OREANDA-NEWS. Fitch Ratings has assigned UK-based Moto Ventures Limited a final Long-term Issuer Default Rating (IDR) of 'B' with a Stable Outlook. Fitch has also assigned Moto Finance Plc's GBP175m senior secured fixed- rate notes due 2020 a final rating of 'B+'/'RR3'. The proceeds of the bond issue were used to refinance Moto's outstanding bonds of GBP176m due 2017.

The 'B' IDR reflects the balance of Moto's leadership in the UK motorway service area (MSA) market despite weak financial metrics. Moto benefits from stable cash flow generation and a regulated operating environment with limited competition, translating into a protected sector. The rating also reflects the company's demonstrated ability in renegotiating contracts with high street brands (i.e. M&S, BP, BK & WH Smiths) and its pricing flexibility.

The IDR is constrained by the high financial leverage, along with weak coverage ratios and high fixed costs. Future growth largely depends on a number of related exogenous factors, including traffic and GDP growth, in addition to on-going capital expenditure focused on site improvements rather than on acquisitions. The possibility of a high dividend payout (although subject to lock-up mechanisms and covenants) reflects a rather aggressive financial policy leading to flat to mildly rising leverage over time, based on Fitch's own projections.

KEY RATING DRIVERS

Leading UK MSA Operator
Moto commands a market share of 36%, compared with its two closest competitors Roadchef and Welcome Break. It operates in a largely mature sector with an oligopolistic structure. High barriers to entry, coupled with high start-up costs and long lead times in obtaining planning permission for new MSAs, mean that existing operators hold largely unchanging market shares. This is an important supporting factor for the ratings.

Regulated Operating Environment
The MSA sector in the UK is highly regulated, with the majority of regulations governing the establishment of new locations. The minimum stipulations include 24-hour access to certain goods and services such as fuel, drink, restroom and free parking for two hours, all of which limit the entry of new participants.

Recent regulatory changes have resulted in an increased range of retail offers and commercial opportunities including alcohol for both off- and on-sale; the removal of retail and gaming area square footage restriction; removal of minimum distance restriction and the increase of alternative-use opportunities, providing there is no increase in net overall traffic. These recent changes have brought about increased commercial opportunities for MSAs within the framework.

Large Proportion of Freehold Sites
Moto has the greatest number of freehold sites (21) among the top three operators. Of the remaining 32 sites, four are long-leasehold sites. The freehold and long-leasehold sites together represent approximately 60% of EBITDA. It has another 28 short leasehold sites, with 10 at peppercorn rents. The structure of the asset portfolio gives Moto largely limited exposure to rent increases. Moto's asset base also underpins expected recoveries for creditors in the event of default.

Strong Cash-flow Generation
The primary uses of cash are interest payments, followed by capex. Working capital needs are minimal given the nature of the business. Funds from operations (FFO) generation has been strong over the last three years, and is forecast to remain robust over the next two to three years.

A non-amortising, back-loaded bullet debt structure also helps preserve cash in the business. However, we do not expect the cash balance to build with earnings growth as dividends are expected to be paid, starting in 2016. Dividend payments will create a negative free cash flow profile in an otherwise cash-generative business model.

Vulnerability to Macroeconomic Factors
Although Moto's performance over the economic downturn in the UK was largely stable, the company remains vulnerable to discretionary spend and traffic volumes. These elements in turn are affected by the prevailing economic environment, in particular, GDP growth. In addition, average transaction value remains low (GBP5.50) in MSAs, and the offerings tend to be homogenous among the top three operators.

Slow Deleveraging; Limited Growth Potential
The UK motorway network is mature, and despite the recent loosening of regulation governing MSAs, there are only a few potential sites for new MSAs. Recent operating performance (FY14) has shown that price increases across the catering portfolio, coupled with new Greggs outlets (and continued M&S roll-outs) have resulted in EBITDA growth over the prior year. Contractually required capex (funded through drawdowns on the capex facility) is likely to increase leverage unless earnings growth outpaces.

Above-average Recovery Prospects
In line with the going concern restructuring approach under the bespoke recovery analysis, we expect above-average recoveries for bondholders in case of default. This reflects Moto's fairly low earnings volatility, high market share compared with key competitors and reasonable asset quality, given the location of the MSAs across the strategic road network. This is reflected in Fitch's assumptions by way of a moderate discount to the most recent EBITDA (15%) and high distressed EV/EBITDA multiple of 7.5x relative to pure retail or gaming credits, which are subject to structurally strong competition and other secular challenges such as online channel investments etc.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

-Revenue CAGR (excluding fuel) of 3% (2015-2018)
-EBITDA margin (excluding fuel) remaining stable at 19% over the same period
-Capex and dividend payouts as per management guidance
-FFO adjusted gross leverage increasing towards 6.8x by end-2017 from 6.4x (end-2015), driven by capex drawdowns combined with slow earning growth
-Liquidity remaining satisfactory throughout the rating horizon

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include
-Decline in FFO adjusted gross leverage to 6.0x or below on a sustained basis and
-FFO fixed charge cover trending towards 2.0x
-Positive and sustained free cash flow (FCF) generation supported by steady profitability

Negative: Future developments that could lead to negative rating actions include
-Increase in FFO adjusted gross leverage above 7.0x on a sustained basis
-FFO fixed charge cover sustained below 1.5x
-Evidence of an increasingly aggressive financial policy
-Adverse change in fuel contract terms such that cash margin flexibility is lost

LIQUIDITY AND DEBT STRUCTURE

The new capital structure includes senior secured bank debt and a senior secured second lien high-yield bond. With its new bond and bank facilities, Moto will face manageable refinancing risk, with its debt maturities extended to 2020.

Liquidity remains adequate with strong FCF generation, access to an RCF of GBP10m and a capex facility. The non-amortising profile of the loans coupled with the bullet maturity of the bond will help preserve cash in the business. The main uses of cash are interest payments and capex, given low inherent working capital movements. We expect dividend distributions to take place from 2016 onwards. Factoring in such dividend payouts, Fitch estimates the company would maintain reasonable cash balances, although post-dividend FCF is expected to turn negative through the forecast period.