Moody’s reviews Mobico’s Ba2 ratings for potential downgrade

Investing.com -- Moody’s Ratings has put the Ba2 long term Corporate Family Rating (CFR) of Mobico Group PLC and the Ba2-PD Probability of Default (PDR) rating under review for a potential downgrade. All ratings of the company, including the (P)Ba2 rating of Mobico’s £1.5 billion backed senior unsecured medium term-note (MTN) program, the Ba2 ratings of £250 million backed senior unsecured medium term notes due 2028, the €500 million backed senior unsecured medium term notes due 2031, and the B1 rating of the £500 million perpetual subordinated non-call fixed rate reset notes have been placed on review for downgrade. Previously, Moody’s had maintained a stable outlook for the company.

This action by Moody’s follows weak credit metrics, with Mobico’s gross debt / EBITDA ratio standing at an estimated 7.2x as of December 31, 2024, interest coverage well below 1x, and negative free cash flow. Additionally, the net proceeds from the disposal of Mobico’s North American School Bus business were lower than expected, thus limiting the potential for debt reduction. The renewal of the long haul concession in Spain due in 2027 also adds to the uncertainty.

Moody’s review will focus on the evaluation of forecast operating trends, the regulatory environment, free cash flow generation, and financial policies and practices.

Mobico’s credit profile is impacted by several factors, including large non-revenue-generating capital investments, growing dependence on the ALSA Spanish business, about 30% of revenues derived from variable passenger demand, ongoing cost pressures around wages, weak prospects of earnings growth elsewhere, and currently stretched credit metrics.

On the positive side, Mobico’s Ba2 long-term CFR rating reflects a high proportion (over 70%) of contracted and concession revenues independent of passenger demand, support from various national and local governments, diversified geographic presence, and a conservative financial policy.

Despite these positives, Mobico’s key credit metrics remain weak. The net proceeds from the sale of the US school bus business will not enable the company to deleverage as much as previously expected. The coverage of interest expenses remained very weak and well below 1x in 2024, when Mobico also generated negative free cash flows.

Mobico’s liquidity remains adequate, with £245 million of cash on balance sheet at the end of last year, with fully available revolving credit facilities totalling £600 million, with £29 million maturing in 2028 and £571 million in 2029.

Moody’s notes that Mobico has significant exposure to environmental risks, driven by carbon transition and pollution risks related to its transportation fleet, and to social risks in connection with regulatory pricing pressure and rising personnel costs. The company has operated outside its stated financial policy and stated last year that the timeline of its net leverage reduction, to its target of 1.5x-2x from 3x at the moment based on its covenant definition, has shifted to 2027 from 2024.

An upgrade is currently unlikely given the challenges that the company faces and its high leverage. The review for downgrade could lead to a multi-notch downgrade and will include the evaluation of the current and forecasted operating trends, the regulatory environment, and free cash flow generation, and on financial policies and practices.

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