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Rating Action:

Moody's affirms Service King's B3 corporate family rating; outlook changed to negative

31 Jan 2020

New York, January 31, 2020 -- Moody's Investors Service, ("Moody's") today affirmed the ratings of Midas Intermediate Holdco II, LLC ("Service King"), including the B3 corporate family rating, and changed the outlook to negative from stable.

"This change in outlook to negative recognizes the weakness in Service King's operating performance, with the result being credit metrics that are well-below the triggers for a downgrade," stated Moody's Vice President Charlie O'Shea. "That said, Moody's believes that management has a strategy that can, if well-executed, reverse the weak operating trends," continued O'Shea. "In addition, the upcoming August 2021 maturity of the term loan is another significant factor, with meaningful progress towards a refinance or extension necessary over the next few months."

Affirmations:

..Issuer: Midas Intermediate Holdco II, LLC

.... Probability of Default Rating, Affirmed B3-PD

.... Corporate Family Rating, Affirmed B3

....Senior Secured Bank Credit Facility, Affirmed B1 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa2 (LGD5)

Outlook Actions:

..Issuer: Midas Intermediate Holdco II, LLC

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Service King's B3 rating reflects its weak credit metrics, with pro forma debt/ EBITDA at the September 2019 LTM of around 8 times and EBIT/interest well below 1 time. Supporting the rating is Service King's solid market position in the highly fragmented collision repair sub-sector, its mutually-beneficial relationships with national and major insurance carriers which represents the vast majority of revenue, and strong industry fundamentals which should support continuing stable demand for its services. However, while demand fundamentals are stable, recent pricing pressure with certain carriers along with higher costs has resulted in an erosion in margins, EBITDA and free cash flow. Leverage and interest coverage are expected to improve such that they approach 7.0 times and 1.1 times respectively over the next 12-18 months should the company's successfully execute its operating efficiency initiatives and the contribution from recent and future store additions should offset labor pressures and support earnings growth. Service King's liquidity profile is adequate, supported by its $131.4 million cash balance as of September 28, 2019, $100 million of which has restrictions as to use, and access to its $100 million revolving credit facility which expires in May 2021. The adequate liquidity is predicated on the expectation that Service King will address well in advance the upcoming August 2021 maturity of its roughly $600 million senior secured Term Loan.

The negative outlook reflects the risks surrounding the speed with and level to which credit metrics will improve, as well as the August 2021 term loan maturity. Given the negative outlook, an upgrade over the near term is unlikely. Over time, ratings could be upgraded if the company is able to drive meaningful revenue and EBITDA growth such that Debt/EBITDA approaches 6.5 times with EBIT/interest sustained materially above 1.25 times. An upgrade would also require the company to maintain at least good liquidity, and the expectation that financial policies will sustain metrics at these levels. Over a shorter horizon, the outlook could return to stable if operating improvements are achieved such that credit metrics begin to generate meaningful positive momentum away from the current downgrade triggers. A stabilization of the outlook would also require addressing the term loan maturity in timely manner. Ratings could be downgraded if "steady state" operating performance does not show signs of stabilization or financial policies become more aggressive such that Debt/EBITDA remains above 7.5 times and EBIT/interest remains below 1.0 times. Ratings could also be downgraded if the company's liquidity profile were to deteriorate for any reason, or if meaningful progress is not made towards addressing the August 2021 term loan maturity in due course.

Service King is exposed to environmental risk as the company is subject to governmental laws and regulations regarding hazardous waste. Service King could be impacted if they are found to be in purported violation of or subject to liabilities under any of these laws or regulations, or if new laws or regulations are enacted that adversely affect the operations, business, reputation, financial condition, or results of operations. Service King was recently fined by the State of California for failure to adhere with hazardous waste regulations. However, the fine was reduced to an immaterial amount, $1.8 million, following Service Kings early adoption of remediation efforts. Service King has put in a place an ongoing training program to ensure that its employees comply with all hazardous waste requirements going forward. Service King's overall corporate governance risk is high given its financial sponsor ownership. Financial strategy and leverage policy are a key concern with sponsor-owned companies, and in the case of Service King, the key risk is that the sponsor's pursuit of an aggressive pace of debt-funded acquisitions, which has increased total funded debt by more than $300 million since 2014, has resulted in an elevated leverage profile that may limit the company's financial flexibility in the event that earnings deteriorate from current levels.

Headquartered in Richardson, Texas, Midas Intermediate Holdco II, LLC is a leading provider of vehicle body repair services with annual revenue of over $1.2 billion. The company operates under the Service King brand name and operated 343 locations in 24 states as of September 28, 2019.

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Charles O'Shea
VP - Senior Credit Officer
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

Margaret Taylor
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.
© 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.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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