OREANDA-NEWS. S&P Global Ratings today said it affirmed its 'B' long-term corporate credit rating on Montreal-based Garda World Security Corp. The outlook is stable.

S&P Global Ratings also affirmed its 'B' issue-level rating on the company's term loans and revolving facilities and its 'CCC+' issue-level rating on Garda's senior unsecured debt. The respective recovery ratings on the debt are unchanged at '3', indicating meaningful (50%-70%) recovery, and '6', indicating negligible (0%-10%) recovery in default.

"The affirmation reflects our view that, although Garda's improving credit ratios are weak for the ratings, the company's improving ratios and adequate liquidity support the ratings," said S&P Global Ratings credit analyst Aniki Saha-Yannopoulos. We also expect Garda's 2017 EBITDA to grow materially following the integration of its recent acquisitions, without a further increase in debt leading to lower leverage and stronger coverage ratios, including EBITDA-to-interest of about 2x.

The company exited fiscal 2016 (year ended Jan. 31) with elevated leverage due to the combination of debt-financed acquisitions and a weakening of Canadian dollar that inflates the company's U. S. dollar-denominated debt. We expect Garda to exit 2017 with debt-to-EBITDA just below 9x, which remains above our previous expectations, as the company integrates full-year cash flow from its acquisitions -- notably Aegis -- improving margins from its cash services segment, and lower debt from a strengthening Canadian dollar. At the same time, we expect the company to maintain sufficient liquidity and cushion under its revolving facility covenants to comfortably pay its fixed charges without any pressure on liquidity.

S&P Global Ratings considers the company's business risk profile satisfactory because, although Garda operates in highly competitive and fragmented markets, it has good customer and geographic diversity and a large portion of revenues (about 30%-40%) that are contracted and recurring.

S&P Global Ratings considers Garda's financial risk profile highly leveraged, as characterized by the company's financial sponsor ownership, its policy to fund acquisitions through debt, and our expectation that Garda will maintain high debt levels.

The stable outlook reflects our expectation that Garda will demonstrate increased EBITDA from the integration of recent acquisitions, recurring contracts, and improving profitability leading to improved leverage. We also believe that the company will maintain enough liquidity beyond the next 12 months to comfortably pay its fixed charges wand keeping EBITDA-to-interest coverage of over 2x.

We could lower the ratings if Garda's EBITDA-to-interest coverage approaches 1.5x. This could be due to weaker-than-expected earnings and cash flow resulting from competitive pressures or operating inefficiencies, or higher interest costs related to increasing debt levels. In addition, we could lower the rating should Garda become liquidity-constrained, with headroom under its leverage covenant of below 10% that could limit the company's availability under its revolving facility.

We could upgrade Garda should its credit metrics strengthen and we believe it is committed to keeping adjusted debt-to-EBITDA close to 5x while maintaining adequate liquidity. At the same time, we would expect the company to sustain its current business risk profile and improve its EBITDA margin to levels in line with industry peers' average profitability.