S&P Global Ratings assigned its ‘CCC+’ issue-level rating with a ‘5′ recovery rating to San Francisco-based transportation-as-a-service provider Uber Technologies Inc.’s new unsecured notes.
S&P also rates the company’s existing unsecured debt ‘CCC+’. Uber plans to use the proceeds for general corporate purposes.
“Our ‘B-’ issuer credit rating and stable outlook are unchanged. Despite our expectation that COVID-19 will significantly affect rides bookings in the second quarter, given they were down 80% year-over-year in April, we believe offsetting factors will allow Uber to sustain its capital structure,” S&P said.
Uber will reduce customer support and recruiting staff to align with market demand. It also consolidated some discretionary investments, divesting its bikes and scooters business to Lime and planning to discontinue Uber Eats in certain markets.
“Uber has $9 billion in unrestricted cash and equivalents at March 31, 2020, equity stakes with a book value of $10 billion, and an undrawn $2.3 billion revolving credit facility due in 2023, which we believe provide ample liquidity to bridge the next several quarters until cash burn is more manageable. We expect cash flow deficits in the $3 billion-$4 billion range in 2020, narrowing to $1 billion-$2 billion next year, which we consider manageable. We believe quarterly EBITDA will approach break-even in mid-to-late 2021,” S&P said.
The rides business shows early signs of recovery with bookings increasing week-over-week for the three weeks before the company’s earnings call on May 7, and bookings in Hong Kong at 70% of pre-COVID-19 levels.
“We expect quarterly rides EBITDA will again cover unallocated corporate expenses no later than sometime in 2021. Eats demand is surging, allowing EBITDA loss margin to narrow. We think the current macroeconomic environment could be a catalyst for price competition to ease more quickly in both rides and Eats on a permanent basis,” S&P said.
ISSUE RATINGS – RECOVERY ANALYSIS
Key analytical factors
— S&P’s simulated default scenario assumes a payment default in 2022 due to continued depressed demand for rides as social distancing measures to manage COVID-19 are in force longer than expected, along with adverse regulatory changes, that exhaust liquidity and cause Uber to exit key markets.
— Uber’s capital structure consists of secured revolving credit facilities totaling $2.27 billion, two secured term loans totaling $2.6 billion, and unsecured notes totaling $4 billion, including the $750 million of proposed unsecured notes.
— The secured term loan, revolving credit facility, and unsecured notes share the same obligors, representing approximately 61% of 2019 consolidated net revenue.
— Collateral for the secured facilities is limited to first-priority security interests in certain of the company’s intellectual property (IP), including present and future patents, trademarks, and copyrights as well as applications for patents, trademarks, and copyrights. Additionally, 66% of the equity interest in Uber Singapore Technology Pte. Ltd. is pledged.
— Collateral excludes the company’s autonomous driving IP.
— Following a payment default and reorganization, S&P assumes the company’s go-forward operations would be pared back primarily to the U.S.
— S&P estimates emergence-level EBITDA of approximately $685 million following a reorganization around its U.S. operations. It values the company using a 7x EBITDA multiple, in the higher half of the range of multiples the rating agency uses for software companies, resulting in a net enterprise value of about $4.5 billion after administrative expenses.
— While S&P believes the collateral package for the credit facilities should give secured lenders a material advantage over unsecured noteholders, the extent of this benefit is difficult to quantify. The facilities do not have liens on all of Uber’s assets. Accordingly, S&P thinks some portion of the company’s enterprise value should be viewed as unencumbered.
— S&P estimates 70% of the company’s value is captured by the collateral package. It assumes the remaining 30% would be shared ratably between secured creditor deficiency claims and unsecured noteholders.
Simulated default assumptions
— Simulated year of default: 2022
— EBITDA at emergence: $685 million
— EBITDA multiple: 7x
— Revolving credit facility: 85% drawn at default
— Net enterprise value (after 5% administrative costs): $4.5 billion
— Valuation split (collateral/noncollateral): 70%/30%
— Value available to first-lien debt claims (collateral/noncollateral): $3.2 billion/$350 million
— Secured first-lien debt claims: $4.6 billion
— Recovery expectations: 70%-90% (rounded estimate: 75%)
— Value available to unsecured lenders: $1 billion
— Unsecured debt claims: $4.1 billion
— Recovery expectations: 10%-30% (rounded estimate: 20%)
All debt amounts include six months of prepetition interest.