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04 Nov 2003
MOODY'S ASSIGNS FIRST TIME PUBLIC RATINGS TO QUANTA SERVICES, INC.
Approximately $250 Million of Debt Securities Affected
New York, November 04, 2003 -- Moody's Investors Service assigned Quanta Services, Inc.
a B1 senior implied rating, a Ba3 rating on its senior secured credit
facilities, and a B2 issuer rating. This is the first time
Moody's has assigned public ratings to Quanta Services, Inc.
(Quanta), and the rating outlook is stable.
The stable rating outlook reflects Moody's expectations that Quanta
will maintain capital structure discipline while pursuing expansion opportunities
and that excess cash flow will be used principally to delever the balance
The ratings incorporate Quanta's short history in its current configuration,
the poor operating performance and credit erosion of the past two years,
the financial and integration risks that accompany an aggressive expansion
strategy, the large (albeit reduced) goodwill exposure, and
concerns over the quality of the accounts receivable exposure.
At the same time, the ratings acknowledge Quanta's size and
scale within its industry, favorable industry dynamics, solid
free cash flow generating ability, enhanced liquidity as a result
of the recent convertible debt offering, strong customer relationships,
and appealing growth opportunities.
The new ratings assigned are listed below:
Ba3 rating on the $200 million senior secured bank credit facility
B1 senior implied rating
B2 senior unsecured issuer rating
Although Quanta was formed in 1997, it did not begin to take on
its current configuration, i.e., as a nationwide
provider of specialized contracting services with a $1.5
billion to $2 billion annual revenue run rate, until 2000,
and for two of the three subsequent years it has been unprofitable or
marginally profitable. Given Quanta's limited history as
a company with national coverage, the efficacy of its acquisition
strategy may not be fully proven. The company is still in a transitional
phase, which will necessarily include integration challenges.
As Quanta seeks additional companies to acquire, integration risks
may continue to grow. For the foreseeable future, acquisitions
will likely be financed with a larger proportion of debt, as the
company's stock price is well off its highs of several years ago.
Consequently, financial leverage could remain under pressure.
Although the company currently has a nationwide presence, there
are a number of gaps in its geographic coverage that could still be filled,
offering additional growth opportunities for some time.
As a result of weakness in nonresidential construction, a shakeout
in the telecommunications sector, some unpleasant surprises in the
cable TV industry, the electric power industry's being rocked
by energy trading scandals, and the time and costs expended in defending
against an unwanted takeover attempt, Quanta has had to weather
two difficult years. Revenues declined, writeoffs and losses
were taken, and credit metrics deteriorated. Pro forma for
the recent $270 million convertible subordinated debt offering
(which is not rated by Moody's) and the proposed new senior secured
credit facility, Quanta's debt/capitalization and debt/EBITDA
ratios as of the trailing twelve months ended June 30, 2003 were
44% and 4.7x, respectively. This compares to
roughly 30% and 1.9x at year-end 2001. It
is likely to be well into 2004 before the company starts to repair these
and other financial ratios in any meaningful sense. However,
despite the weakness in its markets, Quanta has been able to generate
strong free cash flow in 2001 and 2002 and will likely be free cash flow
positive in 2003 as well. As a percentage of total debt,
Quanta's free cash flow in this three year period has ranged/will
range between 18% and 25%.
Although goodwill has been reduced as a result of two large write-offs,
the remaining goodwill balance of nearly $400 million still constitutes
a significant proportion (more than 27%) of assets. If some
of the 85 entities acquired by Quanta from 1997 to 2002 continue to underperform,
there may be additional write-off potential.
Of the 20 largest bankruptcies in history, seven occurred in 2002,
and three of them were Quanta's customers. In addition,
a number of other customers in the telecom and cable TV industries became
insolvent, resulting in significant write-offs in 2001 and
2002. Although the company has set up reserves for some of its
shakier counterparties, it still retains meaningful exposure to
weaker credits. Separately, but in a related vein,
accounts receivable turnover remains over 85 days. Somewhat mitigating
this, however, is that Quanta has assembled an attractive
roster of customers with long-standing relationships. Its
top 20 customers have been with the company or its predecessors for an
average of 23 years, and two large customers have been clients for
On the plus side, Quanta is a leading provider of specialized contracting
services to the electric power, gas, telecommunications,
and cable television industries, possessing size, scale,
and covering a national footprint. The dynamics of the industries
that the company serves are favorable, as utilities, cable
television, and telecommunications companies generally appear to
view favorably the increased outsourcing of their network service requirements.
This permits these companies to concentrate on core competencies and frees
up their capital and management time to pursue additional growth opportunities
in an increasingly deregulated environment.
The proceeds from the recent $270 million convertible subordinated
debt offering as well as the Term Loan B portion of the new senior secured
credit facilities were and will be used to refund privately placed senior
notes, replace an existing bank credit facility, back letter
of credit issuance, and add to corporate cash levels, leaving
the company significantly more liquid than it has been in some time.
The $200 million senior secured credit facilities will consist
of a $50 million, four-year revolver that will be
undrawn at closing and a $150 million, 4 1/2-year
Term Loan B which will act as a pre-funded letter of credit facility.
Initially, $95 million of the Term Loan B will be used to
collateralize letters of credit, with the remaining $55 million
added to corporate cash coffers. The rating on the secured bank
credit facilities was set at one notch above the senior implied rating
because of the strength of the security package. Both the revolver
and Term Loan B will be secured by all of the company's assets,
the book value of which aggregated approximately $1.4 billion
as of June 30, 2003, and by a pledge of 100% of the
capital stock of domestic subsidiaries and 65% of the capital stock
of foreign subsidiaries. The two facilities will be guaranteed
by all of Quanta's domestic subsidiaries as well.
Headquartered in Houston, Texas, Quanta Services, Inc.
is a leading provider of specialized contracting services, offering
end-to-end network solutions to the electric power,
gas, telecommunications, and cable television industries.
Revenues and EBITDA in 2002 were $1.75 billion and $69
Joseph A. Snider
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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