TEXT-S&P affirms Serco DES 'A-' rratings

Mon Oct 29, 2012 2:11pm EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article
[-] Text [+]

(The following statement was released by the rating agency)A)
     -- We are affirming our 'A-' long-term issuer credit and senior secured 
debt ratings on Serco DES Inc.
     -- The ratings on Serco reflect our view of its strong business risk 
profile, satisfactory financial risk profile, and healthy liquidity. 
     -- The stable outlook reflects our view that Serco's financial and 
operational performance remains in line with expectations and that provincial 
policies will remain stable during the next year.

Rating Action
On Oct. 29, 2012, Standard & Poor's Ratings Services affirmed its 'A-' 
long-term issuer credit and senior secured debt ratings on Ontario-based Serco 
DES Inc. (Serco or DriveTest). The outlook is stable.

The ratings on Serco reflect Standard & Poor's opinion of a strong business 
risk profile, a satisfactory financial risk profile that includes a supportive 
covenant package, and adequate liquidity. In our view, modest volume risk and 
a lack of rate-setting autonomy somewhat offset these strengths.

We believe that the foundation of Serco's strong business risk profile is its 
monopoly position and relatively strong and fairly predictable underlying 
demand profile for driver testing services in the Province of Ontario 
(AA-/Negative/A-1+). The company's service area is Ontario, Canada's most 
populous province. Under the terms of the delegation agreement (DA) between 
Serco and the Ontario Ministry of Transport, the company has almost exclusive 
rights with respect to driver examination services. Recent Census results 
indicate that 15-to-19-year-olds (one of the primary demand bases for 
examination services), represented about 7% of total population for Ontario in 
2011. We expect that this level should remain relatively stable as a 
proportion of the province's total population until 2013 (when the DA 
expires). In addition, Ontario projects that net migration to the province (a 
second demand base for examination services) will remain strongly positive for 
the decade. 

We believe that the company's financial risk profile is satisfactory. As of 
year-end 2011, the rolling four-quarter debt service coverage ratio (DSCR) was 
1.05x; for the six months ended June 2012, it was 1.17x. Standard & Poor's 
expects the annual DSCR will remain at 1.15x-1.20x during the next two years. 
In addition, an amortizing debt profile, which results in no retirement risk, 
bolsters the company's financial risk profile. Furthermore, Serco's bond 
covenant package provides creditor support and is at least consistent with 
similarly rated peers'. The package includes a six-month debt service reserve 
fund (DSRF; subject to the adjustment) and a restricted permitted 
distributions test of 1.15x annual senior DSCR cash trap. 

In our opinion, DriveTest's liquidity is healthy. As of Dec. 31, 2011, the 
company had a cash balance of C$9.8 million. Further bolstering its liquidity 
are two letters of credit for C$4.5 million and C$2.0 million. At year-end 
2011, the lines remained undrawn. The company's liquidity includes its DSRF, 
which had a balance of C$14.0 million at year-end, which is more than the sum 
of the next two principal and interest payments. An employee severance reserve 
account allows Serco to pay its employees all of the projected employee 
severance and termination costs for which it would be liable at the end of the 
initial term (August 2013), assuming that the company would cease operations 
then and terminate all of its employees.

DriveTest's lack of rate-setting autonomy constrains our assessment of the 
ratings. Serco's inability to raise fees, and the lack of any automatic annual 
fee adjustments based on inflation, mean it relies completely on the 
underlying demand volume and cost management to meet revenue targets. However, 
we believe that the DA's provisions, which requires the Ontario Ministry of 
Transportation (MTO) to fully compensate Serco for any negative unilateral 
changes to its business position, partially mitigates this weakness. 

Notwithstanding fairly predictable demand for driver examination services in 
Ontario, we believe moderate volume risk still exists. Negative changes in 
demographic profile of, immigration to, or interprovincial migration patterns 
into Ontario would result in a decrease in the number of road tests, which 
subsequently would result in a lower revenue stream, thinner DSCRs, and a 
weaker financial risk profile. 

The stable outlook reflects our view that Serco's financial and operational 
performance remains in line with expectations and that provincial policies 
will remain stable during the next year. Downside pressure on the rating could 
occur if the company's operational performance was to deteriorate 
significantly, and its financial metrics were to weaken markedly. We see 
limited rating upside without a pronounced improvement in the financial risk 

Related Criteria And Research
Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007

Ratings List
Ratings Affirmed

Serco DES Inc.
 Issuer credit rating                  A-/Stable/--
 Senior secured debt                   A-

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left