Fitch Ratings has affirmed
The Rating Outlook has been revised to Positive from Stable. Fitch has also affirmed the 'BB+'/'RR1' ratings on the company's first lien secured revolving credit facility and term loan, and the 'BB-'/'RR4' rating on the senior unsecured notes.
The revision of the Outlook to Positive is driven by lower expected leverage as a result of approximately
Key Rating Drivers
Return to Growth: IAA experienced modest impacts in 2020 as the coronavirus pandemic led to widespread stay-at-home orders that reduced vehicle miles driven, resulting in lower salvaged vehicles for assignment. Revenue declined by approximately 3.7%, as volume declines were somewhat offset by stronger revenue-per-vehicle. Fitch expects that 2021 revenue will increase by approximately 20% as
Significant Financial Flexibility: Fitch views IAA's financial flexibility as a main driver of the rating. The company generated FCF margins of 16.3% in 2020 and 14.1% in 2019. Fitch estimates that the company will have FCF in excess of
Moderating Adjusted Leverage: Fitch expects that IAA's adjusted leverage (total lease adjusted debt/operating EBITDAR) will decline to the high-3x range at FYE21 from approximately 4.5x at FYE20 due to increased EBITDA and a
Shifting Capital Deployment Priorities: In
Leading Market Position: IAA is one of the top two players in the salvage vehicle auction industry, controlling a significant share of the North American market. Its largest competitor,
Positive Long-term Trends: IAA has shifted to an online-only auction model in response to the COVID-19 pandemic. The company has invested significantly in online tools and technologies that it believes will lead to revenue growth by increasing buyer confidence and improving efficiency. Additionally, IAA is taking actions to reduce overhead costs. Through the medium-term this should benefit IAA as they can better utilize capacity, expand into international markets, and increase assignment turnover.
High Profitability: IAA benefits from strong profitability, generating EBITDA margins of approximately 28% in 2020, a slight contraction from pre-pandemic levels of approximately 29%. Fitch expects that recovering auction volumes and higher used car values will result in modest EBITDA margin expansion through the near-term. The asset-light business model and moderate capex are expected to result in significant EBITDA to FCF conversion.
Derivation Summary
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue increases approximately 20% in 2021 due to recovering auction volumes coupled with greater revenue-per-vehicle;
Medium-term revenue growth in the low- to mid-single digits is driven by positive trends in vehicle miles traveled, total loss percentage and used car value;
EBITDA margins are approximately 28% in 2021, with expansion up to 30% by 2024 due to cost saving actions;
Adjusted leverage declines below 4.0x by YE 2021;
FCF is positive at around
Capex totals around 5% to 6% of annual revenue;
Excess cash is deployed towards share repurchases and bolt-on acquisitions;
The company does not make any further debt prepayments.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Adjusted leverage (total lease-adjusted debt/operating EBITDAR) sustains below 4.0x;
FFO adjusted leverage sustains below 5.0x;
The company increases its geographic diversification and reduces customer concentration.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Adjusted leverage sustains above 5.0x;
FFO adjusted leverage sustains above 6.0x;
FCF margins sustain in the low-single digits.
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
IAA entered a new credit agreement in
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.
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
IAA, Inc. LT IDR BB- Affirmed BB-
senior secured
LT BB+ Affirmed RR1 BB+
senior unsecured
LT BB- Affirmed RR4 BB-
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure:
APPLICABLE CRITERIA
Corporate Rating Criteria (pub.
Corporates Recovery Ratings and Instrument Ratings Criteria (pub.
Sector Navigators - Addendum to the Corporate Rating Criteria (pub.
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)
ADDITIONAL DISCLOSURES
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
ENDORSEMENT STATUS
IAA, Inc. EU Endorsed,UK Endorsed
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