Fitch Ratings has upgraded Ashtead Group plc's Long-Term Issuer Default Rating (IDR) to 'BBB' from 'BBB-'.
Fitch has also upgraded the senior notes issued by Ashtead Capital, Inc. that are fully and unconditionally guaranteed by Ashtead to 'BBB' from 'BBB-'. The Outlook on the IDR is Stable.
The upgrade reflects principally the strength of Ashtead's trading performance over the course of the pandemic, which has led Fitch to reassess positively the breadth and resilience of its business model.
Key Rating Drivers
IDR
Ashtead's Long-Term IDR reflects the company's well-established franchise in the equipment rental sector, which has supported consistently strong earnings over the last decade. The rating also takes into account the need to manage a substantial capex programme across periods of potentially fluctuating customer demand, balancing the retention of a good condition fleet with servicing and refinancing the debt funding that supports it.
Operating under the 'Sunbelt Rentals' name, Ashtead is the second-largest equipment rental company in North America, with a further valuable franchise in its UK home market. The sector has expanded significantly in the last decade as an increasing proportion of end-users have chosen the flexibility of renting equipment over owning it, a trend Fitch expects to continue amid users' post-pandemic cash flow pressures. Multi-site operators also enjoy advantages over the traditionally large volume of independent operators in the range of equipment they can provide to their customers, retaining the option to redeploy equipment between different locations.
In the nine months to end-January 2022 Ashtead reported EBITDA of USD2.7 billion. This was 18% above the equivalent prior-year period, which had itself shown only limited decline amid the adverse environment of the pandemic. Performance was strengthened by Ashtead's specialty businesses in areas such as heating, ventilation and air conditioning, which continued to grow across the period of the pandemic and which benefit from less cyclical demand versus the more general tool and equipment hire business that they complement.
At end-9M22 Ashtead's debt (excluding lease liabilities brought on balance sheet by IFRS 16) totalled USD5.1 billion, above end-FY21 level but still well below the USD5.7 billion at FYE20. The reduction reflected management's prompt actions at the onset of the pandemic to cut fleet investment and other discretionary expenditure to conserve cash and avoid excess fleet lying idle.
Fitch regards Ashtead's capex as well-managed, although risks associated with investment in multi-year assets subject to variable demand cannot be wholly offset. Average fleet age at end-January 2022 had stabilised at 40 months, having been 34 months two years earlier.
Fitch uses primarily EBITDA-based metrics in assessing Ashtead's leverage, due to the cash flow-driven nature of its business. At end-January 2022, gross debt/EBITDA was 1.5x, comparable with FYE21 levels. This is low by longer-term standards, and at the lower end of management's own 1.5x-2.0x target for net debt. Fitch expects leverage to increase within this range as capex grows again from recent reduced levels.
Fitch also monitors debt/EBIT on the basis that Ashtead's depreciation has some characteristics of an operating expense, in view of the long-term importance of sustained capex to maintain an attractive fleet. Fitch calculates debt/EBIT at end-January 2022 at 2.5x (on the basis of annualisation of nine-month EBIT), compared with 2.7x at FYE21.
As a complementary metric Fitch considers balance-sheet leverage, as measured by gross debt to tangible equity, which also fell during FY21 amid reduced funding of capex. In 9M22 it has risen to 2.2x, as goodwill on Ashtead's various bolt-on acquisitions and the resumption of the company's share buyback programme have prevented tangible equity growing as quickly as debt. However, the ratio remains well below the 3.4x level at FYE20.
Ashtead's principal sources of funding are an asset-based senior secured revolving credit facility (ABL facility) of USD4.5 billion, and a total USD3.1 billion of senior notes, so funding is reliant on wholesale market confidence for renewal. However, active refinancing during 2021 of both the ABL facility and two of the five issues of senior notes extended maturities to an average six years.
Ashtead's rental assets are subject to market-value movements over their multi-year periods of ownership, potentially leading to impairment or residual value risk in periods of lower second-hand demand. However, Fitch regards Ashtead's depreciation policies as appropriately strict in this regard, alongside its regular engagement of independent experts to assist in monitoring disposal values, which are presently boosted by supply-chain constraints on the production of new equipment.
SENIOR NOTES
Ashtead Capital's notes are fully and unconditionally guaranteed by Ashtead and are rated in line with Ashtead's Long-Term IDR on average recovery prospects. As unsecured obligations, they rank behind Ashtead's ABL facility, which benefits from security over most group assets.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Gross debt/EBITDA approaching 2.5x without a clear route to near-term reduction, or without material cash being held simultaneously
Significant shortening of Ashtead's presently lengthy debt maturity profile
Evidence of unexpected liquidity pressure, eg. from heavy investment in new fleet without then generating the revenue anticipated from it
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Further upgrade is unlikely in the near term. It would require upward reappraisal of the through-the- cycle business stability achievable within the equipment rental sector, in addition to Ashtead maintaining EBITDA growth without raising leverage from its present unusually low level
SENIOR NOTES
The rating of Ashtead's senior notes is primarily sensitive to changes in the company's Long-Term IDR. Additionally, weakening in the recovery prospects of the notes, for example due to a material increase in the relative size of Ashtead's ABL facility, could lead Fitch to notch the notes' rating down from the Long-Term IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
Entity / Debt
Rating
Prior
Ashtead Capital Inc.
senior unsecured
LT
BBB
Upgrade
BBB-
Ashtead Group plc
LT IDR
BBB
Upgrade
BBB-
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
ASHTEAD GROUP PLC 
