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Mobico (MCGLN; Ba2/NR/BBB-) Moody's double-notch downgrade

TRANSPORTATION
  • So it will loose the 50% equity treatment on the £500m NC '25. Reminder co said it had planned not to call this back (can only call in Feb 2031 after that). It would have retained the 50% treatment at Moody's if seniors had stayed in IG and was already going to loose Fitch's 50% treatment regardless.
  • Moody's still says "we currently expect the refinancing of the company's £500 million Perpetual...well ahead of the first call date in November 2025." Reset coupon is high 7% handle (5Y Gilt +414bps) - which will start to look very attractive vs. refi-ing on B1 perp ratings.
  • Accounting for above loss of hybrid treatment Moody's expects gross leverage to move from 6.7x at June '24 to 4x in 1-1.5yrs. Moody's no longer accounts for the sale of NASB in base-case assumptions (similar to Fitch).
  • It expects FCF to remain negative over next 1-1.5yrs as capex remains high - this is something we highlighted post earnings (that the company keeps repeating deleveraging like a motto but in reality is investing in growth while waiting for NASB proceeds).
  • All it has to say on 1H results is "Mobico's operating performance in the first half of 2024 improved after a very weak 2023, although they remained relatively weak." Seems it is not keen to extrapolate the positive trend.
  • On NASB it adds; "Although we acknowledge that the disposal could result in moderate leverage reduction, this is unlikely to restore debt metrics in line with an investment grade rating particularly when the envisaged transaction would result in a significant reduction in scale and diversity."

As is typical for fallen angels, Moody's has set the bar VERY high for upgrade adding "an upgrade would also require Mobico to operate within its stated target to reduce company-defined leverage below 2x, which we do not expect the company to achieve before 2027."
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