Investing.com -- Moody’s Ratings has today affirmed the B3 long term corporate family rating (CFR), B3-PD probability of default rating (PDR) and B3 rating on the backed senior secured bank credit facilities for Expleo Services SAS. However, the outlook for the company has been revised to negative from stable.

The revision is a reflection of Expleo’s weaker than expected operating performance in 2024. The company’s revenue grew by only 1% compared to 2023, falling short of management’s budget by 6%. The weak demand for Expleo’s services is primarily due to ongoing economic challenges faced by key clients in the automotive sector, which accounts for about 24% of Expleo’s revenue. As a result, there have been delays in projects, price re-negotiations and some projects being put on hold.

The weaker performance also led to a higher than expected non-recurring cash charges of €32 million in 2024, primarily related to employee layoffs. This resulted in an increase in Moody’s adjusted debt/EBITDA (leverage) to 7.7x in 2024 from 6.6x in 2023 and weak EBITA/interest of 1.3x in 2024 compared to 1.4x in 2023. Free cash flow (FCF) to debt was also negative at 1% due to the high level of exceptional cash costs among others.

Moody’s expects 2025 to remain challenging for Expleo, with a slight decline in revenue and EBITDA as the automotive sector continues to face headwinds. However, a gradual recovery in revenues is expected around 3%-5% in 2026 and 2027 driven by price increases and volumes, and improvement in EBITDA of around 15% driven by Expleo’s cost savings initiatives, better invoicing rate, more employee layoffs and increased use of junior staff.

Despite these initiatives, the global macroeconomic environment continues to weaken, leading to a high degree of uncertainty. Moody’s adjusted leverage is expected to remain highly elevated at around 7.7x in 2025, before declining to 6.6x in 2026. Free cash flow to debt is forecasted to remain negative at 3% in 2025 before breaking even in 2026.

The negative outlook reflects the expectation that Expleo’s operating performance and credit metrics will remain weak in 2025 with a gradual recovery only from 2026 onwards. It also highlights the limited time for the company to improve its credit metrics ahead of the maturity of its revolving credit facility (RCF) expiring in March 2027 and term loan due in September 2027.

Expleo’s liquidity is adequate with a cash balance of €92 million as of 31 December 2024 and €50 million availability under the RCF out of the total €115 million. The nearest debt maturity will be in March 2027 when the RCF matures.

The ratings could be upgraded if operating performance improves, leading to Moody’s-adjusted debt/EBITDA sustainably below 5.5x, Moody’s-adjusted free cash flow/debt of 3%-5% and a refinancing of the company’s debt facilities well in advance of their maturity, with the company maintaining a solid liquidity profile.

On the other hand, the ratings could be downgraded if operating performance remains weak reflected by a Moody’s-adjusted debt/EBITDA well above 6.5x, EBITA/interest expense below 1.5x or negative Moody’s-adjusted free cash flow all on a sustained basis, or if liquidity concerns arise. The lack of meaningful improvement in credit metrics could jeopardize Expleo’s ability to refinance its debt well in advance of maturity and potentially increase the probability of default.

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