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Rating Action:

Moody's downgrades Service King's corporate family rating to Caa1

24 Mar 2020

New York, March 24, 2020 -- Moody's Investors Service, ("Moody's") today downgraded Midas Intermediate Holdco II, LLC's ("Service King") Corporate Family Rating (CFR) and Probability of Default Rating (PDR) to Caa1 and Caa1-PD, respectively. At the same time, Moody's downgraded the rating on the company's senior secured bank credit facility to B2 from B1 and affirmed the Caa2 rating on the senior unsecured notes. The outlook remains negative.

"Today's downgrade and negative outlook reflect the increased refinancing risk related to the August 2021 maturity of the company's term loan as the company's leverage remains very high," stated Moody's VIce President Charlie O'Shea. "The action also reflects the heightened risk that the company will incur much higher cash interest costs as part of a refinancing transaction such that it meaningfully constrains its future investment capacity and free cash flow generation long-term," continued O'Shea. "Moody's continues with its favorable view of the fundamentals for the collision repair sector and believes that management has a strategy that can, if well-executed, reverse weak operating trends."

Downgrades:

..Issuer: Midas Intermediate Holdco II, LLC

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

.... Corporate Family Rating, Downgraded to Caa1 from B3

....Senior Secured Bank Credit Facility, Downgraded to B2 (LGD3) from B1 (LGD3)

Affirmations:

..Issuer: Midas Intermediate Holdco II, LLC

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa2 (LGD5)

Outlook Actions:

..Issuer: Midas Intermediate Holdco II, LLC

....Outlook, Remains Negative

RATINGS RATIONALE

Service King's Caa1 rating reflects its weak credit metrics, with pro forma debt/ EBITDA at FY 2019 of around 8 times and EBIT/interest well below 1 time (including 50% credit for cost savings from front-office re-structuring initiatives executed in early 2020), as well as the looming 2021 debt maturities. Supporting the rating is Service King's solid market position in the highly fragmented collision repair sub-sector, its mutually-beneficial relationships with national and major insurance carriers which represents the vast majority of revenue, and strong industry fundamentals which should support continuing stable demand for its services. However, while demand fundamentals are stable, recent pricing pressure with certain carriers along with higher costs has resulted in an erosion in margins, EBITDA and free cash flow. Leverage and interest coverage are expected to improve such that they approach the mid-7.0 times range and approximately 1.0 times respectively over the next 12-18 months should the company's successfully execute its operating efficiency initiatives. Additionally, the contribution from recent and future store additions should offset labor pressures and support earnings growth. Service King's liquidity profile is adequate, supported by its $176 million cash balance following a $92 million draw on its revolving credit facility which expires in May 2021, and $26 million of short-term investments as of FY 2019, with roughly $85 million restricted as to use. The adequate liquidity is predicated on the expectation that Service King will address the upcoming August 2021 maturity of its roughly $600 million senior secured Term Loan.

The negative outlook reflects the risks surrounding the speed with and level to which credit metrics will improve, as well as the August 2021 term loan maturity. Given the negative outlook, an upgrade over the near term is unlikely. Over time, ratings could be upgraded if the company is able to drive meaningful revenue and EBITDA growth such that debt/EBITDA approaches 6.5 times with EBIT/interest sustained materially above 1.25 times. An upgrade would also require the company to maintain at least good liquidity, and the expectation that financial policies will sustain metrics at these levels. Over a shorter horizon, the outlook could return to stable if operating improvements are achieved such that credit metrics begin to generate meaningful positive momentum away from the current downgrade triggers. A stabilization of the outlook would also require addressing the term loan maturity in timely manner. Ratings could be downgraded if "steady state" operating performance does not show signs of stabilization or financial policies become more aggressive such that debt/EBITDA remains above 7.5 times and EBIT/interest remains below 1.0 times. Ratings could also be downgraded if the company's liquidity profile were to deteriorate for any reason, or if meaningful progress is not made towards addressing the August 2021 term loan maturity in due course or should the probability of default increase for any reason.

Service King is exposed to environmental risk as the company is subject to governmental laws and regulations regarding hazardous waste. Service King could be impacted if they are found to be in purported violation of or subject to liabilities under any of these laws or regulations, or if new laws or regulations are enacted that adversely affect the operations, business, reputation, financial condition, or results of operations. Service King was recently fined by the State of California for failure to adhere with hazardous waste regulations. However, the fine was reduced to an immaterial amount, $1.8 million, following Service Kings early adoption of remediation efforts. Service King has put in a place an ongoing training program to ensure that its employees comply with all hazardous waste requirements going forward. Service King's overall corporate governance risk is high given its financial sponsor ownership. Financial strategy and leverage policy are a key concern with sponsor-owned companies, and in the case of Service King, the key risk is that the sponsor's pursuit of an aggressive pace of debt-funded acquisitions, which has increased total funded debt by more than $300 million since 2014, has resulted in an elevated leverage profile that may limit the company's financial flexibility in the event that earnings deteriorate from current levels.

Headquartered in Richardson, Texas, Midas Intermediate Holdco II, LLC is a leading provider of vehicle body repair services with annual revenue of over $1.3 billion. The company operates under the Service King brand name and operated 346 locations in 24 states as of FY 2019.

The principal methodology used in these ratings was Retail Industry published in May 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, 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.

Charles O'Shea
VP - Senior Credit Officer
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

Margaret Taylor
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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​
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