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