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I AGREE
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
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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
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Please see www.moodys.com for any updates on changes to
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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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