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Rating Action:

MOODY'S ASSIGNS B3 RATING TO AMERICAN ROCK SALT COMPANY LLC'S SR. SECURED NOTES; OUTLOOK STABLE

24 Feb 2004
MOODY'S ASSIGNS B3 RATING TO AMERICAN ROCK SALT COMPANY LLC'S SR. SECURED NOTES; OUTLOOK STABLE

Approximately $100 Million of Long-Term Debt Affected

New York, February 24, 2004 -- Moody's Investors Service assigned a B3 rating to American Rock Salt Company LLC's (ARSC) proposed senior secured notes. The ratings primarily reflect the company's high leverage, its relatively short operating history, and the risks associated with operating only one mine, selling one commodity product (highway deicing rock salt), and serving a narrow geographic region. The rating outlook is stable. This is the first time Moody's has rated the company. The following summarizes the ratings activity:

Ratings assigned:

$100 million guaranteed senior secured notes due 2014 -- B3

Senior Implied -- B3

Senior Unsecured Issuer Rating -- Caa1

Speculative Grade Liquidity Rating -- SGL-3

ARSC will use proceeds from the proposed senior secured notes and a new credit facility (unrated) to refinance construction loans and to fund a cash distribution to its owners. Of the distribution amount, $32 million will first be used to obtain a letter of credit to secure obligations related to pending litigation with the contractors that constructed the ARSC mine.

The ratings reflect ARSC's significant pro forma leverage with debt to EBITDA of 4.9 times for the LTM ended December 31, 2003 (adjusted for the financing and including seasonally higher revolver borrowings), negative pro forma equity, uncertainty regarding the potential outcome of litigation with the contractors, and the magnitude of the contemplated owner distribution in relation to the size of the company. The ratings also consider the seasonality of revenues (75% of revenues are generated between December and March), inherent mining and geological risks, and a limited operating history given that the fiscal year ending September 30, 2003 represented the first period of full production. The ratings are supported by ARSC's strong market share; favorable meteorological conditions in the region the company serves; the cost advantages associated with operating a new mine; modest capital expenditure requirements; the diversity of its customer base with no single customer accounting for more than 5% of revenues; and the benefit of low taxes due to percentage depletion allowances. The ratings also derive support from ARSC's strong EBITDA margins of nearly 30% over the LTM period; its efficient distribution network; and substantial barriers to entry, including the extensive time required for planning and obtaining zoning approval for a new rock salt mine, and the substantial amount of capital required for the acquisition of mineral rights and mine construction.

The notching of ARSC's senior secured notes (rated B3) at the level of the senior implied rating, despite their contractual subordination to the senior secured term loan and revolver, reflects Moody's belief that recovery in a distressed scenario could be close to par. ARSC is an operating company and holds substantially all the assets of the company. The indenture for the senior secured notes will include standard limitations on dividends, restricted payments, and additional indebtedness.

The stable outlook reflects Moody's expectation that ARSC will maintain the current volume of business and that the company will continue to generate positive free cash flow. The ratings could be lowered if the company's operating performance deteriorates, if cash flow from operations significantly decreases, or if litigation liabilities are worse than anticipated. The ratings could be raised if the company generates good free cash flow and reduces debt, while controlling or resolving contractor litigation issues.

ARSC operates one rock salt mine (the Hampton Corners Mine), which is the largest mine of its type in the U.S. ARSC was formed in 1997 to acquire the assets associated with the new mine, which Akzo Nobel designated to replace its aging Retsof salt mine. The ARSC mine became operational in December 2001 and fiscal 2003 represented the first year of full production capacity. The ARSC mine has a base production capacity of 3 million tons per year with 1.5 million tons of additional swing capacity. The company's network of 21 distribution centers primarily serves the Buffalo, Syracuse, Rochester, and Erie (PA) areas where average annual snowfall exceeds 100 inches. The company's primary customers are governmental agencies and municipalities. Supply contracts with customers are typically rewarded through an annual bidding process.

The ratings reflect risks associated with the fact that ARSC derives all its cash flow from one asset, the Hampton Corners Mine. Moody's is concerned that potential issues, such as equipment outages, labor disruption, or geological problems, could adversely affect the company's ability to meet its financial obligations. For instance, the Retsof mine (located 7 miles from ARSC's mine and operating in the same salt deposit) flooded in 1994 and subsequently closed. Nevertheless, the company believes that its mine is in a location that is less susceptible to flooding than Retsof (which operated over 110 years prior to its closure) and that its operations are being conducted in a more conservative matter. The ratings also reflect the effect of weather conditions on demand for road salt deicing as the severity and frequency of winter storms can result in earnings fluctuations, and the seasonal nature of the business. The ratings also reflect the potential impact of overall economic and competitive conditions on the prices of deicing salt, which is the company's only product.

The ratings also recognize litigation risks, predominantly arising from a dispute with ARSC's contractor (the "EPC Contractor"), who was originally hired to construct the company's mine and surface facilities. The EPC Contractor has made several claims against ARSC, including breach of contract, fraud, and mistake resulting in a voidable contract. The EPC contractor has sought compensatory and punitive damages. However, subsequent motions by ARSC to dismiss certain claims were granted in December 2002 and the only EPC Contractor claim that remains is breach of contract. The punitive damages were tied to certain of the dismissed claims and hence are mooted. The EPC Contractor is currently seeking $27 million of compensatory damages. ARSC has not recorded an accrual for these claims. The ratings are recognize the fact that ARSC will obtain a $32.1 million letter of credit at the closing of its new bank facility in order to secure its obligations relating to a surety bond for 110% of the mechanics lien filed by the EPC Contractor in accordance with procedures established by the New York State Lien Law. ARSC has not provided for litigation losses greater than $32.1 million.

The ratings also take into account ARSC's substantial pro forma leverage. Adjusted for the transaction, the company had total debt of $155 million, which represented almost 1.4 times FY2003 revenues of $95 million. Pro forma debt to EBITDA was 4.9 times for the LTM ended December 31, 2003. Additionally, pro forma debt to capitalization stood at 138% as of year-end. These metrics are based on seasonally high pro forma revolver borrowings of $22 million. ARSC projects that average yearly borrowings under the revolver will be approximately $5 million and that the revolver will be fully paid down by the closing of the offering.

Moody's assigned ARSC a speculative grade liquidity rating of SGL-3. The SGL-3 rating reflects the company's adequate liquidity and Moody's expectation of reasonable free cash flow, its favorable debt maturity profile, and flexibility under the financial covenants for the company's new credit facility. Under the credit facility, ARSC will be required to comply with a fixed coverage test and a bank debt to EBITDA test.

The SGL rating is tempered by the company's modest cash balance, significant seasonality, and limitations regarding the size and unused availability of its new credit facility as well as the lack of alternative sources of liquidity. ARSC's only external source of liquidity will be its $30 million revolving credit facility. Usage under this facility is expected to peak in December or January. Pro forma borrowings were $22 million as of December 31, 2003. Revolver borrowings are dictated by a borrowing base formula, which will limit availability in the summer months when working capital levels are declining.

Headquartered in Mount Morris, New York, ARSC is a leading producer of highway deicing rock salt. The company generated revenues of $95 million over the LTM ended December 31, 2003.

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
David Neuhaus
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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