Fitch Ratings has affirmed
Fitch has also affirmed and withdrawn IAA's senior secured credit facility at 'BB+'/'RR1' and its senior unsecured notes at 'BB-'/'RR4'.
The Rating Outlook is Positive.
Fitch reserves the right in its sole discretion to withdraw or maintain any rating at any time for any reason it deems sufficient.
Fitch has subsequently withdrawn IAA's IDR and Instrument ratings for commercial reasons.
Key Rating Drivers
Leading Market Position: IAA has a strong market position in the relatively stable salvage vehicle auction industry, controlling a significant share of the North American market. Its largest competitor,
High Profitability: Fitch attributes IAA's strong profitability to its asset-light business model and its investments in technology to support a shift towards online-only auctions. Actual EBITDA margins, based on Fitch's calculations, were approximately 29% in 2021, which was up from 28% in the prior year. Fitch expects margins to be in the 27% to 30% range over the next couple of years supported by further technology investments to reduce cycle times and administrative costs.
Strong FCF Generation: Fitch expects IAA's FCF margin to be in the 10% to 12% range over the next couple of years. Fitch expects an increase in cash interest costs as a result of rising interest rates and a sizeable proportion of debt that is floating rate. Fitch notes IAA's acquisition of
Moderating Adjusted Leverage: Fitch expects IAA's adjusted leverage (total lease adjusted debt/operating EBITDAR) to decline towards 3.5x by YE22 from approximately 3.7x at YE21. Lease-adjusted leverage is higher than gross EBITDA leverage (total debt/operating EBITDA, as calculated by Fitch) due to the company's relatively heavy use of operating leases. At YE 2021, gross EBITDA leverage was a Fitch-calculated 2.5x and Fitch expects IAA's gross leverage to be in the high-1x to low-2x range over the next couple of years. Fitch expects total debt to be about
Positive Medium-Term; Long-Term Concerns: Fitch views positively the medium-term trends affecting IAA's business. Fitch expects the growing vehicle car parc in
Derivation Summary
IAA's operating profile is similar to its largest competitor,
Compared with auto retailer
Key Assumptions
Revenues rise in the range of 10% in 2022 due to benefits from volume, price, and inorganic acquisitions completed in the prior year. Revenue grows in the mid-single digits range thereafter due to a rising vehicle car parc and increasing vehicle complexity which supports both volume and pricing;
EBITDA margins are in the 25% to 30% range throughout the forecast;
Capex as a percentage of revenue is in the mid- to high-single digits throughout the forecast;
FCF margins are in the low-teens throughout the forecast;
Total debt is approximately
The company uses excess cash for acquisitions or shareholders return
RATING SENSITIVITIES
Ratings Sensitivities are no longer applicable given the ratings withdrawal.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate 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 '
Liquidity and Debt Structure
Sufficient Liquidity: IAA's liquidity as of
Debt Structure: The company's capital structure consists of a
Issuer Profile
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.
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