New York, May 20, 2022 -- Moody's Investors Service ("Moody's") downgraded the Corporate Family Rating (CFR) of American Rock Salt Company LLC (ARS) to B3 from B2, the probability of default rating to B3-PD from B2-PD, the rating of a first lien secured term loan to B3 from B2 and the rating of a second lien secured term loan to Caa2 from Caa1. The ratings outlook is stable.
Downgrades:
..Issuer: American Rock Salt Company LLC
.... Corporate Family Rating, Downgraded to B3 from B2
.... Probability of Default Rating, Downgraded to B3-PD from B2-PD
....Senior Secured First Lien Term Loan, Downgraded to B3 (LGD3) from B2 (LGD3)
....Senior Secured Second Lien Term Loan, Downgraded to Caa2 (LGD6) from Caa1 (LGD6)
Outlook Actions:
..Issuer: American Rock Salt Company LLC
....Outlook, Changed To Stable From Negative
RATINGS RATIONALE
The ratings downgrade reflects a material increase in financial leverage which was driven by a debt- financed recapitalization undertaken by the company in 2021 which constrained its ability to withstand high variability in winter conditions and maintain a credit profile appropriate for the B2 rating during mild winters. The rating action also reflects a substantial increase in ARS's operating and transportation costs over the last 12 months, mild 2021-2022 winter season that resulted in a relatively low demand for deicing salt and aggressive bidding behavior by a key competitor that forced the company to defend its market share which impacted its profitability.
The B3 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 and 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).
Moody's estimates that ARS's FY2022 EBITDA, as adjusted by Moody's, will be modestly lower on y-o-y basis, with FY2022 adjusted Debt/EBITDA relatively unchanged at 8.5x. Assuming average 2022-2023 winter conditions, rational bidding season behavior by the industry participants, price increases to offset the inflationary pressures and that ARS will use the majority of anticipated free cash flow for debt repayment, Moody's expects adjusted debt/EBITDA to decline to around 7.5x by the end of FY2023. However, should the markets the company serves experience below-average winter conditions, if operating and transportation costs continue to increase above and beyond the implemented price increases or if competition continues to follow aggressive bidding practices, leverage could remain well in excess of 8x in FY2023. The company is expected to remain modestly free cash flow positive during mild winters.
The stable outlook reflects our expectation that the company continues to generate free cash flow through mild winters. The stable outlook also assumes the company does not perform another dividend recapitalization and continues to reduce gross debt.
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's 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 its $70 million asset-based revolving credit facility (unrated) to fund inventory build before collecting significant cash in the first calendar quarter of the year. As of December 31, 2021, ARS had $8 million in cash on hand and $39.8 million drawn under the revolving credit facility. The 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 B3, on par with the B3 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 Caa2, reflecting its subordinate position in the capital structure relative to the 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 are guaranteed by all material domestic subsidiaries of the borrower American Rock Salt Company LLC.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely in the near term given high gross debt levels and history of re-levering the company. However, Moody's would consider an upgrade if the company pays down debt so that in mild (trough) winter conditions leverage does not exceed 6x, interest coverage remains above 2x on a sustained basis, the company generates positive free cash flow and 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 rating if in mild (trough) winter conditions leverage exceeds 8x on a sustained basis, interest coverage falls and remains below 1.25x and liquidity (cash plus revolver availability) declines below $30 million. We could also downgrade the rating if the company undertakes a large debt-financed acquisition or another dividend recapitalization.
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 December 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.
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Botir Sharipov
VP - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
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Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
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