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Related Issuers
Rating Action:

Moody's places the ratings of KAR Auction Services on review for upgrade

28 Feb 2022

New York, February 28, 2022 -- Moody's Investors Service ("Moody's") placed the ratings of wholesale used vehicle auction company KAR Auction Services, Inc ("KAR") on review for upgrade, including the B2 corporate family rating, the B2-PD probability of default rating, the Ba3 senior secured rating and the Caa1 senior unsecured rating. KAR's outlook was changed to ratings under review, from stable. These actions follow KAR's announcement that it agreed to sell its US physical auction business to Carvana, Inc. for $2.2 billion in cash. The transaction is expected to close in the second quarter of 2022. The SGL-1 speculative grade liquidity rating remains unchanged.

The proceeds of the sale will significantly reduce the amount of funded debt and related interest cost. However, the possibility of a rating upgrade may be limited by the company's reliance on a sizeable receivable securitization program, which Moody's views as debt and results in still very high adjusted leverage. Pro forma for the transaction, Moody's estimates debt/EBITDA to be 6.5 times, compared to 8.5 times at year-end 2021. Therefore, Moody's review will focus on: (i) KAR's strategy to transform its auction business to a digital-only wholesale remarketing model, the digital platforms that KAR acquired in the last 18 months to establish a presence in the digital auction segment, as well as the competitive environment for digital marketplaces; (ii) the relative earnings and cash flow contributions of the remaining auction and floor plan financing operations, and the still high adjusted debt levels; (iii) the impact of the planned $1.65 billion debt reduction on KAR's capital structure, including the shift in relative proportions of secured and unsecured debt, and the ensuing impact on instrument ratings using Moody's loss-given-default model, including the possibility of lower recovery prospects for secured debt as a result of the sale of a significant part of KAR's operations; (iv) the potential for additional acquisitions and related impact on financial leverage.

The following rating actions were taken:

On Review for Upgrade:

..Issuer: KAR Auction Services, Inc

.... Corporate Family Rating, Placed on Review for Upgrade, currently B2

.... Probability of Default Rating, Placed on Review for Upgrade, currently B2-PD

....Senior Secured Bank Credit Facility, Placed on Review for Upgrade, currently Ba3 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Upgrade, currently Caa1 (LGD5)

Outlook Actions:

..Issuer: KAR Auction Services, Inc

....Outlook, Changed To Rating Under Review From Stable

RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Prior to the transaction and the review of the ratings, KAR's B2 corporate family rating reflected the company's leading position in the North American wholesale used vehicle auction industry. A deep network of established relationships with institutional sellers, fleet managers and dealers underpins KAR's market presence. The sale of KAR's physical auction business in the US allows KAR to focus on its strategy to transform its operations to a digital-only wholesale remarketing model. However, KAR's transformation remains at an early stage, while KAR also has to contend with competition in the digital marketplace segment from both well-established used vehicle auction services providers and new online entrants.

KAR's mid-teens EBITA margin is attractive. However, the margin is boosted by KAR's very profitable floor plan financing business.

Moody's expects liquidity to remain very good (SGL-1), largely attributable to strong free cash flow and about $300 million of availability under the revolving credit facility.

The ratings could be upgraded if Moody's expects sustained strong organic growth at or above mid-single digit rates, supporting KAR's competitive position against digital disruption and decelerating off-lease trends. Other considerations for an upgrade include debt/EBITDA (including collateralized obligations) sustained below 5.5 times and free cash flow/debt (including collateralized obligations) above 6.0%, while maintaining financial policies; and good liquidity.

The ratings could be downgraded if revenue or EBITA margin becomes pressured due to auction volumes remaining depressed, increased competition or a protracted integration of acquired digital auction platforms. The ratings could also be downgraded if debt/EBITDA (including collateralized obligations) is expected to increase to 7 times or more, free cash flow/debt (including collateralized obligations) is anticipated to be less than 3%, or if liquidity deteriorates.

The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

KAR Auction Services, Inc. is a leading provider of used vehicle auction and related vehicle remarketing services in North America and Europe. The company provides used car auction services through its wholly owned subsidiary, ADESA, Inc ("ADESA"), and short-term floor plan financing to independent dealers through its wholly owned subsidiary, Automotive Finance Corporation ("AFC"). Revenue was $2.3 billion in 2021.

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.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Rene Lipsch
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

Dean Diaz
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.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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