(The following statement was released by the rating agency) WARSAW/PARIS, April 30 (Fitch) Fitch Ratings has affirmed UK-based Pendragon plc's (Pendragon) Long- and Short-term Issuer Default Ratings (IDR) at 'B' and its senior secured rating at 'B+'. The Outlook on the Long-term IDR is Stable. KEY RATING DRIVERS: Relationships with Auto OEMs A significant driver of Pendragon's operations and financial performance is driven by its relationships with the various auto OEMs from which it sources vehicles. While a franchise agreement with an OEM gives a retailer territorial rights to sell a certain brand and provides with a stable, and non-cyclical, gross margin, a retailer is also vulnerable to the financial strength and / or strategy of the OEMs. Cost Structure Flexibility Given the low operating margins inherent in the vehicle sales business model, the flexibility of the operating cost structure of Pendragon is important to offset possibly volatile demand dynamics. To this end, the company benefits from mid-range EBITDA margins, and since the downturn of 2008 and 2009, has improved its flexibility. Nevertheless, another sharp downturn in market demand would likely lead to considerable stress on Pendragon's financial profile. UK Auto Market Following the sharp market downturn in 2008 and 2009 in the UK, auto sales have rebounded in the past two years, but still remain considerably below their 2008 peak. Given the sensitivity of earnings to volume movements, the outlook for auto sales remains a key indicator of future performance. Highly Leveraged Capital Structure As well as bank debt and other on-balance sheet instruments such as finance leases, Pendragon has considerable off-balance sheet operating lease obligations, which together totalled GBP546m at end-2013. Fitch also adjusts debt by adding the portion of stock financing provided by third-party institutions (GBP150m at end-2013), as opposed to other manufacturers whose stock financing is not treated as debt. In Fitch's view stock financing mirrors debt in nature, and would likely be replaced by other forms of bank debt were it to stop being available. This adjustment has the effect of raising leverage by around 0.9x. This meant that Fitch-adjusted gross and net leverage ratios at end-2013 were 4.2x and 3.9x, compared with 4.9x and 4.5x at end-2012. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: - FFO adjusted leverage below 3x (FY13: 4.2x) on a sustained basis - FFO fixed charge cover above 2.5x (FY13: 2.1x) on a sustained basis - Free cash flow (FCF) above 1% (FY13: 1.5%) on a sustained basis Negative: Future developments that could lead to negative rating action include: - FFO adjusted leverage above 6x on a sustained basis - FFO fixed charge cover below 1.5x on a sustained basis - Negative FCF on a sustained basis Contact: Principal Analyst Ishani Goonasekera Analyst +44 20 3530 1509 Supervisory Analyst Tom Chruszcz Director +48 22 338 6294 Fitch Polska SA Krolewska 16 00-103 Warsaw Committee Chair Emmanuel Bulle Senior Director +34 93 323 8411 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected]. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, "Corporate Rating Methodology", dated 5 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139 Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828256 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.