Two agencies cut Omnitracs’ debt rating after SmartDrive purchase

Telematics and ELD provider Omnitracs has had its debt rating downgraded by both S&P Global Ratings and Moody’s because of its acquisition of SmartDrive.

But the news wasn’t all negative. The downgrade essentially comes down to math, with new debt taken on by Omnitracs pushing its debt metrics to a level that essentially required a downgrade. But both S&P Ratings and Moody’s were mostly positive in discussing the long-term impact of the Omnitracs purchase.

The reports on the downgrade also reveal, indirectly and not precisely, what the cost of the acquisition was. That number was not disclosed by Omnitracs in the announcement of the purchase of SmartDrive, a leading provider of truck and in-cab video technology.

The reports note that Omnitracs took on additional debt of $355 million to make the purchase: a $160 million first-lien term loan and a $195 million second-lien term loan. But while S&P Ratings does not disclose any further information about the cost, the Moody’s report says Omnitracs used the proceeds of that new debt plus $71 million in cash from Omnitracs’ balance sheet as well as what it referred to as “rollover equity from SmartDrive’s shareholders.” The amount of that equity was not disclosed, leaving the final acquisition price unknown.

Both S&P Ratings and Moody’s cited various metrics to measure a company’s ability to cover its debts. S&P looks at debt to EBITDA while Moody’s cited free cash flow to gross debt. But either way, what triggered the downgrade is that the numbers for Omnitracs, as a result of taking on additional debt to fund the purchase, has pushed various metrics above levels that meant the prior debt rating for the company was not sustainable. The result was the downgrade.

The new corporate family rating at Moody’s for Omnitracs is B2. The new rating handed down by S&P Ratings is B minus. A side-by-side comparison of the two ratings would put the Moody’s rating as one notch above the S&P rating.

Both ratings are considered speculative, or more colloquially, a junk debt rating, roughly in the middle of the pack of the various steps between the bottom rung and an investment-grade rating.

S&P revised Omnitracs’ debt rating outlook to “stable” from “negative.” It had been negative since an action taken last June.

The move to stable from negative is not surprising; a company with a negative rating can be viewed as on the cusp of a downgrade, which in this case occurred because Omnitracs took on more debt. The downgrade has now occurred so the outlook shifts to stable, albeit at a lower rating.

Even though the moves are downgrades, the commentaries that accompanied both ratings actions were optimistic about the benefits from the acquisition and projected that Omnitracs could bring its debt metrics down in the coming months.

“The SmartDrive acquisition is expected to provide long-term strategic benefits to Omnitracs, including creating a unified video safety, telematics and routing platform at scale,” Moody’s said in its commentary. “The combination will also provide significant mutual cross-sell and expanded go-to-market opportunities with approximately $530 million in combined pro forma annual revenues as of June 30, 2020.”

Echoing what Omnitracs said in its announcement of the SmartDrive acquisition, S&P said the purchase “improves the strength of Omnitracs’ product portfolio and increases its exposure to a faster-growing segment. The consolidation of SmartDrive offers Omnitracs more robust, premium video-based safety and driver coaching capabilities and an established position in this nascent market segment.”

Since Omnitracs is not a publicly traded company, information about its finances is not readily available. But since it does have publicly traded debt, the ratings reports of companies like S&P Ratings and Moody’s can give a look into the finances of it, as well as SmartDrive in this particular round of reviews.

— SmartDrive is the No. 2 provider of in-cab video behind Lytx, which has a 60% share of the market. SmartDrive, based on 2018 revenues, has 18%. The S&P Ratings report cites Frost & Sullivan for that data. Frost & Sullivan also said the video market is expected to have CAGR of more than 20% between 2018 and 2023

— SmartDrive had a 35% compound annual growth rate between 2015 and 2019.

— Omnitracs has a “strong recurring revenue base” that is “typically” above 75% of revenues and a customer retention rate of more than 90%.

— Moody’s had noted this in a prior review of Omnitracs, but it reiterated that revenues for the 12 months ended June 30 were about $450 million.

John Kingston