Today Nordic Credit Rating (NCR) placed its 'B' long-term issuer rating on taxi operator Cabonline Group Holding AB (publ) (Cabonline) on Watch Negative given the unprecedented disruption in the company's operating environment and deterioration in customer demand as a result of ongoing efforts to slow the spread of the corona virus in the Nordic region. By placing the ratings on Watch Negative we are signalling that there is a high likelihood that we will lower them in the next three months due to the sharp decline in customer demand and unpredictable nature of the crisis. There are scenarios in which we could affirm the ratings during this period, which we outline below. However, in our opinion the ratings are likely to be lowered by at least one notch upon resolution of the watch period without material outside support from Cabonline's owners or government-related clients.
Social distancing, business travel restrictions, and the closure of borders, workplaces and schools have reduced demand for taxi transport for all types of customers. In particular, private taxi use (B2C) and business travel (B2B) have decline sharply given restrictions on social gathering and recommendations for social distancing. While we note that 42% of Cabonline's 2019 revenues were linked to public-sector (B2P) contracts, even these revenues are likely to be negatively affected as demand decreases.
Given the current operating environment, we expect reduced EBITDA to result in a breach of the company's scheduled leverage maintenance test covenant during the second quarter of 2020. We note that 75% of revenues from drivers connected to the Cabonline platform are fixed. However, we expect the company to reduce or partially defer these fixed fees to support its drivers' financial positions and believe a longer-term disruption could result in driver bankruptcies, reducing revenues further.
We understand that Cabonline is stopping all capital expenditure and is in negotiations to reduce leasing and operational costs as soon as possible. Due to its franchise-based business model, Cabonline has no financial obligations for cars or salaries, aside from administrative overheads and the costs of its Latvian call centre. An exception is in Finland, where the company is reducing its car ownership, but still leases some of its own cars. Despite these efforts, we expect negative operating cash flow throughout 2020.
Cabonline has one outstanding bond, issued in December 2019. The 2020 coupon payments on the bond are due 9 Jun., 9 Sep. and 9 Dec. at around SEK 35m each. We note that Cabonline had SEK 357m in cash holdings and SEK 125m in super senior revolving credit facilities available as of 31 Dec. 2019.
We see three potential rating scenarios for Cabonline barring a medical breakthrough that stabilises customer demand in the taxi industry.
In our base-case scenario, we expect Cabonline to receive some, but not significant, support, resulting in a one notch lowering of the long-term rating and the senior secured issue rating to 'B-'. The short-term rating would be notched downwards to 'N-4'. This would reflect some government support for the company's B2P contracts and/or capital injections from its owners in the face of no improvement or a further deterioration in the operating environment. Alternatively, it could reflect increased clarity on the timeline for normalisation of the company's operating environment.
In our upside scenario, we could affirm the ratings if Cabonline receives government support equal to any loss of revenues from its B2P business and its drivers receive support such that their fees are paid. Alternatively, if the company receives a significant capital injection from its owners enabling it to meet the coupon payments on its outstanding bond during the worst of the crisis period. This scenario would also assume increased clarity on the timeline for normalisation of the operating environment.
In our downside scenario, we could lower the long-term rating and the senior secured issue rating to 'CCC' or 'CC' and lowering the short-term rating to 'N-4' if Cabonline is unsuccessful in materially reducing its cost base and receives only limited external support from its government-related clients or its owners. This scenario would heighten the risk of the company not covering its interest costs over the medium term.
We are continually evaluating Cabonline's financial and operating position and following negotiations with its direct and indirect employees, creditors and owners as the situation evolves. We expect to resolve the Watch Negative placement within three months.
If you have any questions, please contact:
Mille O. Fjeldstad, credit rating analyst, +4799038916, mille.fjeldstad@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Methodology published on 14 Aug. 2018 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.