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Rating Action:

Moody's assigns first-time B2 CFR to Sisal Pay

02 Dec 2019

Paris, December 02, 2019 -- Moody's Investors Service (Moody's) has today assigned a B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) to Sisal Pay S.p.A. (Sisal Pay or the company), a company, which will be formed through the combination of the payments business of Sisal Group S.p.A. (Sisal Group, B1 stable) and the payments business of Banca 5 S.p.A., a subsidiary of Intesa Sanpaolo S.p.A. (Baa1 stable).

Concurrently, Moody's has also assigned a B2 rating to the new €530 million senior secured floating rate notes due 2026 and to be issued by Sisal Pay S.p.A.

The outlook assigned is stable.

Net proceeds from the new notes, together with common equity and shareholder loans, which meet Moody's criteria for equity credit, will be used to fund the creation of the business. Sisal Group and Banca 5's ownership will be 70% and 30% respectively. Closing of the transaction is expected by end of 2019, subject to customary antitrust approval.

RATINGS RATIONALE

The B2 CFR reflects the (1) high Moody's-adjusted debt/EBITDA of 6.6x at closing of the transaction decreasing to 5.8x-6.0x over the next 12 months, (2) lack of geographic diversification outside of Italy, (3) medium-term risks related to consumers moving away from the proximity channel, though any impact is likely to be gradual and partly offset by market share gains from other market participants such as the Italian post office and banks which are reducing their physical network as well as growth in Sisal Pay's pre-paid card and digital businesses although the latter is loss-making at the moment, and (4) exposure to potential regulatory changes or governmental initiatives aimed at encouraging bank transfers or other forms of online payment over the next years.

However, the CFR also positively reflects the company's (1) leading market position in the Italian proximity payment sector with a network of approximately 51,000 point of sales, (2) good growth prospects in the pre-paid cards and digital payments markets supported by the low penetration of cashless transactions in Italy, (3) potential for significant cost synergies because Sisal Pay will switch the outsourcing of Banca 5's bill payment processing system to Sisal Pay's proprietary platform, (4) good margins as reflected by Moody's-adjusted EBITA margin of around 18% pre-synergies and based on gross revenue (equals to around 43% when commissions paid to merchants are excluded), and (5) Moody's expectation that Moody's-adjusted free cash flow/debt will be above 5% from 2020. Moody's considers that the combination makes strategic sense and Moody's expects that both shareholders of the company will be committed to Sisal Pay's success and deleveraging.

Moody's forecast that Sisal Pay will delever to 5.8x-6.0x over the next 12 months is based on the following assumptions: (1) realization of merger synergies in 2020; (2) a reduction in the losses of the new digital initiatives; and (3) underlying organic growth notably in bill payments, own pre-paid cards, and merchant services. However, these growth assumptions will be partly offset by the loss of Banca 5's pre-paid cards partnership with PostePay from 1 January 2020, and additional overheads related to the set-up of the new business' own support functions.

LIQUIDITY

Sisal Pay's liquidity is adequate mainly due to the large super senior revolving credit facility (RCF) of €92.5 million available until 2026 because cash at closing will be low at around €5 million. There is no financial covenant attached to the RCF.

Working capital is structurally negative but could exhibit significant variability on a weekly basis driven by the timing of cash collections and payments. According to the company, working capital can experience a maximum swing of €50 million, which could require drawings under the RCF, but only for a few days.

ESG CONSIDERATIONS

In terms of social risks Moody's considerations include demographic and regulatory changes leading to a shift of consumer behaviors towards cashless transactions, although the impact of demographic changes will likely be gradual.

As to governance risks, Moody's views Sisal Pay's capital structure as being ring-fenced from the Sisal Group although the new company will be consolidated within Sisal Group' audited accounts. Sisal Pay is 70% private-equity owned (through Sisal Group), which can have a greater propensity to favour shareholders over creditors, but Moody's expects that Sisal Pay and Banca 5 will be committed to the growth and success of the company as well as deleveraging. Moody's expects related party transactions to remain limited and conducted on an arm's-length basis. Except customary transition service agreements for the provision of support functions, there will be a commercial agreement between Sisal Pay and Banca 5 with respect to transactional and banking services not contributed by Banca 5 to the new company.

STRUCTURAL CONSIDERATIONS

The capital structure comprises a €530 million senior secured notes and a €92.5 million super senior RCF. Both debt instruments are secured by a weak security package, which mainly includes pledge on shares and intercompany receivables. However, the super senior RCF will rank ahead of the notes in an enforcement scenario under the provisions of the intercreditor agreement. The super senior RCF will also benefit from upstream guarantees from operating companies accounting for at least 80% of consolidated EBITDA while the notes will be unguaranteed.

The senior secured notes are rated B2, at the same level as the CFR, reflecting the relatively small amount of super senior RCF and operating companies' non-financial debt including trade payables, pension liabilities, and leases ranking ahead due to the absence of upstream guarantee. Payables to strategic partners are not included in Moody's Loss Given Default (LGD) analysis because they will be either covered by segregated cash balances or performance bonds in a liquidation scenario.

Moody's has assigned a separate CFR to Sisal Pay to the CFR of its majority owner, Sisal Group. This is because the documentation of the notes sufficiently ring-fences Sisal Pay's capital structure. There is no cross default or cross guarantees and there are sufficient restrictions in the documentation that prevent the upstreaming of cash from Sisal Pay unless there has been material deleveraging to below 3.75x from c. 5.3x at closing (based on the consolidated net leverage ratio as defined under the debt indenture).

RATING OUTLOOK

The stable outlook reflects Moody's expectation that Moody's-adjusted debt/EBITDA will reduce to 5.8x-6.0x over the next 12 months, a level that more comfortably positions the company within the B2 rating, and positive free cash flow, which will strengthen liquidity. The stable outlook assumes the company will not undertake material debt-funded acquisitions or distribution to shareholders.

FACTORS THAT COULD LEAD TO AN UPGRADE/DOWNGRADE

An upgrade could materialize if underlying earnings growth and the realization of merger synergies lead to: (1) Moody's-adjusted debt/EBITDA reducing closer to 5.0x on a sustained basis, and (2) a solid liquidity profile including Moody's-adjusted free cash flow of around 5%.

A downgrade could materialize if weak underlying EBITDA growth or integration issues, including lower synergies than expected lead to: (1) Moody's-adjusted debt/EBITDA remaining sustainably above 6.0x, or (2) weaker liquidity or negative Moody's-adjusted free cash flow. Negative rating pressure could also occur if longer-term demand for some of Sisal Pay's proposed business offerings, such as prepaid cards, digital payments, or banking and other new services, are unlikely to grow as anticipated and sufficiently offset any future decline in the bill payment business or continued decline in the telecom business.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Created through the combination of the Sisal Group's payments business and Banca 5's payments business, Sisal Pay will be a key player in the Italian proximity payments industry. The company generated pro-forma gross revenue of €325 million in 2018 or net revenue of €151 million excluding commissions paid to merchants.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Laura Kaliszewski
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Jeanine Arnold
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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