Fitch Rates Boels ‘BB-‘; Outlook Stable

Fitch Ratings has assigned Boels Topholding BV a Long-Term Issuer Default Rating (IDR) of ‘BB-‘ with a Stable Outlook. The agency has also assigned Boels’ senior secured debt a ‘BB-‘ rating.

Boels is a Netherlands-headquartered equipment rental company operating in multiple European countries. It has recently agreed on the debt-supported acquisition of Cramo plc, extending its geographic footprint, particularly in Scandinavia.

Key Rating Drivers

Boels’ IDR reflects its elevated leverage following its acquisition of Cramo and the need to balance cyclicality of customer demand in its business with reinvesting sufficiently to maintain a young and productive fleet. The rating also takes into account Boels’ management’s significant experience in the equipment rental sector (including successfully steering the business through the global economic crisis), its plans over the medium term to bring leverage back down towards current levels, and its number two position in the European market on the combination of Boels’ well-established franchise with that of Cramo, which has a largely complementary fit.

In view of the cash flow-driven nature of Boels’ business, Fitch uses debt/EBITDA-based metrics in assessing leverage, as opposed to more balance sheet focused debt/equity measures. In the equipment rental sector, Fitch regards depreciation of rental fleet assets as akin to a recurring operating expense, and so deducts depreciation of rental equipment from EBITDA in arriving at ‘adjusted EBITDA’ in its leverage calculation. Boels’ adjusted EBITDA gross leverage under Fitch’s calculation was around 4.7x in 2018, and we expect this to rise to around 8.4x in 2020 following the acquisition of Cramo. This compares with 2020 net debt to unadjusted EBITDA of around 3.5x and is a constraining factor on the rating, particularly in light of the potential for EBITDA variability through the economic cycle.

Fitch notes that in any typical period Boels also receives proceeds from the disposal of rental assets, but does not deduct this from the ‘gross’ fleet depreciation figure in view of the potential for these proceeds to fluctuate. We also note that Boels seeks to maintain a young fleet, which (via higher depreciation) increases the significance of Fitch’s EBITDA adjustment relative to that for a rental company operating with older, fully depreciated equipment.

Fitch views Boels’ deleveraging potential as sound. Given relatively short fleet order periods and the acceptable average age of its rental fleet (relative to useful economic lives) in a hypothetical sectoral downturn Boels could materially reduce its sizeable projected capital expenditure. This could in turn lead to improved operating cash flows and reduced gross leverage.

The equipment rental sector is growing, as an increasing proportion of end-users in many European markets choose to rent equipment rather than own it. Multisite operators such as Boels enjoy advantages over independents in the depth of fleet they are able to stock, as well as in brand recognition. Although the sector remains fragmented, the acquisition of Cramo is set to strengthen Boels’ franchise by lifting it to the number two position in Europe, bringing increased purchasing power in procurement and other scale benefits.

Cramo, in particular, draws significant business from the construction sector, the cyclicality of which typically leads to reduced demand for its suppliers during a market downturn. Boels’ customer base is more diversified than Cramo’s (including more DIY and maintenance business), but also includes the construction sector. Fitch notes Boels’ management’s intention to increase Cramo’s operations in less cyclical, Boels’ style generalist areas, but still regards the combined group’s business model as exposed to potential volatility through the economic cycle.

Boels’ business model requires constant reinvestment in the fleet to maintain sufficient inventory with which to satisfy customer demand at high points in the cycle while seeking to avoid lower utilisation rates at cyclical low points rendering those investments uneconomic. Excess expenditure ahead of a period of declining revenues could also pressurise liquidity. In Fitch’s opinion, the capital expenditure process at Boels appears well-managed to date.

However, we believe the risks associated with investment in multi-year assets subject to variable demand cannot be fully mitigated and will require even more careful management on the absorption of the more construction-focused Cramo.

Boels’ rental assets are subject to market value movements over their multiyear periods of ownership, which could give rise to impairment or residual value risk if their depreciation periods were not appropriately strict. Fitch regards Boels’ track record of generating annual net gains on disposal positively, while noting that asset values could come under greater pressure during a downturn, particularly once accounting for Cramo’s more construction-focused fleet.

Boels’ chief executive has substantial experience in the equipment rental sector, leading the business through both macro upturns and downturns, including the global economic crisis. In recent years, the wider management team has been strengthened, and Cramo’s management’s knowledge of its own geographic markets will remain with the group post-acquisition. As a private company, Boels lacks the degree of governance scrutiny typically applied to a public company, but Fitch views positively the family interest in the long-term health of the business, with a track record of reinvesting earnings rather than extracting them in dividends, and the expressed intention of continuing this policy in the medium term to assist in reducing leverage.

Boels is refinancing all of Cramo’s debt and its own as part of the acquisition transaction. This reduces the source and maturity diversification of its previous funding (e.g. via repayment of financing raised in the Schuldschein market) and concentrates it within the €1.6 billion Term Loan B, supplemented by a €200 million revolving credit facility (RCF) from the same providers.

However, the seven-year tenor of the Term Loan B (and 6.5 years of the RCF) provides good medium-term visibility.

The Term Loan B and RCF are classified as secured, in keeping with other Term Loan B transactions. However, in the absence of direct security over Boels’ operating assets, Fitch rates the facilities in line with Boels’ Long-Term IDR (as it would an unsecured obligation),  indicating average recovery prospects.

The Stable Outlook on Boels’ Long-Term IDR reflects Fitch’s expectation that the group will be able to report adequate profitability in most market conditions while maintaining liquidity and managing down its leverage.

Rating sensitivities

In view of the significant additional debt taken on to finance the Cramo acquisition, and the integration risks associated with that transaction, an upgrade is unlikely in the near term.

However, Fitch expects anticipated near-term earnings to be used to reduce leverage, and an improvement in associated metrics in line with management budgeting could support positive rating momentum over the medium to long term.

The ratings would be negatively impacted if leverage did not reduce as currently expected, whether through core EBITDA within either Boels or Cramo not reaching target levels, the integration of Cramo proving more costly than expected, or additional debt being taken on to fund other investments, in particular, if by end-2022 debt to adjusted EBITDA under Fitch’s metric remained materially above 7.0x, or if the covenant of a maximum 6.5x net debt to unadjusted EBITDA in Boels’ Term Loan B documentation came under pressure.

Given the scale of the Cramo acquisition, potential integration risks are elevated. Evidence of any outsize integration challenges could weigh negatively on the IDR.

The debt ratings are primarily sensitive to any changes in Boels’ Long-Term IDR. Should Boels introduce a debt tranche secured on operating assets ranking above existing instruments (or a subordinated tranche below them), Fitch could notch the debt ratings down (or up) from the Long-Term IDR, on the basis of weaker (or stronger) recovery prospects.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’.

ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.