Fitch Ratings has assigned Ainavda Parentco AB (trading as Advania) a first-time expected Long-Term Issuer Default Rating (IDR) of 'B(EXP)' with a Stable Outlook.
Fitch has also assigned Ainavda Bidco AB's senior secured debt, including its seven-year term loans and a revolving credit facility (RCF), an expected instrument rating of 'B+(EXP)' with a Recovery Rating of 'RR3'.
The assignment of final ratings is contingent on the receipt of information conforming to the documentation already reviewed. The group will use the new term loans to refinance existing debt and pay related fees and expenses.
The 'B(EXP)' IDR reflects Advania's high leverage, balanced by improving free cash flow (FCF) and a sustainable business model with a significant portion of predictable revenues with low customer churn in the group's managed IT services operations. This, together with the group's geographic and customer diversification, provides resilience against the higher end-market cyclicality in the group's professional services.
The Stable Outlook reflects expectation of deleveraging, with Fitch-defined EBITDA leverage declining to around 6.0x by 2025 and FCF turning positive on a sustained basis from 2025, supported by strong organic growth, reduced interest costs and acquisition-and-integration related expenses post the transformative acquisitions of Visolit in 2021 and Valtti in 2022. Weaker-than-expected growth or material debt-funded acquisitions affecting the deleveraging profile could put pressure on the rating.
Key Rating Drivers
High Leverage: We expect Advania's gross EBITDA leverage to remain high at 6.6x at end-2024, after a spike to 6.9x at end-2023 from debt-funded acquisitions over the past three years. We forecast it will deleverage to 6.1x in 2025, mainly on revenue growth, small bolt-on acquisitions funded by cash, and on moderately improving operating margins. We believe any large transformational acquisitions would trigger draws under the RCF, which may constrain deleveraging. Assuming a successful refinancing, Advania would have no near-term maturities.
Improving FCF: Fitch expects FCF to remain neutral to negative in 2024 before it turns positive from 2025 onwards, supported by continuing reduction in interest expenses following the refinancing. However, the costs associated with integrating large acquisitions will continue through 2024, preventing FCF from turning positive this year. A decline in non-recurring expenses is should help improve liquidity and financial flexibility from 2025.
We anticipate a gradual improvement in net working capital from 2024 due to enhanced inventory management and an increasing share of managed services with advance payments, yet outflows will persist in 2024-2027. Fitch projects FCF margins at low single digits in 2025-2027.
Low Interest Coverage: Advania refinances its debt at floating rates with around half of it being hedged. We expect EBITDA interest coverage to remain below its negative sensitivity of 2.0x until 2026 as a result of exposure to high interest rates. However, we anticipate interest coverage to trend towards 2.0x by 2026 on increasing EBITDA.
Acquisitive Growth Strategy: Advania aims to grow its revenue and EBITDA organically but also by continuing bolt-on acquisitions, which, so far, have been effectively integrated, resulting in Fitch viewing its strategy and execution risks as moderate. These acquisitions, mainly focused on small, similar-profile companies in its service areas, have enhanced Advania's market presence. A few large-scale acquisitions in the past three years have improved its geographic reach, including entry into the UK market. Future transformational acquisitions could present greater integration challenges and may lead to higher financial leverage.
Minimal Customer Churn: Advania's customer net retention rates across all business lines remained above 100% in 2023. Its exposure to the public sector benefits its operating profile, offering long term contracts and securing stable, predictable revenue streams. Increasing public-sector exposure can also reinforce Advania's reputation as a trusted provider and open up further cross-selling opportunities; however, we expect Fitch-calculated EBITDA margin to remain at 9%-10%.
Low Margins: We conservatively project Fitch-defined EBITDA margin to increase to 10% in 2027 from 9.6% in 2023. Advania's profitability has been constrained by a high 42%-45% share of low-margin hardware sales in overall revenue, supported by increased demand from the public sector. In managed and professional services, personnel costs constitute the majority of the cost base, which restricts operating leverage and caps margins relative to those of peers in software development
Profitability improvement is supported by the strategic relocation of some labour functions to lower-cost regions such as South Africa and Serbia, coupled with an emphasis on optimising staff utilisation rates.
Healthy Organic Growth: Advania maintained robust organic revenue growth of 9.3% in 2023, building on a 15.2% rise in 2022, despite economic downturn leading to slower spending in the IT sector. We anticipate the sector to gain momentum from the ongoing trend of IT service outsourcing, as businesses increase IT investments to match the speed of digital transformation. We project 5.6% organic revenue CAGR for 2024-2027, largely attributed to the group's strength in managed services supported by its historical success in upselling to its existing customer base, alongside moderate professional services revenue growth.
Derivation Summary
We compare Advania with service peers with a significant portion of recurring revenue, including Sportradar Management Ltd (Sportradar; BB-/Stable) and Apex Structured Intermediate Holdings Limited (Apex; B/Stable). We also compare Advania with IT services and consulting peers like Engineering Ingegneria Informatica S.p.A (EII, B/Stable), Clara.net Holdings Limited's (Claranet, B/Stable), Cedacri S.p.A. (B/Negative), and AlmavivA S.p.A. (BB/ Stable).
Advania and Claranet have comparable business and financial profiles as managed services providers pursuing growth via acquisitions. This strategy has led to high leverage and modest interest coverage for both, though Advania benefits from a larger scale.
Advania's market position is not as strong as some of its peers like Centurion, Almaviva or Cedacri, but it has greater diversification, having expanded its operations across six countries, in contrast to these peers' single-market focus. Low customer concentration shields Advania from sector-specific cyclicality or regulatory pressures that constrain the likes of Sportradar and Cedacri, which cater to more specialised markets.
Advania's profit margins are behind those of its wider group of peers which, in turn, limit its capacity for FCF generation and result in relatively higher leverage with slower deleveraging. This is primarily attributed to the substantial portion of hardware distribution sales within Advania's total revenue stream.
Advania, like Apex, is highly acquisitive and pursues an M&A-led growth strategy. However, Apex's larger scale and significantly stronger margins and deleveraging profile result in a higher leverage capacity than Advania. Almaviva is rated higher due to its significantly lower leverage and stronger domestic market share.
Key Assumptions
Organic revenue growth of 7.1% in 2024 with managed services being the biggest contributor. This is followed by an average organic revenue growth of 5.6% in the following three years. Projected revenue is supported by cash-funded bolt-on M&As increasing overall revenue CAGR to 6.6% in 2024-2027
Fitch-defined EBITDA margin to stabilise at 9.7% in 2024 and to improve to 10% by 2027, reflecting the reduced impact of inflationary pressures, improvement of staff utilisation rates and focus on post-integrations commercial initiatives
Capex at 1.1% of revenue in 2024, followed by 1% to 2027
Improving working capital outflows between 2024 and 2027. We project a slight improvement from 1.8% of revenue outflow in 2023 to 1.5% outflow by 2025 and 1.2% to 2027, reflecting a focus on inventory management and an increasing share of managed services supporting the reduction of the receivables in the balance-sheet structure
Bolt-on M&As at a 5.5x valuation totaling to SEK187 million in 2024, followed by SEK280 million-SEK340 million per year to 2027
Refinancing costs of SEK235 million in 2024, followed by SEK5 million per year to 2027
No dividends or other shareholder payments between 2024 and 2027
Recovery Analysis
Fitch estimates post-restructuring going-concern (GC) EBITDA would be about SEK1.3 billion, which may be due to distressed EBITDA from reputational damage and a loss of public-sector contracts in some markets or significant reduction in consultancy/professional services driven by a weak economic or highly competitive environment.
An enterprise value (EV) multiple of 5.5x is applied to the GC EBITDA to calculate a post-reorganisation EV. The multiple is in line with that of close sector peers'.
Administrative claims of 10% are deducted from the EV to account for bankruptcy and associated costs
The total amount of senior secured debt for claims includes SEK9.5 billion senior secured first-lien term loans (split between pound sterling, Swedish krona, Norwegian krona and euro facilities) and an equally ranking SEK2.5 billion (current equivalent of EUR210 million) RCF that we assume to be fully drawn in distress.
The debt waterfall analysis results in expected recoveries of 52%, resulting in a 'RR3' Recovery Rating and a 'B+(EXP)' instrument rating for the senior secured first-lien debt.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
FCF margins sustained above 5%
Fitch-defined EBITDA leverage below 5.0x on a sustained basis
EBITDA interest coverage sustained above 3.0x
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Material slowdown in organic growth due to market downturn or intensified competition, resulting in lower Fitch-defined EBITDA margins consistently below 9% and negative FCF
Debt-funded acquisitions preventing deleveraging, resulting in Fitch-defined EBITDA leverage above 6.0x
EBITDA interest coverage consistently below 2.0x
Liquidity and Debt Structure
Satisfactory Liquidity: Advania had unrestricted cash of SEK260 million at end-2023. Its liquidity profile is underpinned by a multi-currency EUR210 million (currently SEK2.5 billion) RCF, which we expect to be undrawn at end-2024, by positive expected FCF generation from 2025 and no near-term debt maturities. Refinancing risk is deemed manageable, assuming Advania would deleverage ahead of maturities.
Issuer Profile
Headquartered in Stockholm, Advania offers a wide array of IT services, including custom software and cloud solutions, and hardware for mid-sized to large companies and government entities across six Nordic countries.
Date of Relevant Committee
08 May 2024
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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