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Investing.com -- S&P Global Ratings has downgraded the credit rating of U.S.-based automotive risk and asset management software and services provider Polaris (NYSE:PII) Parent LLC (Solera). The downgrade to ’CCC+’ from ’B-’ is due to expected negative free operating cash flow (FOCF) of up to $100 million in fiscal 2025 (ending March 31, 2025), and slower revenue growth. The previous expectation was slightly positive FOCF.
Despite improvements in EBITDA margin from cost savings and potentially lower cash interest and working capital outflows, Solera is facing a high debt service burden and slower revenue growth. These challenges are due to issues in its Fleet Solutions business, which are affecting its deleveraging and cash generation. This could force Solera to depend on additional debt or other external funds to fully pay down its revolver.
S&P Global Ratings maintains a stable outlook on Solera, reflecting their view that the company has sufficient liquidity for at least the next 12 months to meet its minimum operating needs. It is also likely that Solera will extend the June 2026 maturity of its $500 million revolving credit facility. However, the company’s high leverage of about 8x and high debt service burden resulting in weak cash generation after debt servicing could make its long-term capital structure unsustainable.
In the first nine months of this fiscal year, Solera reported negative FOCF of about $172 million, which has resulted in an increasing reliance on its revolver. The company partially paid down its revolver with a $350 million secured term loan with a payment-in-kind (PIK) toggle feature due in 2028. This new facility and other minor ancillary facilities obtained in the fiscal year helped increase its total available liquidity to about $466 million as of Dec. 31, 2024, from about $290 million as of March 31, 2024.
However, if Solera is not able to generate significant cash internally to sustainably meet its debt servicing requirements without needing to rely on its revolver, which still had an outstanding $145 million balance at the end of December, this would be viewed as a near-term reprieve.
With weaker revenue growth and net working capital flows than in the last projections, S&P Global Ratings now expects a net cash burn of up to $20 million in fiscal 2026. Although this represents a potential return to positive FOCF of about 1% of debt helped by lower average interest rates and potential net working capital improvements, it is lower than the prior expectation of at least 2% FOCF to debt in fiscal 2026.
S&P Global Ratings could lower its rating on Solera if it expects sustained negative FOCF generation, significantly reduced total available liquidity, weaker-than-expected revenues or EBITDA margins, or increased risk of the company needing to consider a debt amendment or exchange transaction. An upgrade would require improved organic revenue growth, long-term EBITDA cash interest coverage improvement, and sustained liquidity improvements after accounting for potential seasonality and debt servicing outflows.
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