New York, May 12, 2021 -- Moody's Investors Service, ("Moody's") assigned
a B2 rating to American Rock Salt Company LLC's ("ARS")
new $470 million first lien term loan and a Caa1 rating to the
new $100 million second lien term loan. At the same time,
Moody's affirmed the B2 Corporate Family Rating (CFR) and the B2-PD
probability of default rating. The rating for the existing first
lien term loan will be withdrawn upon repayment. The ratings outlook
is negative.
"The change in the outlook to negative reflects the company's decision
to pursue a debt- financed recapitalization, in part,
to make a significant distribution to shareholders with the resulting
increase in leverage materially constraining its ability to maintain a
credit profile appropriate for the B2 rating during mild winters,"
said Botir Sharipov, Vice President and lead analyst for American
Rock Salt.
Assignments:
..Issuer: American Rock Salt Company LLC
....Senior Secured 1st Lien Term Loan,
Assigned B2 (LGD3)
....Senior Secured 2nd Lien Term loan,
Assigned Caa1 (LGD6)
Affirmations:
..Issuer: American Rock Salt Company LLC
.... Corporate Family Rating, Affirmed
B2
.... Probability of Default Rating,
Affirmed B2-PD
Outlook Actions:
..Issuer: American Rock Salt Company LLC
....Outlook, Changed To Negative From
Stable
RATINGS RATIONALE
The rating affirmation reflects the company's continued and successful
efforts to improve operating performance, increase productivity
and efficiency, which along with higher average selling prices,
have led to margin expansion and improved profitability over the last
few years notwithstanding a challenging calendar year 2020. The
B2 CFR reflects ARS's limited scale with a single mine, lack
of business diversity and weather-dependent business model that
results in volatile credit metrics and cash flow generation. The
rating is supported by the company's sector leading operating margins,
highly variable cost structure, typically strong cash flow from
operations and low capital expenditures partially offset by a dividend
policy that has historically led to significant shareholder distributions.
Factors that further support the rating are high barriers to entry in
rock salt mining industry and cost advantages in the company's primary
markets in western and central New York and Pennsylvania due to favorable
access to truck and rail transportation, as well as operating one
of the lowest cost and the newest salt mines in the United States.
The rating also reflects ARS's adequate liquidity and expectations
that the owners would support the company during periods of exceptionally
weak snowfall (e.g. two or more consecutive warm winters).
As a part of transaction, ARS will transfer and consolidate NOMI
Holder LLC and other related entities, previously owned by the holding
company, into the borrower group at the OpCo level, eliminating
rent payments and royalties historically paid by ARS, increasing
collateral and providing a small uplift to EBITDA. While ARS paid
down a significant portion of debt since the last dividend recapitalization
in 2011, the proposed $203 million distribution to the holding
company funded by new debt and $40 million in balance sheet cash
will increase its debt and materially reduce the financial flexibility
required to withstand potentially high variability in winter conditions.
A mild 2019-2020 winter not only led to a drop in deicing volumes
in FY2020, but also left municipal customers with elevated inventories,
reducing solicited volumes and prices during the last bidding season.
Customers' elevated inventory levels and a light start to the 2020-2021
winter led to a 35% y-o-y decline in tonnage sold
in the December quarter, causing leverage to rise to 6.9x
for LTM December 2020 from 3.7x for LTM December 2019. While
January weather was near average, February's substantial and frequent
snowfall and consistently below freezing temperatures have likely reduced
government and commercial customer inventories, and have resulted
in a significant increase in tonnage sold and revenues during the March
quarter. YTD for FY 2021, ARS tonnage sold has increased
6.6% y-o-y, resulting in EBITDA increasing
in the March 2021 period and leverage declining as compared to the LTM
December 2020 period.
Moody's estimates that ARS's leverage in FY2021 (September
year-end) will remain in the range of 6.5-7x.
Assuming average 2021-2022 winter conditions and that ARS will
use the majority of anticipated free cash flow for debt repayment,
Moody's expects adjusted debt/EBITDA to decline to 6-6.5x
by the end of FY2022. However, should the markets the company
serves experience below-average winter conditions, leverage
could be well in excess of 7.5x in FY2022, which is above
the current downgrade trigger. The company is expected to remain
modestly free cash flow positive during mild winters.
The negative outlook reflects the company's decision to pursue a debt-financed
recapitalization with the resulting increase in leverage elevating the
risk that during mild winters, leverage could exceed 7.5x
and that ARS might not be able to maintain a credit profile appropriate
for the B2 rating.
By the nature of its business, i.e. deriving nearly
100% of its revenues from underground mining of rock salt deposits,
American Rock Salt faces a number of ESG risks typical for a company in
the mining industry including compliance with stringent health,
safety and environmental regulations. The company is subject to
many and varied environmental laws and regulations in the areas where
it operates. However, the ESG risks for ARS are generally
lower than those of base and precious metals producers because salt mining
is considered less hazardous and requires less processing (crushing and
grinding). The company needs to maintain social relationships with
the community surrounding its mine. The governance risk is above
average given the company's private ownership has shown to support
an aggressive dividend policy with a significant amount of cash flows
that had historically been distributed to shareholders.
American Rock Salt is expected to have adequate liquidity for at least
the next 12 months. We anticipate positive free cash flow on an
annual basis but expect significant quarterly variation due to the seasonality
of the salt business and need to build up inventories in advance of the
selling season. The company builds cash on the balance sheet in
the first and second fiscal quarters (fourth and first calendar quarters)
as it collects accounts receivable from the snow season and uses most
of its cash in the third and fourth fiscal quarters. We expect
the company will rely on the new $70 million asset-based
revolving credit facility (unrated) to fund inventory build before collecting
significant cash in the first calendar quarter of the year. On
a pro forma transaction basis, ARS is expected to have $37
million in cash and cash equivalents. As of March 31, 2021,
ARS had nothing drawn under the revolving credit facility. The
new revolver is subject to borrowing base and will expire in 2026.
The revolver commitment steps down to $35 million from March to
August each year and contains a springing fixed charge coverage ratio
test of 1.1x if revolver excess availability is less than 10%
of the borrowing base. We do not expect the covenant will be triggered
over the next four quarters.
The senior secured first lien term loan due 2028 is rated B2, on
par with the B2 CFR, reflecting its large proportion of the overall
debt. It has a first priority lien on all fixed domestic assets,
salt reserves and minerals rights. The senior secured second lien
term loan due 2029 is rated Caa1, reflecting its subordinate position
in the capital structure relative to the $470 million first lien
term loan and the $70 million asset-based revolver (unrated)
due 2026 that has a first priority lien on current assets. The
term loans is guaranteed by all material domestic subsidiaries of the
borrower American Rock Salt Company LLC, including the new entities
brought into the borrower group.
As proposed, the new credit facilities are expected to provide the
borrower with covenant flexibility that could adversely affect creditors.
Notable terms include:
1) Incremental debt capacity up to the sum of the greater of $100
million and 100% of four-quarter, pro forma EBITDA,
plus an unlimited amount not exceeding 5.0x First Lien Leverage
Ratio (for pari passu basis secured debt). No portion of the incremental
may be incurred with an earlier maturity than the initial term loans and
the incremental debt is subject to MFN pricing protections; 2) The
credit agreement will permit the transfer of assets to unrestricted subsidiaries,
up to the carve-out capacity, and subject as well to "blocker"
provisions which prohibit the transfer of any intellectual property that
is material to the operation of the company or its restricted subsidiaries,
taken as a whole, to unrestricted subsidiaries; 3) Dividends
or transfers resulting in partial ownership of subsidiary guarantors could
jeopardize guarantees subject to protective provisions which will only
permit guarantee releases if they are in connection with a bona fide,
legitimate business purpose of the company and not for the primary purpose
of effecting a release from such guarantee to evade creditors; 4)
The credit agreement will provide some limitations on up-tiering
transactions, including the requirement that each lender consents
to amendments to subordinate the liens securing the first lien credit
facilities attaching to all or substantially all of the collateral to
any other material indebtedness for borrowed money. The above are
proposed terms and the final terms of the credit agreement may be materially
different.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
We see limited upside to the company's ratings due to its current
business profile (operating a single mine), modest size and high
leverage post the proposed dividend recapitalization transaction.
However, quantitatively, Moody's would consider an upgrade
if the company pays down debt so that in mild (trough) winter conditions
leverage does not exceed 4x, the company maintains good liquidity
and a conservative financial policy (i.e. does not continually
dividend out excess cash or lever up to take advantage of improved earnings).
Moody's could downgrade the ratings if leverage is expected to exceed
7.5x, interest coverage to fall below 2x and sustained liquidity
(cash and revolver availability) to decline below $30 million.
We could also downgrade the ratings if the company undertakes a large
debt-financed acquisition, does not reduce indebtedness or
makes a significant distribution that will further constrain its ability
to maintain a credit profile appropriate for the B2 rating through mild
winters.
American Rock Salt Company LLC produces highway deicing rock salt.
The company operates a single mine in upstate New York and sells primarily
to state and local government agencies in the northeastern United States.
The firm is a wholly owned subsidiary of American Rock Salt Holdings LLC,
which is closely held by private investors including some members of management.
The company does not publicly disclose its financial statements.
Headquartered in Retsof, NY, American Rock Salt generated
approximately $220 million in revenue for the twelve months ended
March 31, 2021.
The principal methodology used in these ratings was Chemical Industry
published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388.
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 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.
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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.
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.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK 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.
Botir Sharipov
VP - 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
Glenn B. Eckert
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
