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Rating Action:

Moody's assigns B2 CFR to AAG FH LP; outlook is stable

17 Jun 2019

$225 million of new debt rated

Toronto, June 17, 2019 -- Moody's Investors Service ("Moody's") assigned ratings to AAG FH LP ("AAG"), consisting of a B2 corporate family rating (CFR), B2-PD probability of default rating, and a B3 rating to its proposed senior unsecured notes, with AAG FH FinCo Inc. as a co-issuer. The outlook is stable. This is the first time Moody's has assigned ratings to the company.

AAG is in the debt market to raise new $225 million (C$300 million equivalent) senior unsecured notes due in 2024. Net proceeds will be used to repay outstanding borrowings under its existing bank facilities, refinance existing preferred equity interests and to buy out minority investors.

Ratings Assigned:

Corporate Family Rating, B2

Probability of Default Rating, B2-PD

$225 million senior unsecured notes due 2024, B3 (LGD5)

Outlook:

Assigned as Stable

RATINGS RATIONALE

AAG's B2 CFR is constrained by: (1) Moody's expectation that leverage (adjusted Debt/EBITDA) will be sustained around 6x in the next 12 to 18 months (pro forma 6.1x for LTM Q1/2019) as free cash flow may be used for acquisitions; (2) execution risks around its car dealership acquisition growth strategy; (3) small revenue size relative to rated US auto retailing peers; and (4) likelihood that slowing macroeconomic conditions could impact new vehicle sales. However, the company benefits from: (1) favorable positions in its chosen markets (Ontario, Alberta, and Oregon); (2) resilient business model, with good contributions from parts and service and finance and insurance segments, which reduce reliance on new vehicle sales; (3) good brand diversity; and (4) EBITDA margin that is stronger than those of higher rated peers.

The B3 rating on AAG's $225 million senior unsecured notes due in 2024 is one notch below the B2 CFR primarily because of secured obligations (revolving operating facility, revolving floorplan facilities and wholesale leasing facility) ranking above them in the capital structure.

AAG has adequate liquidity. Sources exceed C$165 million while it has about C$8 million of debt repayment in the next four quarters. The company's liquidity consists of C$8 million of cash when the transaction closes, Moody's expected free cash flow around C$30 million through the next four quarters, and about C$130 million of availability under its revolving operating facility, floorplan facilities and wholesale leasing facility. AAG's facilities are subject to financial covenants and Moody's expects cushion of more than 20% through the next four quarters. AAG has limited ability to generate liquidity from asset sales.

When the transaction closes, AAG will have a new uncommitted C$7.5 million revolving operating facility, a new revolving floorplan facility that totals C$268 million, a new wholesale leasing facility that totals C$30 million, and existing floorplan facilities provided by Toyota Motor Credit Corporation and Honda Canada Finance Inc., with limits of $44.5 million and C$4 million respectively. All the facilities are due on demand, but as they are all secured with vehicle inventory and as the lenders and OEMs have vested interests in the success of the dealerships, Moody's does not expect a demand payment to be made.

The stable outlook reflects Moody's expectation that the company will maintain at least adequate liquidity and will manage its acquisition growth strategy such that leverage will not be sustained above 6x.

A rating upgrade could be considered if the company sustains adjusted Debt/EBITDA below 5x (pro forma 6.1x for LTM Q1/2019) and EBIT/Interest above 2.5x (pro forma 2x for LTM Q1/2019). A rating downgrade could occur if the company sustains adjusted Debt/EBITDA towards 7x (pro forma 6.1x for LTM Q1/2019) and EBIT/Interest below 1x (pro forma 2x for LTM Q1/2019). A downgrade could also occur if liquidity worsens, possibly due to negative free cash flow generation on a consistent basis.

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.

AAG FH LP, headquartered in Toronto, Ontario, Canada, is a privately-owned auto retailer with 22 dealerships across North America. Revenue for the fiscal year ended December 31, 2018, pro forma for full year contribution from acquisitions, was about C$1.2 billion. When the transaction closes, AAG's CEO will hold 100% ownership and voting power of the company.

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.

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

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.

Peter Adu, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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