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Rating Action:

Moody's assigns a B3 CFR to Osmose; rates proposed LBO financing

04 Aug 2015

Approximately $435 million of debt securities rated

New York, August 04, 2015 -- Moody's Investors Service assigned a B3 Corporate Family Rating and a B3-PD Probability of Default Rating to Osmose Utilities Services, Inc. ("Osmose"), a B2 rating to the company's proposed first lien senior secured credit facilities consisting of $275 million term loan due 2022 and $45 million revolving credit facility expiring 2020, and a Caa2 rating to proposed $115 million second lien term loan due 2023. The rating outlook is stable.

Osmose has entered into a definitive agreement whereby Kohlberg & Company will acquire the company from its current owners Oaktree Capital Management, L.P. The transaction will be financed with the term loan proceeds and an equity contribution from the sponsor. The transaction increases the company's debt significantly (by approximately $150 million) to $390 million, which results in a total debt level in excess of revenues and pro forma debt-to-EBITDA leverage rising to approximately 7.3x (incorporating the beneficial impact of recently renegotiated contracts). The company's highly leveraged balance sheet represents a credit profile consistent with the B3 rating category. Pro forma EBITDA less capex to interest coverage is estimated at 1.6x.

Moody's took the following rating actions on Osmose Utilities Services, Inc:

Corporate family rating, assigned a B3;

Probability of default rating, assigned a B3-PD;

Proposed $275 million first lien term loan due 2022, assigned a B2 (LGD3);

Proposed $45 million first lien revolving credit facility expiring 2020, assigned a B2 (LGD3);

Proposed $115 million second lien term loan due 2023, assigned a Caa2 (LGD5);

Stable rating outlook.

Issuer: Osmose Holdings, Inc:

The company's existing ratings, including the B2 CFR, remain unchanged and will be withdrawn upon closing of the transaction.

All ratings are subject to the execution of the transaction as currently proposed and Moody's review of final documentation. The instrument ratings are subject to change if the proposed capital structure is modified.

RATINGS RATIONALE

The B3 CFR reflects Osmose's high financial leverage and total debt in excess of revenues resulting from the purchase of the company by Kohlberg. The rating also reflects the company's small size relative to rated companies in the business services industry, a history of aggressive financial policies that have included multiple dividends, acquisitions, and divestitures, and the event risks associated with potential shareholder friendly actions given the private equity ownership. The rating is supported by favorable industry fundamentals, including increasing regulatory requirements, aging infrastructure, and increasing customer outsourcing of utility pole maintenance and repair services, the company's good market positions and national footprint, long-term contracts and customer relationships, positive free cash flow, and a good liquidity position.

The B2 rating on the first lien facilities reflects their first priority security interest in all assets of the company and its guarantors, which include its immediate parent company and its domestic subsidiaries. The Caa2 rating on the second lien term loan reflects the subordinate lien on the collateral that would result in first loss absorption provided in the event of a default.

The stable rating outlook reflects our expectations for organic growth in revenues and earnings to result in modest deleveraging over the next 12 to 18 months.

The company's good liquidity position is supported by our expectations of modest free cash flow generation, sufficient availability under the $45 million revolving credit facility to fund seasonal working capital needs, and the flexibility under the springing first lien leverage covenant. Liquidity is constrained by the seasonality of the business, which results in negative free cash flows during working capital intensive quarters.

The ratings could be considered for an upgrade if adjusted debt to EBITDA is sustained below 6.0x, free cash flow to debt is maintained in at least a mid single digit percentage range, and there is a demonstrated commitment to more conservative financial policies.

The ratings could be considered for a downgrade if leverage is sustained above 7.5x, if the company generates negative free cash flow, or if the liquidity position deteriorates.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Osmose Utilities Services, Inc., headquartered in Atlanta, GA, provides utility pole inspection, treatment, and restoration services to investor-owned utilities, cooperatives, municipalities, and telecommunication utility providers. The company also provides additional value-added services, engineering services, underground vault inspection and repair, product sales, and other ancillary services. Osmose is being acquired by Kohlberg & Company from Oaktree Capital Management, L.P., which has been involved since 2012. In the LTM period ending June 30, 2015, the company generated approximately $300 million in revenues.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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 following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

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.

Natalia Gluschuk
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns a B3 CFR to Osmose; rates proposed LBO financing
No Related Data.
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