Weighed down by almost £3bn of debt, the AA could be crippled by a credit downgrade of just one notch, analysts said today.
Ratings agency S&P is due to deliver a review of the roadside recovery giant in the coming weeks. It follows the AA last month unveiling its turnaround plan.
Most of the AA’s £2.8bn debt pile is formed of corporate bonds. Analysts from Jefferies said “the most likely outcome” from the S&P review was to maintain the AA’s investment grade rating but put the firm on negative watch.
However, a downgrade by one notch would have “severe free cash flow implications”, Jefferies said and cost the firm £50m.
“That is likely to be a reasonably terminal for equity holders,” Jefferies said.
The AA has previously said there is "no reason for a downgrade", but declined to comment specifically on the Jefferies note.
Liberum analyst Joe Brent said the free cash flow impact would be less given not all of the AA’s bonds needed to be repaid in 2020. A tranche of £500m would be refinanced first. If the S&P downgraded the AA – and such a downgrade was still in place in a year’s time – the cash impact would be nearer £10m, he said.
Bondholders are unlikely to be able to step in earlier than the end of the decade. Earnings would need to collapse by 30 per cent for the AA to breach covenants and necessitate an early restructuring, Brent added.
AA shares have yo-yoed in recent weeks, plunging on 22 February in the wake of the proposed changes. They have subsequently leapt on boardroom changes and claims the firm was approached by private equity in early 2017.
Today, shares fell over six per cent.