(Alliance News) - Moody's Investors Service on Wednesday revised its rating outlook on National Express Group PLC to negative from stable as the Covid-19 pandemic reduced travel and slowed the economy.
At the same time, the ratings agency also affirmed National Express's backed senior unsecured debt ratings at Baa2 and its backed senior unsecured MTN Programme rating at (P)Baa2.
"The negative rating outlook reflects Moody's expectations of pressure on National Express' revenues, Ebitda and operating profit as a result of the reduced travel in the wake of the coronavirus, as well as the related overall slowdown in the economic activity," Moody's explained.
Moody's said it was expecting that the public transport firm will see the most damage in business lines that rely on passenger revenues, about 38% of total revenue, while its contract-based businesses will suffer less.
"Moody's understands that a number of contracting authorities and local governments are working with National Express to continue to make at least partial payments under the contracts. In addition, a number of national governments have approved economic aid measures that will help companies, such as National Express," Moody's noted.
For example, National Express has said that in its North America business - representing 45% of 2019 revenue - more than half of school bus customers, customers representing 90% of the firm's transit revenue, and most private hire customers, are paying either partial of full contract payments.
Some contracts in National Express's ALSA business, which represented 30% of 2019 revenue, "were either structured on a gross cost basis where the revenue level does not depend on passenger volumes or could be modified with the help of supportive local authorities".
Because of this National Express has estimated that about 40% of ALSA revenue was independent of the level of demand. National Express has also reduced the level of its service and shrunk its workforce in order to control costs.
In the UK, 22% of 2019 revenue, National Express has benefited "from a measure of protection from concession income while the coach business is able to mitigate its costs through its third party structure". Its German and Bahrain contracts are mostly structure on a gross cost basis, as with ALSA.
National Express has put a halt to "all acquisition and capital expenditure activities", Moody's noted, with senior management taking pay deferrals and reduced salary.
"As a result of these efforts, Moody's expects National Express to stem the deterioration of its credit profile and preserve liquidity," the ratings agency said.
Nonetheless, Moody's is still expecting National Express's leverage to increase to more than 6 times from just 4.1 times in 2019, falling in 2021 to 5 times.
Moody's added that the Baa2 rating reflects the company's "diversified geographic presence, with significant revenue and operating profit contributions from the USA, the UK and Spain", as well as "historically stable operating margins across its primary businesses". The rating is also reflective of the company's "disciplined investment and acquisition strategy" and moderate leverage target of net debt to earnings before interest, tax, depreciation, and amortisation of between 2.0 and 2.5 times.
A ratings upgrade, while not expected at present, might occur is the firm's retained cash flow to net debt ratio was above a mid-twenties percentage and funds from operations interest cover was more than 7.0 times. These would both need to be on a sustained basis.
"Any upward rating pressure associated with the positioning of financial metrics against the above ratio guidance would be considered in the context of the likelihood of material acquisitions and/or returns of cash to shareholders," Moody's noted.
A failure to see recovery in demand or a weakened liquidity profile could spell a downgrade. Furthermore, "an external growth strategy resulting in a significant deterioration in business mix or increase leverage would be viewed negatively."
Shares in National Express were up 5.9% at 236.27 pence in London on Thursday morning.
By Anna Farley; annafarley@alliancenews.com
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