# FirstGroup significant liquidity, and a diverse portfolio

- Link: https://www.directorstalkinterviews.com/firstgroup-significant-liquidity-and-a-diverse-portfolio/412809585
- Published: 2020-03-23T07:30:16+00:00
- Author: Giles Arbor

**FirstGroup plc** (LON:FGP) provides the following update on the rapidly evolving
impact of the Coronavirus (‘COVID-19’) pandemic on the business, our response to
the UK government’s announcement of emergency measures to support the rail industry
which is vital in keeping key workers moving, and the other actions the Group is
taking to manage the risks to passengers, employees and its operations.

Our first priority since the start of the COVID-19 outbreak has been the health 
and safety of the Group’s passengers, employees and communities. The Group continues
to rigorously apply the advice of governments and health authorities throughout 
our businesses, including implementing additional cleaning regimes and the provision
of advice to passengers. At the same time, we recognise our leading role in providing
essential transportation services, to ensure that key workers and people who need
to travel have the ability to do so.

In recent days the Group has seen unprecedented changes in the market environments
for all its businesses. There have been substantial volume reductions in our passenger
demand businesses in North America and the UK. First Student has been impacted by
the closure of almost all of the schools which it serves, while First Transit is
experiencing significantly reduced service requirements. Government advice and policy
in our markets is changing rapidly, and we are in very active discussions with many
of our customers about future service levels and full or partial payments in lieu
of reduced service. Given these changes are all taking place during a significant
trading period for the Group, we are no longer able to provide guidance on the outturn
for the remainder of the financial year to 31 March 2020.

However, the Group’s resilience in this situation reflects:

**The Group’s diverse portfolio of market-leading businesses**

 * Benefit from contractual structures and protections already in place in several
   businesses
 * The fast and comprehensive emergency measures the UK Government has put in place
   for the next six months, in order to support the continuity of critical rail 
   industry services during this unprecedented period of demand reductions
 * Productive engagements with our major customers, including school boards throughout
   North America, and local, state and national governments in the UK, US and Canada
 * Customers recognise the need to rapidly adjust services to fit current demand
   including for key workers, whilst preserving ability to restore service when 
   required

**The Group has significant current liquidity**

 * £400m in committed undrawn facilities and free cash as at end of February 2020
 * Access to additional sources of financing, including a £250m bank bridge facility
   signed 19 March 2020
 * The Group’s net debt: EBITDA ratio was 1.5 times on the banking covenant test
   which requires less than 3.75 times at the end of the first half, and typically
   improves in the second half

**Immediate and significant management actions to preserve cash**

 * Actions already implemented across entire Group to reduce operating expenditure
 * Future capital expenditure orders on hold and managing existing commitments accordingly
 * Decisive management actions include a range of salary deferrals and sacrifice,
   hiring freezes, and halting of consultant and contract labour where possible 
   across the Group
 * We welcome the emergency support programmes to protect jobs and businesses that
   governments have announced in our markets, and will access them as appropriate
 * Will continue to take all necessary actions to preserve cash through period of
   uncertainty

> **Matthew Gregory, FirstGroup Chief Executive said:**
> “The health and safety of our people, our passengers and their communities is 
> our top priority and across all of our businesses we are working hard to support
> the response to the growing pandemic, and closely following all government and
> health authority guidance. I want to thank my colleagues across the Group for 
> their outstanding effort and commitment in providing vital services for our customers
> and communities in the face of a rapidly changing environment.
> “Continuity of transport is essential to governments, local services and many 
> of our customers throughout this time, and they will also be critical to a restoration
> of normal life when the present uncertain and extremely difficult situation is
> overcome. We welcome and have accepted the UK Government’s swift and comprehensive
> offer of emergency measures which provides certainty for all of the Group’s franchises
> and the continuity of our vital rail networks during this time.
> “We have taken immediate and significant actions to preserve cash and protect 
> our financial position. Our customers recognise this is an unprecedented situation,
> and we have led constructive and positive engagement with them, including with
> school boards throughout North America and across all levels of government in 
> the UK and North America. Currently, the situation is changing day by day, and
> accordingly we are fully utilising all levers at our disposal to ensure the most
> effective management of our cost base through this intense period of uncertainty.
> “We have significant liquidity, and a diverse portfolio of leading transportation
> assets that are critical to the 2.1 billion passengers we carry and for the communities
> we serve, both now and in the future. The long-term fundamentals of our businesses
> are sound, we have taken immediate action and will continue to do all that is 
> necessary to ensure the Group emerges from this exceptional situation in the most
> robust position possible.”

**Financial position and liquidity**

The recent precipitous and continuing reductions in service levels and demand resulting
from the outbreak of and response to COVID-19, the very active discussions underway
with many of our customers about future service levels and full or partial payments
in lieu of reduced service, and the rapidly evolving policies of governments in 
our markets are all taking place during a significant trading period for the Group.
As a result, we are no longer able to provide guidance on the outturn for the remainder
of the financial year to 31 March 2020.

The Group has considerable financial headroom and liquidity. As at the end of February
2020, the Group’s undrawn committed headroom and free cash was approximately £400m.
The Group’s committed facilities include an £800m revolving bank facility which 
matures in November 2023 and is currently less than half drawn, as well as £82m 
in committed bank and leasing facilities signed since the end of the first half 
of the financial year. The Group has free cash in excess of £100m in addition to
cash held inside our rail franchise operations and available supplier financing 
arrangements of more than $100m.

On 19 March 2020 the Group signed a new £250m bank bridge facility for the refinancing
of the next bond maturity in April 2021.

The Group also has access to a £150m accordion feature on the revolving bank facility
and other leasing facilities, which are currently unutilised. The Group is in discussions
to arrange additional facilities in a number of lending and leasing markets to provide
further headroom and greater security for the Group. The Group also notes the recent
announcement from the UK Treasury and the Bank of England of a new commercial paper
programme for which we would expect to qualify given our investment grade ratings,
significant UK employment and UK headquarters.

The Group’s three bonds outstanding have no financial covenants and the Group’s 
committed facilities and US private placement notes include a net debt:EBITDA covenant
of no more than 3.75 times and a fixed charge cover of no less than 1.4 times. Both
are measured at end September and end March on a ‘fixed GAAP’ basis, i.e. excluding
the effects of the new IFRS16 operating lease accounting standard (which increased‘
headline’ net debt by £1,022m at end September, principally for rail rolling stock
leases). As at 30 September 2019, FirstGroup’s net debt: EBITDA ratio was 1.5 times
and the fixed charge cover was 1.7 times on the banking covenant tests. Given the
nature of the fixed charge calculation, the EBITDA headroom on the two covenants
is broadly comparable.

As at end of February 2020, the Group’s remaining future cash exposure to the rail
franchise operating companies was £272m. For the duration of the Emergency Measures
Agreements with the UK government the Group does not expect any cash outflow to 
support the rail franchise operating companies.

**Covid-19 update by division**

**First Student (£352m or 50% contribution to 2019 Group EBITDA)**

We are the market leader with a fleet of 42,500 yellow school buses across 40 US
states and seven Canadian provinces. Following the recent changes in government 
advice, almost all of the schools served by First Student have now announced closures.
Most closures are likely to be maintained until at least the end of the Easter holidays,
and there can be no certainty that schools will start up again before the end of
the summer holidays. School closures also result in the cancellation of school charter
trips and we have also seen a significant decline in the demand for external charters(
charter represents approximately 8% of divisional revenue). Although some of our
1,100 contracts include guaranteed minimum revenue commitments (mainly in Canada),
the majority do not. First Student is therefore currently in very active and productive
discussions with all of our school board customers on a contract-by-contract basis
to agree a level of payment that will ensure we retain the capability to restart
services when schools reopen. As the leader in the industry, we have reinforced 
the importance of maintaining the driver and operational capability for our customers
through the current situation by engaging with industry bodies and the sector. It
should be noted that most school districts remain fully funded to continue to provide
education, school transportation and other services. So far, we have resolved discussions
with customers representing approximately 55% of our school bus fleet in the US 
and Canada, within which we have secured full or partial payment (either contractually
or by recent agreement) from more than 90%.

**First Transit (£71m or 10% contribution to 2019 Group EBITDA)**

We are a market leader and operate more than 300 contracts in the fixed route, paratransit,
shuttle, vehicle maintenance and other transit management segments. The majority
of contracts reflect payment for making services available over agreed time periods,
with the principal exception being in paratransit where the revenue is driven more
by the volume of trips undertaken by the business. Our fixed route operations (35%
of divisional revenue) are largely classed as essential services but due to the 
significant reduction in ridership, and increasing orders to ‘shelter in place’ 
by various US states, we are likely to see reduced service requirements. Paratransit
operations (32% of divisional revenue) are seeing trip numbers decline by approximately
half. Shuttle operations (16% of divisional revenue) are seeing service reductions
in certain airport contracts and all university clients have now reduced service
requirements significantly to holiday timetables and/or engaged e-learning protocols.
As with First Student, we are in active dialogue with our customers regarding payment
through any reductions in service to ensure the operations are in a position to 
restart efficiently at the appropriate time. So far, we have proactively engaged
with the 135 customers (representing more than 65% of divisional revenue) with identified
material service impacts, and to date 17% of those customers have already agreed
to make full or partial payments in lieu of reduced service requirements. We are
also requesting waivers for all liquidated damages consequential on the outbreak
and are typically receiving favourable responses from our clients.

**Greyhound (£39m or 5% contribution to 2019 Group EBITDA)**

Revenues have fallen by approximately 65% as the outbreak and government advice 
has developed, and border closure plans between the US and Canada have recently 
been announced. The business is rapidly reducing capacity to match lower demand 
levels and is reducing headcount. Alongside airlines and other transport operators,
Greyhound is urgently seeking federal and state assistance to ensure that the community-
critical transportation connections that it provides, as the only national intercity
bus operator in North America, are maintained through the present situation. Greyhound
is also in active discussions with government transportation agencies to obtain 
relief on rents and fees for intermodal facilities.

**First Bus (£120m or 17% contribution to 2019 Group EBITDA)**

In the UK our First Bus business, which operates approximately 20% of regional bus
services in the UK and Ireland, has seen fare-paying passenger revenue declines 
and concessionary volume declines of approximately 65%. The bus industry is engaging
with national and local government to ensure that service provision can be rapidly
adjusted to meet reduced demand without any of the usual notice periods, given the
pace at which the situation is evolving. First Bus anticipates further reductions
in demand and is rapidly reducing service levels to weekend timetables which will
reduce mileage significantly across its networks. We are working with all of our
key stakeholders to ensure that the changes to timetables, concessionary travel 
rules and provision of specific services continue to support healthcare and other
key workers, and are communicating these developments to our customers. We are actively
engaged with the UK government, alongside the bus industry, for the purpose of securing
the urgent support required including a guarantee of already budgeted sources of
income for bus and coach operators.

**First Rail (£127m or 18% contribution to 2019 Group EBITDA)**

In line with the wider UK rail industry, passenger volumes in our businesses have
reduced substantially since last week with revenue up to 90% lower over the last
few days as Government advice has changed. Following consultation with Government,
the industry will operate a reduced timetable akin to weekend service levels from
Monday.

We welcome and have accepted the comprehensive response of the UK Government who
have acted swiftly to provide support for the country’s vital rail networks. These
measures provide continuity and certainty for all of the Group’s rail franchises
through Emergency Measures Agreements which will last six months or longer if required.
For the duration of the Agreements, the Government will waive our revenue, cost 
and contingent capital risk. During this time our train operating companies will
be paid a fixed management fee, which varies according to the individual profile
of the franchise, and have the potential for a small performance-based fee.

**Cost reduction and cash management**

There remains considerable uncertainty as to how the impact of the outbreak and 
government guidance and policy will continue to affect demand going forward. In 
addition to the actions taken to sustain revenue, the Group has also taken immediate
and significant actions to reduce costs and optimise cash flow and liquidity, including
removing all non-essential operating expenditures, halting all future capital expenditure
and managing any existing capital expenditure commitments where practical. Across
the Group, a combination of salary sacrifice and deferrals, hiring freezes, and 
the halting of consultant and contract labour are being implemented. We welcome 
the government packages of emergency measures recently announced in North America
and the UK to assist companies in managing their employment costs during this time.

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