Investing.com -- S&P Global Ratings has revised its outlook for OPENLANE Inc. from stable to positive, reflecting the company’s improved financial performance in recent years. The ratings agency affirmed all ratings, including the ’B’ issuer credit rating on the company. This positive outlook suggests a potential rating upgrade within the next 12 months if OPENLANE can reduce and sustain its leverage below 6x and maintain its free operating cash flow (FOCF) to debt above 5%.

OPENLANE’s financial metrics have shown consistent improvement over the past few years, with increased profitability in its digital marketplace and debt repayment. Despite leverage being slightly above 6x at the end of 2024, S&P expects OPENLANE to maintain EBITDA margins above 20% this year, which would support a decrease in debt to EBITDA below 6x and continued strong FOCF to debt above 5%.

The company’s improved operating performance, stronger free cash flow, and debt repayments have strengthened its credit metrics. OPENLANE has grown its digital Marketplace business, especially its dealer volumes. This growth has led to improved profitability in the segment, with EBITDA margins increasing to 7.5% in 2024 from 5.5% the previous year and a loss in 2022. This has uplifted OPENLANE’s consolidated EBITDA, with margins exceeding 20% in 2024.

However, despite the growth of the Marketplace segment, the Finance business still generates over half of OPENLANE’s profitability. Although the Finance segment’s results were lower in 2024 due to a tightening interest margin earned on its floor plan loans, S&P expects its EBITDA to remain steady throughout the forecast period.

S&P forecasts consolidated EBITDA margins to be sustained at around 22% and debt to EBITDA of just below 6x in 2025, with gradual improvement toward the mid-5x area by the end of 2026. FOCF to debt is expected to remain comfortably above 5% annually.

OPENLANE ended 2024 with $540.7 million of total liquidity, composed of balance sheet cash of $143 million and net revolver availability of $397.7 million under its U.S. and Canadian credit facilities. The company has sufficient sources of liquidity to repay its remaining $210 million of June 2025 notes.

Since 2022, OPENLANE has repaid $1.9 billion of debt using proceeds from the sale of its ADESA US physical auction business in 2022, cash flow generation, and its recent sale of the noncore key service business during the fourth quarter of 2024. The company’s commitment to debt repayment, combined with improved Marketplace profitability, has significantly de-leveraged its capital structure over the past few years.

S&P could revise its outlook to stable if the company sustains leverage above 6x or FOCF to debt falls below 5%. This could occur if a larger decline in off-lease volumes strains Marketplace profitability or the Finance segment provisions for credit losses remained elevated. Credit metrics could also be weakened by OPENLANE pursuing aggressive financial policies such as large acquisitions or similar debt-financed activities.

The ratings agency could raise its rating on OPENLANE if leverage can be sustained below 6x with FOCF to debt above 5%. The company could achieve these metrics if it can uphold cost efficiencies in its digital Marketplace business and steady profitability from the Finance segment.

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