Overview
— We expect Mobile Mini Inc., a lessor of portable storage units
and mobile office units, to gradually improve its financial profile with modest
earnings growth and continued debt paydown.
— We are affirming all ratings, including our ‘BB-‘ long-term corporate
credit rating, on the company.
— The stable outlook reflects our expectations that the company’s
financial profile will stay within the range we consider acceptable for the
rating while earnings improve modestly.
Rating Action
On May 30, 2012, Standard & Poor’s Ratings Services affirmed its ‘BB-‘
corporate credit rating on Tempe, Ariz.-based portable storage units and
mobile office units leasing company Mobile Mini Inc. The outlook remains
stable.
At the same time, we affirmed our ‘B+’ rating (one notch below the corporate
credit rating) on the senior unsecured notes. The ‘5’ recovery rating,
indicating our expectations that lenders would receive a modest (10%-30%)
recovery in the event of a payment default, is unchanged.
Rationale
The ratings on Mobile Mini reflect its narrow operations (the leasing and sale
of portable storage units and mobile office units) and its exposure to
cyclicality in certain end markets. Somewhat offsetting these weaknesses are
the company’s leading market position and relatively stable earnings and cash
flow. We categorize Mobile Mini’s business risk profile as “fair,” its
financial risk profile as “aggressive,” and its liquidity as “adequate” under
our criteria.
Mobile Mini is the only national lessor of portable storage units in an
otherwise fragmented industry in the U.S. The company also has a dominant
market position in the U.K. and limited operations in the Netherlands and
Canada. Leasing portable storage units provides a flexible, low-cost, and
convenient alternative to permanent warehouse space and self-storage sites. In
addition to storage purposes, customers use portable units as mobile offices.
The company also sells new and used portable storage units and provides
delivery, installation, and other ancillary products.
Mobile Mini has a fleet of about 236,600 units and a diverse customer base of
more than 80,000 lessees. Portable storage units (often converted marine cargo
containers) make up about 81% of the fleet, mobile office units 17%, and
storage trailers 2%. Although office units make up a smaller portion of the
fleet, relative to the storage units, they have a high book value because the
boxes are customized to become suitable for workspace. Accordingly, office
container leases contribute more to revenues than the proportion of these
units in Mobile Mini’s fleet. As of March 31, 2012, approximately 33% of the
units on lease were leased to consumer services and the retail industry, 34%
to construction, 18% to industrial and commercial customers, and the remaining
15% to a mix of customers including government institutions and homeowners.
The company’s current mix of end markets is more diverse than in 2007, when
43% of units were on lease to the construction industry.
Fleet utilization steadily increased over the past year, averaging 56.8% for
the quarter ended March 31, 2012, compared with 53.9% in the prior-year
period. Still, current levels are depressed relative to the five-year
historical average of 64.9% and reflect the weak, albeit improving U.S.
economy and cyclical pressures. Seasonality also plays a role in fleet
utilization. For example, the construction industry tends to be busy in the
summer, and the retail industry experiences seasonal pick-up in the fall,
ahead of the holiday season. Although improved utilization and lease rates
have contributed to earnings growth, margins have declined primarily due to
expenses related to building and opening new locations. For the 12 months
ended March 31, 2012, operating margins (after depreciation) declined to about
27% from 29% a year ago and more than 30% in 2009. We expect that margins
could experience modest pressure over the next year from expenses rise for
additional “greenfield” locations. Greenfield locations are low-cost, start-up
operational yards where the company redeploys idle fleet.
As a leasing company, Mobile Mini can operate at higher leverage than a
typical like-rated industrial company. Although the company has paid down more
than $200 million of debt since December 2008, we still consider its financial
profile aggressive, largely as a result of $541 million in incremental debt
the company assumed in conjunction with the acquisition of Mobile Storage
Group (MSG) in June 2008. On April 14, 2011, $147.4 million of convertible
preferred stock automatically converted into common equity. Prior to the
conversion, we treated the preferred stock as debt, in line with Standard &
Poor’s rating methodology. Mobile Mini’s ongoing debt paydowns, conversion of
preferred stock into common equity, and earnings growth have contributed to an
improved financial profile. As of March 31, 2012, lease-adjusted debt to
capital was 49% (low for a leasing company), debt to EBITDA 5.1x, and funds
flow from operations (FFO) to debt 15.2%. We expect FFO to debt to remain in
the mid-teens percent area, and debt to EBITDA to decrease to less than 5x and
debt to capital to decrease to the mid-40% area over the next year.
Liquidity
Mobile Mini has adequate liquidity. We believe its sources of cash will likely
exceed its uses substantially over the next 12 months. Cash sources include
existing unrestricted cash balances of $2 million and $550.7 million in
availability (after taking into consideration outstanding letters of credit)
under its $900 million secured asset-based revolving credit facility
(unrated), which matures in 2017.
Revolver availability is subject to a borrowing base calculation based on a
valuation of the company’s eligible accounts receivable, eligible fleet, and
other property. We believe that the company’s revolver and FFO will be
sufficient to cover working capital needs and modest capital spending in 2012.
Mobile Mini’s capital expenditures are almost all discretionary and for the
purposes of meeting anticipated demand. Accordingly, in our evaluation of
liquidity, we estimated a moderate amount of minimum capital spending. We also
expect cash uses to include $0.4 million in remaining debt maturities for 2012.
In accordance with Standard & Poor’s methodology and assumptions, in our view,
the relevant aspects of Mobile Mini’s liquidity include:
— Coverage of cash uses by cash sources well in excess of 1.2x, the
minimum level for an adequate designation, for the next year;
— Our expectation that net sources would be positive, even with a 15%
drop in EBITDA, consistent with our criteria standard of 15%;
— Mobile Mini’s ability to absorb low-probability, high-impact shocks,
based on positive cash flow and ability to scale down capital spending
drastically;
— Mobile Mini’s sound relationships with banks, in our assessment,
including arranging credit facilities; and
— Generally prudent risk management, in our view, including reducing
capital spending sharply (as demonstrated in 2009).
Financial covenants are springing, tested only if borrowing availability falls
below the greater of $90 million or 10% of the facility size. As of March 31,
2012, the company’s borrowing availability far exceeded the test threshold.
Springing financial covenants include a maximum leverage ratio of 5.5x and a
minimum fixed-charge coverage ratio of 1x. Mobile Mini uses a different
definition of debt and EBITDA than Standard & Poor’s.
Recovery analysis
Mobile Mini’s bank financing consists of a $900 million secured asset-based
revolving credit facility maturing in 2017 (unrated), a $150 million senior
unsecured note maturing in 2015, and a $200 million senior unsecured note
maturing in 2020. For the complete recovery analysis, see Standard & Poor’s
recovery report on Mobile Mini to be published on RatingsDirect following this
research update.
Outlook
The outlook is stable. We expect the company to gradually improve its
financial profile with modest earnings growth and by paying down debt and
keeping capital spending modest. Over the long term, we expect Mobile Mini to
benefit from improving market fundamentals.
We expect that the company’s financial measures will improve gradually in 2012
and beyond. We could upgrade the company if this improvement is stronger than
expected, resulting in FFO to debt approaching 20% and operating margins
returning to higher than 30%. However, if the company’s financial profile
changes substantially, because of weaker-than-expected earnings growth,
causing FFO to total debt to fall to the high-single-digit area for a
sustained period, we could lower the ratings.
Related Criteria And Research
— Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
— Criteria Guidelines For Recovery Ratings On Global Industrials
Issuers’ Speculative-Grade Debt, Aug. 10, 2009
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Ratings Affirmed
Mobile Mini Inc.
Corporate credit rating BB-/Stable/–
Senior unsecured B+
Recovery rating 5
