ATS Corporation's outlook changed to stable from positive

Moody’s Ratings affirmed ATS Corporation’s Ba3 corporate family rating but revised its outlook from positive to stable, citing expectations that the company's debt to EBITDA will remain above 3.5x over the next 12 to 18 months due to a planned transportation segment transition and an EV customer issue in FY25. Despite current leverage around 4.5x, Moody's noted strengths including strong revenue visibility, a healthy backlog, and good liquidity, anticipating deleveraging to approximately 3.8x by FY26 and 3.5x by FY27. The stable outlook reflects Moody's expectation of ATS returning to organic growth and achieving significant deleveraging, with potential for an upgrade if debt to EBITDA consistently falls below 3.5x or a downgrade if it remains above 4.5x.

Analysis

Moody's has affirmed ATS Corporation’s Ba3 corporate family rating but revised its outlook to stable from positive, signaling a longer-than-anticipated deleveraging period. The primary driver for the outlook change is the expectation that debt-to-EBITDA will remain above 3.5x over the next 12 to 18 months, a consequence of the planned transition away from its transportation segment and challenges related to an EV customer in fiscal year 2025. Despite current leverage standing at a high 4.5x, the rating is supported by strong underlying fundamentals, including a trailing twelve-month book-to-bill ratio well above 1x and a healthy backlog that underpins expectations for a return to organic growth. The company maintains a strong liquidity position with approximately C$1.2 billion in total sources and has a proven track record of deleveraging post-acquisitions. Moody's projects leverage will improve to around 3.8x by the end of FY2026 and reach the 3.5x target in FY2027. However, constraints remain, including the company's relatively small scale, the cyclicality of its industry, and risks associated with its active M&A strategy.

Key Decisions for Investors

• Investors should view the stable outlook as a signal of a prolonged deleveraging timeline, requiring patience as the company works towards its 3.5x debt-to-EBITDA target by FY2027.
• Monitor key performance indicators such as the book-to-bill ratio and free cash flow generation as leading indicators for the company's return to organic growth, and treat a sustained debt-to-EBITDA ratio above 4.5x as a critical downgrade trigger.
• The investment case is heavily dependent on management's execution of the strategic pivot from the transportation segment; any further setbacks in this area or with the EV customer issue could materially delay the deleveraging plan and pressure the valuation.
• Given the active acquisition strategy and associated releveraging risks, any significant new M&A activity should be carefully evaluated for its potential to disrupt the company's balance sheet repair trajectory.