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Rating Action:

Moody's assigns B1 rating to American Residential Services LLC credit facility, B2 CFR; outlook stable

23 Sep 2020

New York, September 23, 2020 -- Moody's Investors Service (Moody's) assigned a B2 Corporate Family Rating and a B2-PD Probability of Default Rating to American Residential Services L.L.C. (New) and a B1 rating to the company's proposed first lien senior secured bank credit facility. The outlook is stable.

The credit facility, consisting of a $470 million first lien term loan and $75 million revolver, along with a $130 million second lien term loan (not rated), will be used to fund the purchase of the equity of American Residential Services L.L.C. and repay all outstanding debt. Existing private equity sponsor, Charlesbank Capital Partners, entered into a definitive agreement to sell 55% of American Residential Services to GI Partners and will retain a 45% ownership stake. The current ratings of American Residential Services L.L.C. will be withdrawn at the close of the transaction.

The assignment of the B2 Corporate Family Rating reflects the company's high leverage following the transaction. Moody's estimates that leverage will be approximately 6.5 times by the end of 2020. However, Moody's expects credit metrics to improve as the company realizes benefits of recent cost reduction initiatives.

The B1 rating on the first lien revolver and term loan reflect the benefit of loss absorption provided by a meaningful amount of second lien term debt.

The following rating actions were taken:

Assignments:

..Issuer: American Residential Services L.L.C. (New)

.... Corporate Family Rating, Assigned B2

.... Probability of Default Rating, Assigned B2-PD

....$75 million 1st Lien Revolving Credit Facility due 2025; assigned B1 (LGD3)

....$470 million 1st Lien Term Loan due 2027; assigned B1 (LGD3)

Outlook Actions:

..Issuer: American Residential Services L.L.C. (New)

....Outlook, Assigned Stable

RATINGS RATIONALE

American Residential Services L.L.C. (New)'s B2 Corporate Family Rating reflects the company's high leverage, integration risk associated with its growth through acquisition strategy, presence in a fragmented market with intense competition, and industry seasonality. The rating also reflects the company's scale that provides efficient access to the supply chain, geographic diversity, and the non-discretionary nature of its services.

The rating also incorporates Moody's consideration of governance risks associated with the private equity ownership of the company and the lack of an independent board. Further, Moody's views the initial financial policies as aggressive given the high pro forma leverage and the expectation that the company will continue to have an active acquisition strategy.

The stable outlook reflects Moody's expectation that the company will grow organically and through acquisitions in a disciplined manner. Moody's also expects the company to improve its operating margin through cost controls and maintain a good liquidity profile.

Moody's expects the company to have a good liquidity profile over the next 12 to 18 months characterized by availability under the proposed $75 million revolving credit facility. Moody's also expects that the company will generate free cash that will be available to repay any seasonal revolver borrowings. Covenants are expected to include a springing net leverage covenant applicable to the revolver. There are no maintenance financial covenants on the term loan. We don't expect the company to trigger the test of the covnant on the revolver.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO A DOWNGRADE

• A decline in revenues and EBITA margins

• Failure to reduce debt from the pro forma 2020 level of 6.5x or improve EBITA to interest to exceed 2.0x.

• A weakening of liquidity

• More aggressive financial policies, including debt funded acquisitions and / or shareholder distributions.

FACTORS THAT COULD LEAD TO AN UPGRADE

• An increase of EBITA margins to 15% or greater

• Sustained debt to EBITDA of 5.0x or lower

• Sustained retained cash flow to net debt near 15%

• Maintenance of good liquidity

American Residential Services L.L.C., headquartered in Memphis, Tennessee, is one of the largest providers of HVAC, plumbing, sewer, drain cleaning, and energy efficiency services in the United States. The company serves both residential and commercial customers through a network of 71 service center locations in 23 states. Charlesbank Limited Partnership bought a majority of the equity interests in ARS in April 2014 and as a result of the proposed transaction will own a 45% stake with GI Partners owning the remaining 55% (pre-management and existing lender investment). In the last twelve months ended June 30, 2020, the company generated over $1 billion in revenue.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Scott Manduca
Vice President - Senior 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

Dean Diaz
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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