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Rating Action:

Moody's rates Allied Universal's new capital structure; changes outlook to stable; affirms B3 CFR

13 Jun 2019

Approximately $5.12 billion of new debt rated

NOTE: On June 18, 2019, the press release was corrected as follows: In the second paragraph, the third sentence was changed to “CDPQ's pending acquisition of a roughly 46% equity stake ($1.292 billion from Warburg Pincus and Wendel along with an additional $150 million of equity) is expected to close subsequent to the refinancing.” In the seventh paragraph of the RATINGS RATIONALE section, the second sentence was changed to “Revenues pro forma for a full year of US Security are about $7.1 billion for the twelve months ended March 31, 2019.” Revised release follows.

New York, June 13, 2019 -- Moody's Investors Service ("Moody's") today assigned ratings to Allied Universal Holdco LLC's ("Allied Universal") new capital structure including a B3 rating to the proposed first lien bank credit facilities; a B3 to the proposed senior secured notes and a Caa2 to the proposed senior unsecured notes. At the same time, Moody's affirmed Allied Universal's B3 Corporate Family Rating ("CFR") and B3-PD Probability of Default Rating. The outlook also changed to stable from negative.

Proceeds from the new $2.520 billion first lien term loan, $500 million senior secured notes, $1.05 billion senior unsecured notes, $150 million of new equity from CDPQ and the release of restricted cash will be used to refinance all existing debt and to pay related fees and expenses. At the same time, Allied Universal is seeking to raise a new $300 million first lien revolving credit facility, a new $750 million asset based revolving credit facility (unrated) and a $200 million delayed draw first lien term loan. CDPQ's pending acquisition of a roughly 46% equity stake ($1.292 billion from Warburg Pincus and Wendel along with an additional $150 million of equity) is expected to close subsequent to the refinancing.

The affirmation of the B3 CFR acknowledges Moody's view that this transaction is largely leverage neutral and extends Allied Universal's nearest debt maturity to 2024. The change in outlook to stable reflects that the new $300 million revolving credit facility and $750 asset based revolving credit facility provides Allied Universal with good liquidity to support its working capital cycle and expected cash flow deficit in 2019. The change in outlook to stable also acknowledges Moody's forecast for Allied Universal to reduce debt/EBITDA to below 7.5x by the end of 2019, the level that has been cited as a potential downgrade factor.

The following ratings are assigned (subject to receipt and review of final documentation):

Assignments:

..Issuer: Allied Universal Holdco LLC

....Senior Secured First Lien Revolving Credit Facility, Assigned B3 (LGD3)

....Senior Secured First Lien Term Loan, Assigned B3 (LGD3)

....Senior Secured First Lien Delayed Draw Term Loan, Assigned B3 (LGD3)

....Senior Secured Regular Bond/Debenture, Assigned B3 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Assigned Caa2 (LGD6)

Affirmations:

..Issuer: Allied Universal Holdco LLC

.... Probability of Default Rating, Affirmed B3-PD

.... Corporate Family Rating, Affirmed B3

Outlook Actions:

..Issuer: Allied Universal Holdco LLC

....Outlook, Changed To Stable From Negative

The follow ratings are unchanged and will be withdrawn upon closing of the transaction:

..Issuer: Allied Universal Holdco LLC

....Senior Secured First Lien Revolving Credit Facility, at B2 (LGD3)

....Senior Secured First Lien Term Loan, at B2 (LGD3)

....Senior Secured First Lien Delayed Draw Term Loan, at B2 (LGD3)

....Senior Secured Second Lien Term Loan, at Caa2 (LGD6)

....Senior Secured Second Lien Delayed Draw Term Loan, at Caa2 (LGD6)

RATINGS RATIONALE

Allied Universal's B3 Corporate Family Rating is broadly constrained by its highly leveraged capital structure, aggressive acquisition history and private equity ownership. Debt/EBITDA for the twelve months ended March 31, 2019 is 7.8x. Moody's forecast it will improve to 7.3x by the end of 2019. The rating also acknowledges that Moody's expect free cash flow (after mandatory term loan amortization, capital lease payments and contingent consideration payments) to remain negative in 2019 given the costs associated with the integration and synergies and the ongoing high level of EBITDA add-backs. The rating encompasses Allied Universal's low operating margins relative to other services companies, and Moody's expectation that operating margins will continue to face pressure as a result of ongoing labor inflation and a change in revenue mix towards larger but gross lower margin contracts.

Moody's generally views a change in ownership amongst private equity firms as largely credit neutral. However in Allied Universal's case, Moody's note that the transaction will reduce the ownership stake of existing firms which had supported very aggressive financial policies which included debt financed recapitalizations, shareholder distributions and acquisitions. Moody's generally views CDPQ's willingness to provide some additional equity for acquisitions as a credit positive. However, the proposed $200 million delayed draw term loan indicates that Allied will remain heavily reliant on debt to finance acquisitions.

Allied Universal benefits from its market position as the US's largest security services company, the recession resistant nature of the security services business, a history of successfully integrating smaller tuck-in acquisitions and its adequate EBITA/interest expense of roughly 1.4x for the twelve months ended March 31, 2019. Despite the expectation for negative free cash flow in 2019, Moody's view Allied Universal as having good liquidity largely supported by the $750 million asset based revolving credit facility and $300 million senior secured first lien revolving credit facility. Also, we believe that Allied Universal's free cash flow should turn positive in 2020 as the size of acquisitions made going forward will require lower cash costs to integrate and achieve potential synergies.

Ratings could be downgraded should Allied Universal experience a decline in organic operating performance or the loss of contacts with key customers. Ratings could also be downgraded should operating performance or financial policies support debt/EBITDA remaining above 7.5x beyond 2019 or free cash flow-to-debt remaining below 2%. Ratings could also be downgraded should liquidity deteriorate.

Ratings could be upgraded should operating performance and financial policy support debt/EBITDA sustained below 6.0x and EBITA/interest expense above 2.0x. An upgrade would also require continued revenue growth at stable operating margins and good liquidity.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Conshohocken, Pennsylvania and Santa Ana, California, Allied Universal Holdco LLC is the largest North American security services company. Revenues pro forma for a full year of US Security are about $7.1 billion for the twelve months ended March 31, 2019. Following the close of the transaction, Allied Universal will be owned by CDPQ, Warburg Pincus LLC, Wendel Group and other minority holders including management.

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.

Margaret Taylor
Senior Vice President
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

John E. Puchalla, CFA
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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