Fitch Ratings has placed Nordic bus operator Nobina AB's Long-Term Issuer Default Rating (IDR) of BBB-/Stable on Rating Watch Negative (RWN) following the public offer for 100% of Nobina's shares from Ride BidCo AB (Basalt Infrastructure Partners III GP Limited) of SEK9,323 million (100% equity value).
The RWN reflects our expectations that a possible recapitalisation of the company under the new ownership structure could lead to leverage levels that are higher than the current rating downgrade sensitivity of funds from operations (FFO) net adjusted leverage above 4x.
We intend to resolve the RWN after we have assessed the post-acquisition financing structure in combination with the strategy and financial policies to be pursued by the new owner. Our review may stretch into 2H22 and may result in rating affirmation if Nobina's financial profile remains unchanged and ringfenced from any acquisition debt, or in a downgrade if credit metrics are weaker than our negative rating sensitivities.
Key Rating Drivers
Limited Information on Financing Structure: Nobina's board supports the offer and we thus view its acceptance as likely. Fitch understands that the offer is fully financed with a combination of equity and debt financing provided by Banco Santander, S.A. and National Westminster Bank Plc. However, we do not have information about the equity and debt ratio or the conditions for the debt that has been granted by the two banks. Although we expect the new debt to be placed in Ride BidCo, and not in Nobina, Nobina may not be fully ringfenced in the new group structure. Although the main part of Nobina's debt is related to the financing of buses, its SEK700 million green bond features a change-of-control clause.
Strong Operating Performance: Nobina has performed above our expectations in 1HFY22 (financial year to end-February) mainly due to ongoing and profitable Covid-19-related business in Sweden (through Samtrans subsidiary) and pandemic-adapted contracts in Sweden. Revenue growth of 24.5% and the doubling of the EBITA in 1HFY22 suggest a better full-year result than in our previous forecast.
The forecast stronger operating cash flow in FY22 is mitigated by greater investments in new buses, due to contract migration, as communicated by Nobina on the capital markets day in November 2021. Nevertheless, we expect Nobina's strong operating performance to have a positive effect on leverage metrics in the short term.
Sufficient Debt Service Capacity: Nobina has in the past five years paid annual dividends of around SEK300 million, except in FY21 when the dividend was cancelled. Based on our updated rating case with Nobina's existing debt structure, we believe that cash flow generation should be sufficient to service the acquisition debt in Ride BidCo after the buyout. A full ringfencing and unchanged capital structure and dividend policy at Nobina could thus support a rating affirmation.
However, we cannot rule out opportunistic measures, such as larger dividend recapitalisations, under the new ownership. Such measures, more aggressive growth and capital structure targets or lack of ringfencing around Nobina resulting in consolidation of Ride BidCo's debt would lead to a downgrade.
Production Contracts Bring Stability: Nobina generated around 75% of its revenue from production contracts with little revenue risk. This is higher than UK peers and has resulted in Nobina's performance being more stable during the pandemic. Some of Nobina's incentive contracts temporarily have been converted to production contracts, as a result of the pandemic, and the associated income loss has partly been recovered through negotiations with the public transport authorities.
We believe, however, that Nobina's incentive contracts will return to pre-crisis levels as they motivate the company to increase efficiency on its bus routes and to increase the number of its passengers.
Contract Migration Partly Postponed: The pandemic has partly postponed contract migration, resulting in a materially lower renewal rate of 87% for Nobina in FY21 (number of tendered buses won by Nobina compared with Nobina's buses exposed to tenders). We view Nobina's strategy of prioritising profitability over volume as positive for long-term performance. However, a high number of new contracts results in increasing costs at the beginning of the contract period related to short-term inefficiencies in routes and personnel.
Leading Nordic Bus Company: Nobina has a leading position in the bus segment of the Nordic public transport market with a share of 16%. The company benefits from scale by operating almost 4,000 buses, and from local expertise as the only company with operations in four Nordic countries. However, Nobina is exposed to competition during the tender process for public transport contracts, which affects both its ability to win contracts and the attractiveness of their terms.
Growth Through Acquisitions: Nobina pursues a combination of organic growth and M&A focused on its core business. It made two acquisitions in western Sweden towards FYE21 and one in 1H22 within the service traffic area. The impact of the pandemic on other operators in the industry has provided Nobina, as a leading regional operator with financial strength, with further growth opportunities. We expect Nobina to seize some of these opportunities, for example, within the service traffic area.
We expect potential acquisitions to be partly debt-financed, resulting in temporarily increasing leverage metrics, but which may be mitigated by expected margin accretion. However, this assumption may also change with the new ownership.
Derivation Summary
Nobina's revenue visibility is stronger than that of UK land transport companies rated by Fitch, including National Express Group Plc (NEX; BBB/Stable) and FirstGroup plc (BBB-/Negative) due to a larger share of contracted revenue and a more favourable market environment, leading to more predictable cash flow generation. This is mitigated by its smaller size and weaker diversification compared with NEX. In Nobina's main market of Sweden, the pandemic affected public transport less than in the UK, US or Spain, which explains its short-term stronger revenue stability in Fitch's forecast relative to peers'.
Key Assumptions
Revenue growth in the low teens in FY22, followed by decreasing revenue in FY23 as Covid-19-related revenue fades out. Low single-digit growth in FY24-25.
Improving profitability in FY22 followed by a reduction in FY23 due to less Covid-19-related business and material contract migration. Margins remain stable in FY24-FY25.
Capex of around 11% of revenue in FY22 and increasing to 17% in FY23 due to contract migration. Average of 8.8% in FY24-FY25.
RATING SENSITIVITIES
The rating is on RWN and we thus do not expect an upgrade, however, factors that could, individually or collectively, lead to positive rating action/upgrade:
Affirmation: failure of the bid or new policies largely confirming our current assumptions on ringfencing from acquisition debt
Upgrade: Successful management of contract migration and growth while maintaining a strong financial profile with FFO adjusted net leverage below 3.3x on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Declining revenue through a consistent loss of contracts not offset by new wins and/or sustained underperformance on costs, leading to FFO net adjusted leverage above 4x on a sustained basis
Significant rise in capex and/or M&A leading to material deterioration of credit metrics on a sustained basis
Lack of ringfencing from acquisition debt at Ride BidCo
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 '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.
Liquidity and Debt Structure
Adequate Liquidity: At FYE21, Nobina's cash position of SEK1,049 million, an available credit line of SEK300 million and a subsequent green bond issue of SEK200 million are sufficient to cover short-term maturities of SEK1,083 million. While the company's debt repayment schedule is evenly balanced and is mostly driven by amortisation of finance leases, contract migration would require large capex, leading to negative free cash flow (FCF) in FY22-FY25. Most of the capex will be financed through finance leases or loans and no cash prepayment is required for purchase of buses.
Issuer Profile
Nobina is a leading bus operator in the Nordics with Sweden as its largest market. The operations are divided into the three business areas: Nobina Bus, Nobina Care and Nobina Mobility. Nobina operates around 4,000 buses under more than 110 contracts.
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
Nobina AB
LT IDR
BBB-
Rating Watch On
BBB-
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
NOBINA AB (PUBL) 
