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Rating Action:

Moody's downgrades PetroChoice to B3 stable

27 Jun 2018

New York, June 27, 2018 -- Moody's Investors Service ("Moody's") has downgraded PetroChoice Holdings, Inc.'s Corporate Family Rating (CFR) to B3 from B2, senior secured first lien term loan and revolver to B2 from B1, and its senior secured second lien term loan to Caa2 from Caa1. Moody's also downgraded its probability of default rating to B3-PD from B2-PD. The rating outlook is stable.

"The rating downgrade reflects PetroChoice's high debt leverage relative to other B2-rated companies, limited free cash flow generation and the lack of improvement in margins, despite significant acquisitions over the past three years," says Jiming Zou, a Moody's Vice President and Lead Analyst for PetroChoice.

Rating Action:

PetroChoice Holdings, Inc.

Corporate Family Ratings, downgraded to B3 from B2

Probability of Default Rating, downgraded to B3-PD from B2-PD

Senior Secured First Lien Revolving Credit Facility, downgraded to B2 (LGD3) from B1 (LGD3)

Senior Secured First Lien Term Loan, downgraded to B2 (LGD3) from B1 (LGD3)

Senior Secured Second Lien Term Loan, downgraded to Caa2 (LGD5) from Caa1 (LGD5)

Rating Outlook, Remains Stable

RATINGS RATIONALE

PetroChoice's debt leverage has remained high in the low 7 times range since the 2015 acquisition by private equity firm Golden Gate Capital. The company has executed seven acquisitions since Golden Gate became the equity sponsor in 2015 and has funded the majority of the purchase price for those acquisitions with incremental debt. Despite management's intention to keep purchase multiples low and use synergies to get leverage back to the target range, transaction-related costs, business integration needs and increased freight and operational costs have constrained earnings improvement. Annual free cash flow generation during 2015-2017 was low relative to PetroChoice's reported total debt of $422 million at the end of 2017 and could limit their ability to continue with their acquisition driven growth strategy.

Management has recognized this issue and is now prioritizing organic growth and attempting to accelerate business synergies and raise operational efficiency in the next 12-18 months. While they expect improved earnings, Moody's is concerned that leverage may only decline towards mid-to-high 6 times by the end of 2019 and at this level leverage would remain high compared to other B2-rated chemical peers such as Highline Aftermarket Acquisition, LLC and rank the company similar to other B3 peers such as Vantage Specialty Chemicals, Inc. and Polymer Additives, Inc.

The rating downgrade also factors in the likely reduction in availability under the credit facility at the end of 2018. PetroChoice's $40 million revolving credit facility contains a springing first lien leverage covenant which will be tested if outstanding amount exceeds $12 million ($8 million outstanding as of March 31, 2018). Leeway under this financial covenant will become limited, as the covenant threshold lowers to 4.5x for the quarter ending December 2018 and thereafter, from 5.0x for the prior quarters (4.4x as of March 31, 2018). Although Management doesn't expect the outstanding revolver to exceed $12 million or its first lien net leverage to exceed 4.5x, any unexpected deterioration in earnings or additional borrowings would limit the company's access to its revolver and constrain its financial flexibility. Baring such an adverse event, PetroChoice's liquidity is adequate and supported by its modestly positive free cash flows expected for the next 12 months, about $7 million of cash at the end of March 2018 and only $2.9 million debt amortization in the next 12 months.

PetroChoice's B3 CFR also reflects its small revenues scale, a narrow product and business scope, and geographic concentration focused in the eastern half of the US -- albeit expanding through acquisitions into Western and Midwestern US. Business challenges include the integration of a number of acquired companies in recent years and realization of expected synergies which are necessary to grow earnings and reduce debt.

Supporting its B3 CFR are predictable sales from diverse end-markets including auto service markets, general industrial, mining, construction, and commercial transportation services. The company has reliable distribution margins and positive retained cash flow, since lubricant pricing has historically been less volatile than crude oil prices and the company has demonstrated the ability to pass through lubricant and base oil price increases. As one of the largest lubricants suppliers, PetroChoice enjoys a favorable relationship with its largest supplier, ExxonMobil, and benefits from customer density in its territories.

The stable outlook reflects that PetroChoice will be able to demonstrate modest growth in EBITDA in 2018 by achieving business synergies, and will generate positive free cash flow.

Rating upgrade requires the company to achieve and sustain leverage below 6.5x, improve margins and cash generation, and establish a track record of successfully integrating acquisitions without a meaningful increase in leverage. Moody's could downgrade the rating, if free cash flow turns negative and leverage continues to increase or if its liquidity profile deteriorates.

PetroChoice Holdings Inc. is one of the largest distributors of lubricants and lubricant solutions in the United States. On July 7, 2015, Golden Gate Private Equity, Inc., signed an agreement to acquire the company from prior equity sponsor Greenbriar Equity Group. PetroChoice has executed seven acquisitions since Golden Gate became the equity sponsor.

The principal methodology used in these ratings was Chemical Industry published in January 2018. 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 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.

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.

Jiming Zou
Vice President - 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

Brian Oak
MD - Corporate Finance
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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