(Debtwire) Europcar state support and cost cutting plans to salvage liquidity but COVID clouds outlook

07 May 2020 | 15:23 BST

Europcar's March rental revenues plummeted with travel restrictions leaving 2020 guidance uncertain. But the French-headquartered car rental group could benefit from more state funding and it unveiled a sizeable cost cut plan on its 1Q20 earnings call. While it remains a pressured name, it could eventually bounce back, according to two buysiders and a deep-dive analyst, with a third buysider concerned.

The company held the earnings call on Tuesday (5 May) to discuss its 1Q20 results. The quarter was challenging with pre-IFRS 16 adjusted corporate EBITDA widening to a negative EUR 90.9m versus a negative EUR 38.6m at 1Q19.

The group had organic revenue growth in positive territory for its different segments in January and February, but March volumes plunged following the outbreak of COVID-19 with lockdown measures restricting travel. March total revenues were down a whopping 34.6% year-on-year (YoY) with Europcar March 2020 organic rental revenues down 36.5% for cars, 50.1% for low-cost vehicles, 14% for vans and trucks and 3.9% for urban mobility.

Management refused to give guidance on April trading when asked on the earnings call. In its investor presentation management noted 2Q20 will be severely impacted by the April lockdown and a slow reopening from May. Positively, the company is in ongoing negotiations with landlords for rent reduction whilst it will also cancel its dividend and restart its securitisation program in the US. However, US-headquartered car rental group Avis Budget recently stated it expects April and May revenues to be down 80% YoY, according to a press report.

“After a solid start of the year 2020, Europcar Mobility Group was hit by the COVID-19 crisis. In early March, the drop in the number of bookings accelerated rapidly, first in Italy, and then in all our key geographies. To adapt to this extraordinary situation and mitigate revenue loss, [the group] engaged unprecedented cost reduction measures totalling EUR 850m by year-end, as well as cash preservation and liquidity securing measures, to navigate through the next months of crisis and be in position to progressively resume operations, thanks to our flexible operating model, when local economies start to recover,” CEO Caroline Parot commented in a press release. “[As] the situation remains highly uncertain, it is premature to share any 2020 earnings outlook. During Q2 and H2, it is likely that we will focus on the domestic customers segment, building on a shift from international to “local” travel, while pushing agility further in terms of cost base.”

Europcar is a company equity and credit investors were shorting before COVID-19, one of the buysiders noted. The feeling is that the bonds are not a buy yet given plans for holidays have been cancelled and a big part of the group’s business is travel related. It is not clear when people will go back to work and even when they do return, holidays may be off for some time. “Will Europcar survive or not?” the buysider added.

“The biggest question is how the business will bounce back with corporate versus non-corporate and corporate versus leisure, [given] there are different ways to segment the company. It’s still the biggest issue but I’m reasonably constructive and results were not so horrific,” independent deep-dive research firm Sarria said. “If one didn’t know about COVID sure you’d say oh my god, but if take into account the travel industry exposure, we think the results were good.”

“With the financial flexibility in place Europcar can survive,” Sarria continued. “The next question is how they can tackle the debt burden and though we don’t know how long COVID lasts, the newsflow was positive. However, they are dependent on tourism and this is an after-vaccine rebound while other companies could rebound sooner.”

Cash rental

Metrics are rising. Corporate net leverage was 4.7x at 1Q20 with consolidated net leverage, which includes fleet debt at 4.0x. The equity cushion remains thin with shares at EUR 1.55 per share leaving a puny EUR 260m market capitalization versus EUR 3.968bn consolidated net debt including lease liabilities.

Europcar burnt cash in 1Q20 with negative corporate free cashflow of EUR 136m as corporate net debt increased to EUR 1.068bn versus EUR 880m at FY19.

The company will likely turn cashflow negative on an annual basis if earnings continue to fall. With a EUR 226m LTM 1Q20 corporate adjusted EBITDA, Europcar would generate just EUR 16m free cashflow based on FY19 numbers given EUR 55m non-recurring expenses, EUR 75m non-fleet capex, EUR 1m working capital release, EUR 30m cash taxes and EUR 51m interest.

Liquidity at 1Q20 was falling, suggesting a need for further funding to weather working capital swings. Group 1Q20 liquidity at the corporate level includes EUR 291m of cash while it had drawn a EUR 611m combined total of its EUR 650m RCF and EUR 450m NEU commercial paper.

“There is good value on [US-headquartered] Avis and Hertz as well as Europcar, particularly the recent Avis senior secured note, which came at a 10.5% coupon with 97 OID and was pari passu with term loans,” a second buysider said. “There are solutions and post-confinement, there will be pent up demand because people will want to avoid public transport, but it’s all about liquidity duration here. People will be ready to drive 1,000 km rather than fly or take the train and maybe more in the US!”

The Sixt sense

In recent weeks the group has secured EUR 321m of new financing facilities including a EUR 220m term loan 90% guaranteed by the French state, EUR 81m new financing facilities 70% guaranteed by the French state and a EUR 20m incremental RCF funded by Eurazeo. The state guaranteed facilities are unsecured debt, ranking pari-passu with the senior unsecured bonds.

There could also be further funding in the pipeline from other country governments aside from France and Spain. German car rental peer Sixt SE signed a syndicated loan agreement with a bank consortium including KfW government support for a EUR 1.5bn two-year revolving credit facility.

“Debt has only been raised in France and Spain so other governments could help; for instance, Sixt received the RCF from the German government. If there is a liquidity hole of EUR 100m throughout the cycle then Eurazeo will have a big return on capital if they inject cash,” the third buysider said. “The industry can bounce back. If there are fewer cars to rent, then prices go up so the return on invested capital does well. They are burning cash currently and I’d not put my hand in the fire, but they should have enough liquidity and could get funds from the government.”

The group is also hopeful it can reign back cashburn through improving earnings with its cost-cutting plans. The EUR 850m cost-reduction programme for the year includes a sharp reduction in fleet volumes with the average fleet down around 20% YoY in April and planned to reduce by a third in June. It also hopes to reduce operating variable costs while 80% of its employees are under partial employment, with further HQ cost cuts on the cards as well.

Europcar’s EUR 600m 4.125% senior secured 2024s lost eight points since Monday (4 May) to 55.25-mid yielding 19.5% while the EUR 450m 4% senior unsecured 2026s dropped seven points and are indicated at 53.5-mid yielding 19.5%, though both bonds have been steady since Tuesday evening reporting, according to Markit. S&P have estimated recovery values of zero to 10%, according to the analyst.

“You don’t short bonds at 50 cents, but I wouldn’t long either as these senior notes could still go down to 10 cents,” the first buysider said. “We know for certain that the next quarter will be completely bad, and it is best to wait for this quarter to pass and then decide to invest.”

There had been analyst hypotheses of a possible change of control, should sponsor Eurazeo sell its holding and another shareholder acquires more than 50% of voting power. However, the 29.9% Europcar shareholder participated in the recent Europcar financing alongside the French state and bank consortium, suggesting it remains committed.

by Adam Samoon