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Rating Action:

Moody's upgrades American Rock Salts CFR to B2; outlook stable

05 Nov 2019

New York, November 05, 2019 -- Moody's Investors Service ("Moody's") upgraded American Rock Salt Company LLC's (ARS) corporate family rating to B2 from B3 and probability of default rating from B2-PD from B3-PD. Instrument ratings are detailed below. The outlook is stable.

Upgrades:

..Issuer: American Rock Salt Company LLC

.... Probability of Default Rating, Upgraded to B2-PD from B3-PD

.... Corporate Family Rating, Upgraded to B2 from B3

.... Senior Secured 1st Lien Term Loan, Upgraded to B2 (LGD4) from B3 (LGD4)

Outlook Actions:

..Issuer: American Rock Salt Company LLC

....Outlook, Remains Stable

RATINGS RATIONALE

The upgrade reflects the improved credit profile and our view that a strong projected operating performance, continuously solid demand for deicing salt and higher expected realized prices in the next 12-18 months will allow the company to sustain debt protection metrics appropriate for the B2 rating. The company's debt/EBITDA, as adjusted by Moody's declined from 6.6x in fiscal 2017 to 3.6x in the twelve months ended June 30, 2019. We expect debt/EBITDA as adjusted by Moody's, to range between below 4x and 7x over the rating horizon depending on the number of snow and ice events. The upgrade also assumes the company will not pursue a dividend recapitalization or make a significant distribution that will increase its indebtedness, reduce financial flexibility and constrain its ability to maintain a credit profile appropriate for the B2 rating through mild winters.

Customer salt inventories were low following the above-average winter weather events during the 2017-2018 winter season and another harsh winter season in 2018-2019, supporting strong demand for deicing salt and benefitting US salt producers including American Rock Salt. Although the improvement in ARS's credit metrics is mostly attributed to favorable winter season (high number of snow and ice events) and the resulting increase in EBITDA and free cash flow, the company is capable of generating modest free cash flow through mild winters as well, by scaling back production, reducing costs and limiting margin compression.

American Rock Salt is expected to have an adequate liquidity for at least the next 12 months. We anticipate positive cash flow from operations on an annual basis, but expect significant quarterly variation due to the seasonality of the salt business and the need to build up inventories in advance of the selling season. The company builds cash on the balance sheet in the first and second fiscal quarters (fourth and first calendar quarters) as it collects accounts receivable from the snow season and uses most of its cash in the third and fourth fiscal quarters. We expect the company will rely on its $60 million asset-based revolving credit facility (unrated) to fund inventory build-up before collecting significant cash in the first calendar quarter of the year. As of June 30, 2019, the company had $7 million in cash and cash equivalent and approximately $25 million of availability under the RCF. The revolver is subject to borrowing base and expires in 2025. The revolver commitment steps down to $30 million from March to August each year and contains a springing fixed charge coverage ratio test of 1.1x if revolver excess availability is less than 10% of the borrowing base. We do not expect the covenant will be triggered over the next four quarters.

The stable outlook reflects our expectation that the company continues to generate free cash through mild winters. The stable outlook also assumes the company does not perform a dividend recapitalization.

By the nature of its business, i.e. deriving 100% of its revenues from underground mining of rock salt deposits, American Rock Salt faces a number of ESG risks typical for a company in the mining industry, including compliance with stringent health, safety and environmental regulations. However, the ESG risks for ARS are generally lower than those of base and precious metals producers because salt mining is considered less hazardous and requires less processing (crushing and grinding). The governance risk is above average given the company's private equity ownership has shown to support an aggressive dividend policy with a significant amount of cash flows that had historically been distributed to shareholders.

We see limited upside to the company's ratings due to its current business profile (operating a single mine), modest size and history of re-levering the company. However, quantitatively, Moody's would consider an upgrade if the company pays down debt so that in mild (trough) winter conditions leverage does not exceed 4x, the company maintains good liquidity and a conservative financial policy (i.e. does not continually dividend out excess cash or lever up to take advantage of improved earnings).

Moody's could downgrade the ratings if in mild (trough) winter conditions leverage is expected to exceed 7.5x, interest coverage to fall below 2x and sustained liquidity (cash and revolver availability) to decline below $30 million. We could also downgrade the ratings if the company undertakes a large debt-financed acquisition or sizeable dividend recapitalization or makes a significant distribution that will constrain its ability to maintain a credit profile appropriate for the B2 rating through mild winters.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

American Rock Salt Company LLC produces highway deicing rock salt. The company operates a single mine in upstate New York and sells primarily to state and local government agencies in the northeastern United States. The firm is a wholly-owned subsidiary of American Rock Salt Holdings LLC, which is closely-held by private investors including some members of management. The company does not publicly disclose its financial statements. Headquartered in Retsof, NY, American Rock Salt generated approximately $298 million in revenue for the twelve months ended June 30, 2019.

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.

Botir Sharipov
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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