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Rating action

Scope Ratings GmbH (Scope) has today assigned a BB+/Stable rating to German bike leasing and financing company BLS Beteiligungs GmbH (BLS). Scope has also assigned a BB+ rating to senior secured debt issued by BLS.

Rating rationale

The issuer rating reflects BLS’ successful business model as a platform for bike leasing in Germany, a market that has rapidly grown in recent years and is still expected to do so during the rating horizon. BLS acts as an intermediary between companies that sign leasing contracts on behalf of their employees and bike manufacturers and dealers; it also provides financing for bike purchases on behalf of its customers. Key determinants of Scope’s business risk assessment are the company’s market share of more than 20% only eight years after its founding and its very good profitability in its core segment of bike leasing brokerage.

In 2021, BLS was acquired by financial investor Brockhaus Capital Management (BCM). BCM has taken over 60% of BLS’ share capital from its two founders. The founders have reinvested the proceeds to gain 40% in BCM’s acquisition vehicle. BCM has financed most of the BLS takeover with equity, while the acquisition vehicle BLS Beteiligungs GmbH has funded the remaining EUR 30m through debt. Despite this, BLS’ financial risk profile has remained solid, which is reflected in the rating. The company’s very low leverage is likely to be sustained as the company was debt-free before and the acquisition-related debt increase can now be reduced by the company’s ability to drive significant revenue growth and to generate substantial free operating cash flow.

BLS provides bike financing through internal and external leasing and refinances its leasing obligations by forfaiting, securitisation of leasing receivables as well as by bank debt. The securitisation model via CrossLend, which was started two years ago in order to provide funding diversification, is now to be abandoned. In 2022, revenue (up 46% YoY, pro-forma) and EBITDA (almost trebling) showed significant growth rates thanks to the attractiveness of BLS’ business model and its ability to gain new customers. In addition, the business model provides for positive environmental considerations by avoiding traffic-related pollution and fostering personal health (ESG factor: credit-positive environmental factor).

Market shares and profitability continue to be the main strengths of BLS’ business risk profile (assessed at BB). BLS’ sales volume of about 120,000 bikes in 2022 reflects some 30% growth over 2021 despite some supply chain bottlenecks still having delayed bike purchasing transactions in 2022. With regard to profitability, Scope believes that BLS' comparatively high adjusted EBITDA margin in a peer context is sustainable as it reflects the company’s asset-light business model as a platform provider able to generate significant revenue growth. BLS’ operating profits contain commission income from leasing and insurance companies as well as from leasing receivables sold. An additional benefit is that the business model provides superior visibility on future sales, which can be estimated accurately based on the number of new firms contracted and the number of employees eligible for a bike order. Growth drivers continue to be lifestyle and healthcare related factors, product innovation (e-bikes) and tax advantages due to political support.

Diversification is still the weak point of the business risk profile. However, it is progressing, not only via the Hofmann Leasing acquisition on the funding side, but thanks to BLS’ entry onto the Austrian market (700 firms contracted) and its ambitions to expand the product range beyond bikes. However, given how recent these two changes are, the diversification assessment will remain unchanged until relevant growth can be demonstrated. While underlying markets may be large, the competitive environment is still evolving, with large players like Volkswagen Financial Services who have recently entered the bike leasing segment. Thus, while customer diversification (more than 45,000 corporate customers with more than 2.5m employees under contract) and the exposure to specialist bike retailers (about 5,000) are good, both regional and market segment diversification are still a constraint for BLS’ diversification.

BLS’ financial risk profile (assessed at A) is presently much stronger from a rating perspective than its business risk profile. This is due to the business model’s low cash absorption in a non-capital-intensive industry. Given that neither capital expenditure nor working capital are significantly cash absorbing, the resulting free operating cash flow has been increasing significantly (EUR 36m in 2022, almost trebling YoY). Scope continues to project very high Scope-adjusted free operating cash flow/debt relative to the ratings, even after more sizeable taxes have to be paid from 2023. BLS’ operational setup was originally funded without any financial debt and entirely through equity. Scope decided to not net cash against debt for the Scope-adjusted-debt calculation based on a) limited cash amounts historically, and b) more comfort with regard to the continuation of cash generation in a post-Covid scenario.

In 2022, BLS continued to achieve high operating growth (31% growth in bikes distributed and 46% in sales realised, both YoY) based on high demand for leased bikes, spurred by a combination of favourable factors (health focus of customers, tax incentives, product innovation). BLS has been able to decrease leverage quickly from the slightly high levels seen in 2021, which reflected the takeover by BCM, including a small element of financial debt, and the fact that supply chain bottlenecks from some East Asian suppliers in 2020 have become less significant in the last couple of quarters.

Scope expects the significant growth in bike leasing to continue through the rating horizon (i.e. until 2024), assuming BLS can continue to finance this growth while maintaining sufficient liquidity. The latter is likely to benefit from increasing annual free operating cash flow of EUR 30m-50m, which is very high compared to EBITDA. Liquidity is adequate, benefiting from the low short-term financial debt balance (except for the EUR 10m in bearer certificates) while cash generation continues to ramp up. Based on the comfortable cash generation in 2022, BLS was able to pay back early EUR 21.7m of its EUR 30m acquisition loan.

Scope did not adjust the rating for supplementary rating drivers. The bearer certificate documentation stipulates a leverage covenant of below 2x.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation that BLS’ balance sheet will continue to reflect small amounts of financial debt and its ability to finance significant growth without jeopardising credit metrics.

A positive rating action could result from a successful execution of growth plans and no emergence of additional competitors. It could also be supported by improved diversification through BLS’ expansion into other leasing products.

A negative rating action could result from a sustained increase in leverage to above 2.5x. This could be caused by BLS’ inability to increase platform use to about a third of total refinancing volumes and to lessen its dependence on traditional financing via the forfaiting of receivables.

Long-term debt rating

Scope has assigned a senior secured debt rating of BB+, taking into account the issuance of a new EUR 10m bearer bond. Reflecting a conservative approach on the expected value of recoverable assets (mainly receivables) pledged to its loan exposure, recovery stands at the low end of the ‘above-average recovery’ category. However, given high uncertainty about the real volume of recoverable assets at the time of a default (one of the major potential reasons for a company default would be a significantly decreased volume of contracts and hence receivables or problems with the collection rates of trade receivables), Scope chose a debt category rating that signals average recovery expectations even for a senior secured debt position.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Olaf Tölke, Managing Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 26 June 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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