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Rating action

Scope Ratings GmbH (Scope) has downgraded its corporate issuer rating on Spanish logistics company Ontime Corporate Union S.L. to BB-/Stable from BB/Stable. Scope has also downgraded its long-term senior unsecured debt rating to BB- from BB. Scope has affirmed the short-term debt rating at S-3.

Rating rationale

The issuer’s business risk profile (assessed at BB-) remains driven by the average size of the company. Following the transforming acquisition of Acotral in Q4 2021 for EUR 70m, Ontime has increased its revenue from EUR 110m in 2020 to EUR 499m in 2021on a pro-forma basis. Acotral is a leading road logistics service company in Spain with a strong footprint in Andalucia. It generates around EUR 350m in revenue. The acquisition was done in light of Ontime’s current strategy to act as a market consolidator in the logistics sector. Thanks to anticipated organic growth and multiple acquisitions, Ontime expects to triple in size and reach a turnover of EUR 700m by 2023. Although its market share has substantially improved from below 1% to 2.6%, Ontime remains an average-sized player in the fragmented Spanish road logistics market.

The business risk profile is still supported by solid operating margins. The strong integration of the business model that offers services covering all aspects of the logistics chain bolsters profitability. The focus on fully integrated services in Spain was initiated in 2014 and is a key differentiating factor as few Spanish players offer the same degree of service. In a very fragmented market where road logistics companies often compete on price, Ontime benefits from high customer retention. This is due to multi-year contracts including high value-added services such as warehousing and automated processes. However, the Acotral acquisition has negatively impacted Ontime’s profitability. Scope-adjusted EBITDA margin has decreased from 26% in 2020 to 16.5% in 2021 on a pro forma basis. The decrease in operating margin is due to Ontime’s reliance on outsourcing. This business model compromises on profitability to improve the company’s scalability and is less working capital intensive. Ontime is shifting its business model from relying mainly on its own lorry fleet, drivers and warehouses to a more asset light structure by intensifying its use of subcontractors. This will be executed thanks to upcoming acquisitions that will likely weigh on the company’s profitability in the medium term.

The competitive positioning is also constrained by limited geographical diversification and a concentrated customer portfolio. Ontime generates more than 90% of its revenue in Spain. Its customers diversification deteriorated after the acquisition of Acotral: while the top 15 clients previously accounted for around 38% of sales in 2020, the top 10 clients accounts for 72% of sales in 2021 due to one Acotral’s customer (Mercadona) accounting for 62% (70% expected in 2022).

The financial risk profile (assessed at BB-) is limited by the increase in financial leverage as measured by Scope-adjusted-debt/EBITDA. The latter has deteriorated from 2.4x in 2020 to 2.8x in 2021 (6.8x on a reported basis). The EUR 26m capital increase realised in 2021, following the EUR 20m equity issuance in 2020, has allowed Ontime to reduce the impact of the Acotral acquisition on leverage. Indebtedness is expected to increase in 2022 and 2023 as the expansion phase undertaken by Ontime heavily relies on external growth. As no additional capital increase is expected in the short and medium term, the multiple acquisitions will be debt funded leading to Scope-adjusted-debt/EBITDA increasing above 3.5x. Credit metrics are expected to remain volatile due to many unknowns such the size and the timeline of the expected acquisitions in addition to the debt booked at the acquired companies’ level. Scope expects free operating cash flow to turn slightly positive on the back on improving working capital and lower capex, although positive Scope-adjusted free operating cash flow/debt expected in 2022 mainly comes from large divestments, viewed as non-recurring. Working capital consumption is expected to improve following the completion of the expansion phase in Spain and free operating cash flow will be pressured by capex. The forecasted decrease in the capex-to-sales ratio from 2022 onwards is based on Ontime’s new strategy of switching to a more asset light model. Capex will be used to recurringly renew Acotral’s fleet as its main customer, Mercadona, requires modern lorries for its logistics. The level of investments in the fleet is limited by its capex covenant set up at a maximum of EUR 20m per year in 2022/2023 and EUR 10m in 2024.

Scope assesses liquidity as adequate, with the EUR 25m of short-term debt maturing in 2022 being fully covered by the unrestricted cash balance and EUR 41m of undrawn credit lines.

Outlook and rating-change drivers

The Stable Outlook anticipates that the group’s financial leverage will remain above 3.5x due to the multiple upcoming acquisitions done in the light of Ontime’s expansion strategy. The rating case also assumes that Ontime will successfully comply with its financial covenants in 2022 and 2023.

A positive rating action could be warranted if an indication of a less aggressive M&A policy leads to Scope-adjusted debt/EBITDA moving below 3.5x on a sustained basis and if free operating cash flow remains positive while Ontime maintained its current business risk profile.

A downgrade could be triggered if the company showed financial leverage over 5.0x Scope-adjusted debt/EBITDA on a sustained basis. A financial leverage exceeding 5.0x could be triggered by a significant deterioration of operating profitability in its core segments or higher-than-expected working capital requirements. A negative rating action could also be warranted if the company failed to comply with its financial covenants, leading to inadequate liquidity.

Long-term and short-term debt ratings

Scope downgrades Ontime’s debt instrument rating on senior unsecured debt to BB-, down one notch in line with the issuer rating. This instrument rating is based on a hypothetical liquidation scenario as of end-2023, in which Scope computed an average recovery for senior unsecured debt holders based on Scope’s assumptions of attainable liquidation values.

Scope affirms the debt instrument rating to short-term debt at S-3. The issuer has launched a EUR 50m commercial paper programme in 2021, used for EUR 26m at year-end 2021.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Thomas Langlet, Senior Analyst
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 September 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate.

Conditions of use/exclusion of liability
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