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Rating Action:

Moody's assigns CoolSys's first-time CFR of B3; first lien credit facilities rated B3

13 Nov 2019

New York, November 13, 2019 -- Moody's Investors Service ("Moody's") assigned first-time ratings for CoolSys, Inc. (CoolSys),including a B3 Corporate Family Rating (CFR) and a B3-PD Probability of Default Rating. Concurrently, Moody's assigned B3 ratings to the company's proposed $35 million senior secured first lien revolver, $235 million senior secured first lien term loan, and $40 million senior secured first lien delayed draw term loan. The outlook is stable.

CoolSys will utilize proceeds from the proposed term loan to refinance the company's existing debt, including a bridge loan from private equity sponsor Ares Management which along with a sizable equity contribution, funded the March 2019 acquisition of CoolSys. The delayed draw term loan availability expires in 24 months, and is subject to a pro forma first lien net leverage ratio test not to exceed closing date level. Proceeds from the delayed draw term loan can be used for permitted acquisitions, other permitted investments, and for capital expenditures, or to repay revolver borrowings incurred to fund the foregoing transactions. All ratings are subject to Moody's review of final documentation.

"The B3 CFR reflects CoolSys' position as a leading provider in the highly fragmented commercial refrigeration-HVAC services sector, as well as the company's relative small scale and aggressive growth strategy through acquisitions," said Oliver Alcantara, Moody's lead analyst for CoolSys. "We expect free cash flow generation will continue to be pressured by on-going acquisition related charges, and we project organic revenue growth by low single digit over the next 12-18 months," added Alcantara.

Assignments:

..Issuer: CoolSys, Inc.

.... Corporate Family Rating, Assigned B3

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

....Senior Secured First Lien Revolving Credit Facility, Assigned B3 (LGD3)

....Senior Secured First Lien Term Loan, Assigned B3 (LGD3)

....Senior Secured First Lien Delayed Draw Term Loan, Assigned B3 (LGD3)

Outlook Actions:

..Issuer: CoolSys, Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

CoolSys' B3 CFR reflects the company's strong market position and recurring revenue base counterbalanced by its small scale and aggressive growth strategy through acquisitions. CoolSys is a leading provider of refrigeration and HVAC services in the US, primarily to grocery, retail, and foodservice end markets. The sector is highly fragmented, and CoolSys has gained market share mainly by being a consolidator over the past few years, a trend that will continue. Pro forma for the proposed refinancing debt/EBITDA leverage is high at 6.0x for the twelve months period ending September 29, 2019. Moody's leverage calculation excludes the $40 million delayed draw term loan and gives full year credit for recently closed acquisitions. Moody's projects the company will reduce debt-to-EBITDA leverage to around 5.6.x by the end of fiscal 2020, mainly through earnings growth, driven by low single digit organic revenue growth.

CoolSys' broad geographic reach coupled with its status as a "one-stop-shop" is a competitive advantage over smaller local or regional players, because it allows the company to service large national or super regional customers. Furthermore, 54% of revenue is generated from recurring maintenance service contracts, and CoolSys' longstanding relationships with its key customers with high retention rates of 96%, supports revenue stability. However, the rating also reflects the company's small scale with annual revenue under $500 million, and its aggressive growth strategy through debt funded acquisitions. Furthermore, CoolSys's roll-up strategy will continue to pressure free cash flows because of on-going cash charges related to acquisitions. The rating also reflects the company's exposure to cyclical client spending, customer concentration highlighted by its top 10 customers generating a material portion of the revenue, and aggressive financial strategies under private equity ownership. The company's liquidity is adequate, characterized by minimal cash balances, and access to its $35 million revolver (undrawn at close) that provides flexibility to manage seasonal operating cash flow volatility.

The stable outlook reflects Moody's expectation that the company will grow revenue by low single digits organically while gradually improving profit margins and credit metrics over the next 12-18 months. Moody's also expects the company will continue executing its acquisition strategy prudently with minimal disruption both operationally and financially, and that the company will generate positive free cash flow on an annual basis by fiscal the end of fiscal 2020.

Ratings could be upgraded if the company meaningfully increases its scale and customer diversification while debt/EBITDA is sustained below 5.5x and free cash flow/debt above 5%. In addition, a ratings upgrade will require financial strategies that support credit metrics at those levels, and good liquidity. Ratings could be downgraded if revenue growth slows materially, profitability deteriorates or the company loses a major customer such that debt/EBITDA is above 6.5x or EBITA/interest is below 1.0x. Ratings could also be downgraded if liquidity weakens for any reason, if the company fails to generate free cash flow on an annual basis by 2020, or the company's financial strategies become more aggressive, including undertaking a large debt-financed acquisition or dividend distribution.

Preliminary terms in the company's first lien credit agreement indicate that CoolSys has incremental facility capacity of up to the greater of a fix amount or 100% of consolidated pro forma adjusted EBITDA over the prior four quarter period, plus an additional amount subject to a pro forma first lien net leverage ratio test. Only wholly-owned subsidiaries must provide guarantees; partial dividends of ownership interests could jeopardize guarantees. The credit agreement also permits the designation of unrestricted subsidiaries and the transfer of assets to unrestricted subsidiaries, subject to the limitations and baskets in the negative covenants. In addition, the asset-sale proceeds prepayment requirement has leverage-based step-downs, and is eliminated if the first lien net leverage ratio is at least one turn below the closing date first lien net leverage ratio, with the right to reinvest or commit to reinvest within 180 days.

The above are proposed terms and the final terms of the credit agreement can be materially different.

Headquartered in Brea, California, CoolSys is a leading independent provider of HVAC and refrigeration services in the US, mainly for grocery, retail, foodservice, convenience, and other end markets. The company is majority owned by private equity sponsor Ares Management. Annual revenue pro forma for recent acquisitions is less than $500 million.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. 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.

Oliver Alcantara
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

John E. Puchalla, CFA
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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