Although we view a downgrade as unlikely at this time, we could lower the rating if Ritchie pursues an aggressive financial policy, using more debt than we forecast to fund shareholder-friendly initiatives or large acquisitions, such that it achieves and sustains adjusted debt-to-EBITDA increases above 3.5x. We could also lower the rating if adverse changes in operating conditions, such as a global economic recession or unexpected integration costs, lead to weakness in operating or measures.
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