Regulatory Filings • Nov 26, 2024
Regulatory Filings
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November 25, 2024
We downgraded Axactor after we revised downward our revenue and EBITDA projections, leading to somewhat higher leverage than anticipated. Axactor's collection performance was weaker than expected over the last three quarters, ultimately reaching a low point of approximately 90% in Q3 2024, which is the lowest since Q4 2021 when it was 91%, and significantly lower than the same period last year, which was 99%. The collection decrease has also placed constant pressure on the company's covenants this year as EBITDA levels dropped. This occurs in a particularly difficult environment for the cash collection industry, where households and small- to medium-size companies continue to suffer the consequences of a long period of high interest rates and inflation. Furthermore, considering the persistent headwinds within the sector, Axactor decided to recognize significant negative portfolio revaluations during the last quarter of the year to offset the decreased collections and adjust its ERC curve. Although
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these revaluations do not have a negative cash effect, they do affect Axactor's profitability metrics and overall performance. As a result, we revised downward our adjusted EBITDA projections for Axactor, leading to higher-than-expected projected leverage.
While some of the factors affecting Axactor's collection are industry- and macro-related, we consider the impact on the company to be greater compared to other rated peers within the distressed debt purchasers (DDP) industry that sustained collection levels above 100% and stable EBITDA margins. Additionally, if we compare Axactor's covenant situation and refinancing risk with other DDPs, such as B2 Impact or Arrow Global, it compares less favorably.
Axactor's recent portfolio sale will relieve some pressure on its covenants but will further hamper its future revenues. The company recently announced that it entered into an accretive portfolio sale for €83 million, representing approximately 6% of its total nonperforming loan (NPL) portfolio. Although the sale was made at 102% of the book value, it still falls short of the estimated recovery value assigned by the company at the time of purchase. In this sense, Axactor's future revenues will be negatively affected by the sale, leading us to revise our cash EBITDA expectations downward. However, with the proceeds from the sale, the company will be able to reduce its debt stack and relieve some pressure from its covenants.
Despite the negative impact on Axactor's collection, adjusted EBITDA margins have remained relatively stable. Axactor's EBITDA margins have been somewhat resilient despite the decrease in collections, supported by various proactive operating expense management initiatives, including a new IT infrastructure provider and the renegotiation or cancellation of less profitable contracts within the servicing segments. In this sense, we expect cash-adjusted EBITDA levels to stay at about 60% and debt-to-cash adjusted EBITDA to hover close to 5.2x-5.5x for the following 12 months.
We expect liquidity to remain sound for the next 12 months, but refinancing pressures loom.
Axactor has kept a stable cash position despite challenges on the macroeconomic and industry fronts. Its adequate management of operating expenses has been crucial in offsetting lower collection volumes and higher interest burdens. However, the company needs to increase its liquidity to continue investing in accretive portfolios, keep covenants in check, and ensure a profitable business. We do not foresee immediate liquidity problems--there are no major maturities due in 2024-2025--but significant debt pressures are starting to appear. In June 2026, the company's revolving credit facility (RCF) matures, followed by a bullet maturity of approximately €280 million in September of the same year. We expect Axactor to proactively manage the refinancing of the RCF and the 2026 notes at least 12 months before they mature, and we will monitor whether its majority shareholder provides any support. We would consider taking another negative rating action if we saw a material increase in refinancing risk.
The negative outlook reflects that Axactor's credit profile may continue to deteriorate as refinancing risk increases.
We could lower the ratings if headwinds in collections persist, leading to decreased revenues and further negative revaluations within its ERC curves. This would also translate into an increase in
leverage since adjusted cash EBITDA would decrease, causing adjusted debt to cash EBITDA levels to exceed 6x, ultimately increasing the refinancing risk the company faces for its 2026 maturities.
We could revise the outlook to stable if we see sufficient evidence of improved collections and if the company stabilizes its revenue sources at a sustainable level slightly above its maintenance capital expenditure levels. Any positive rating action would also depend on Axactor's refinancing risk and its ability to roll over upcoming debt maturities in 2026.
Axactor is a Norway-based debt purchaser and servicer founded in 2015. Its core business involves purchasing nonperforming debt in the Nordics, Spain, Germany, and Italy. It specializes in unsecured consumer debt from banks and other consumer lenders. Approximately 23% of the group's total income comes from consumer debt collections on behalf of third parties and ancillary services. The group is publicly traded on the Oslo Stock Exchange, with investment company Geveran Trading Co Ltd., indirectly owned by Mr. John Fredriksen, owning just under 50% of the share capital.
We expect liquidity sources to remain above 1.2x their uses for the next 12 months. While we do not foresee immediate liquidity problems--there are no major maturities due in 2024-2025--significant debt pressures are starting to appear. We expect Axactor's liquidity profile to continue based on its collection performance.
Principal liquidity sources:
Principal liquidity uses:
Constantly high interest rates and lower collections have pressured Axactor's covenants, which are directly related to its cash EBITDA and the loan to value (LTV) of its portfolios. The covenants that depend on Axactor's cash EBITDA have been under constant pressure due to the challenging industry environment and high interest rates. We consider the company may benefit from decreasing interest rates. The latest portfolio sale will relieve some pressure for the following quarters but if collections do not pick up, they could linger.
When we monitor these covenants, we consider the company's reported metrics. As of third-quarter 2024, the covenants limits and breaching thresholds without considering the latest portfolio sale were:
ESG factors have no material influence on our credit rating analysis of Axactor. We consider the company has well-placed policies to mitigate potential risks that may arise in an industry that is under constant scrutiny regarding business ethics, data privacy, and security. However, we consider these policies are broadly in line with other DDPs and are not a sufficiently differentiating factor to underscore against other rated peers.
Note: Debt amounts include six months of accrued interest that we assume will be owed at default. Collateral value includes asset pledges from obligors (after priority claims) plus equity pledges in non-obligors. We generally assume usage of 85% for cash flow and 60% for asset-based lending revolving facilities at default.
| To | From | |
|---|---|---|
| Issuer Credit Rating | B-/Negative/-- | B/Stable/-- |
| Business risk: | Fair | Fair |
| Country risk | Low | Low |
| Industry risk | Moderately high | Moderately high |
| Competitive position | Fair | Fair |
| Financial risk: | Highly leveraged | Highly leveraged |
| Cash flow/leverage | Highly leveraged | Highly leveraged |
| Anchor | b | b |
| Modifiers: | ||
| Diversification/Portfolio effect Neutral (no impact) | Neutral (no impact) | |
| Capital structure | Neutral (no impact) | Neutral (no impact) |
| Financial policy | Neutral (no impact) | Neutral (no impact) |
| Liquidity | Adequate (no impact) | Adequate (no impact) |
| Management and governance | Fair (no impact) | Fair (no impact) |
| Comparable rating analysis | Negative (-1) | Neutral (no impact) |
| To | From | |
|---|---|---|
| Axactor ASA | ||
| Issuer Credit Rating | B-/Negative/-- B/Stable/-- | |
| Senior Unsecured | B- | B |
| Recovery Rating | 3(60%) | 3(60%) |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/504352. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings. Alternatively, call S&P Global Ratings' Global Client Support line (44) 20-7176-7176.
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