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Rating Action:

Moody's affirms PowerTeam's B3 CFR following dividend recapitalization; outlook stable

13 Feb 2018

New York, February 13, 2018 -- Moody's Investors Service (Moody's) affirmed PowerTeam Services, LLC's (PowerTeam) B3 Corporate Family Rating and B3-PD Probability of Default Rating following the company's announced plan to pursue a dividend recapitalization. Concurrently, Moody's assigned B2 ratings to the company's proposed $60 million first-lien revolver and $595 million first-lien term loan, and a Caa2 rating to its proposed $135 million second-lien term loan. PowerTeam plans to utilize the term loan proceeds to refinance existing debt and fund a $112 million dividend to the company's private equity sponsor Kelso & Company and other shareholders. The rating outlook is stable.

"The company is taking advantage of its improved performance thanks to the storm revenue to refinance its current capital structure, while also paying out a dividend," according to Inna Bodeck, Lead Analyst with Moody's. The transaction is credit negative because it increases debt and cash interest expense at a time when cost pressures and delays in certain customer orders are weakening margins of the electrical business outside of storm-related work. "The overall increase in leverage is modest and we believe that long-term industry tailwinds and strength in the gas segment will continue to support the B3 Corporate Family Rating," added Bodeck.

Moody's affirmed the ratings and maintained a stable rating outlook due to Moody's expectations that the company will continue to benefit from the favorable industry dynamics, including aging infrastructure and outsourcing of maintenance work by gas and electric utilities. Performance will continue to see some volatility due to the timing of customer orders including the commencement of work, but the credit metrics will continue with Moody's expectations for the B3 rating category given the company's operating profile. The refinancing also favorably extends the maturity profile.

Ratings for the existing first-lien revolver and term loan, as well as the second-lien term loan, remain unchanged but will be withdrawn in conjunction with their refinancing following closing of the proposed new debt issuances.

Moody's took the following rating actions on PowerTeam Services, LLC:

Ratings Affirmed:

Corporate Family Rating at B3

Probability of Default Rating at B3-PD

Ratings Assigned:

$60 million Gtd Senior Secured First-Lien Revolver, B2 (LGD3)

$595 million Gtd Senior Secured First-Lien Term Loan, B2 (LGD3)

$135 million Gtd Senior Secured Second-Lien Term Loan, Caa2 (LGD5)

Outlook remains stable

RATINGS RATIONALE

PowerTeam's B3 CFR reflects its modest scale, lack of geographic and end-market diversification versus other rated engineering and construction companies, significant customer concentrations, and event risk under private equity ownership. The company is primarily focused on providing services to gas and electric utilities and its operations are concentrated in 22 states (the southeastern and central part of the US). The company has no exposure to other end-markets and little exposure to other geographic regions, creating dependence on local economic and competitive conditions. Additionally, work order releases can be sporadic, as they were in 2016 and 2017, causing inefficient utilization of labor and assets and margin compression. This level of operating volatility coupled with increased financial risk from the recent dividend recap (Moody's pro-forma for transaction Debt/EBITDA of 5.5x at close, expected to gravitate to 5.8x towards the end of 2018 due to the roll-off of storm profits) positions the company weakly in the B3 rating category. However, Moody's expectation for a successful restructuring (including systems upgrades, processes centralization) of the company's electrical segment, a favorable view of the long-term tailwinds benefiting the industry, and PowerTeam's adequate liquidity continue to support the rating.

The stable rating outlook reflects Moody's expectation that debt-to-EBITDA will increase to a high 5x range and liquidity will be adequate over the next twelve to eighteen months. This reflects Moody's view that revenue and earnings will decline in the mid-single digits range in 2018 as abnormally high storm revenue in 2017 rolls off and PowerTeam executes a restructuring of its electrical segment.

The ratings could experience upward pressure if the company improves margins, has funds from operations (cash flow from operations before working capital changes) above 15% of outstanding debt, generates comfortably positive free cash flow, and sustains its debt-to-EBITDA leverage ratio below 5.0x.

Negative rating pressure could develop if deteriorating operating results, debt financed acquisitions or shareholder dividends result in funds from operations (cash flow from operations before working capital changes) declining below 10% of outstanding debt or the debt-to-EBITDA leverage ratio remaining above 6.0x. A deterioration in liquidity, including a reduction in cushion under financial covenants, could also result in a downgrade.

The principal methodology used in these ratings was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Cary, North Carolina, PowerTeam Services, LLC is a domestically focused utility transmission and distribution infrastructure services company, offering natural gas and electric utilities a wide array of services that help maintain and upgrade their infrastructure and operate more efficiently and reliably. The company generated revenues of less than $1 billion for the last twelve months ended September 30, 2017. Kelso & Company acquired majority ownership of PowerTeam in 2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Inna Bodeck
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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