TEXT-S&P raises Penske Automotive Group to 'BB-'

June 21 - Overview
-- Bloomfield Hills, Mich.-based Penske Automotive Group Inc. has
improved credit measures in the past year and continues to generate good
discretionary cash flow.
-- We are raising our corporate credit rating on Penske to 'BB-' from
'B+' because we believe its credit measures can remain at or better than
recently attained levels. We are also raising our issue rating on the
subordinated notes to 'B' from 'B-'.
-- The outlook is stable, reflecting our belief that Penske's business
model, prudent financial policy, and operating track record will enable it to
sustain its improved credit measures.

Rating Action
On June 21, 2012, Standard & Poor's Ratings Services revised its corporate
credit rating on Bloomfield Hills, Mich.-based Penske Automotive Group Inc. to
'BB-' from 'B+'. The outlook is stable.

In addition, we raised our issue ratings on the company's 7.75% senior
subordinated notes and 3.5% subordinated convertible notes to 'B' (two notches
lower than the corporate credit rating) from 'B-'. The '6' recovery rating on
the notes remains unchanged and indicates our expectation that lenders would
receive negligible (0-10%) recovery in the event of a payment default.

Rationale
We continue to assess Penske Automotive Group's business risk profile as
"fair" and its financial risk profile as "aggressive." Our fair business risk
profile assessment mitigates the company's high leverage and aggressive
financial risk profile, in our view. Penske has a resilient business model,
with a diverse revenue stream (including its foreign operations) and flexible
cost basis. Also supporting our assessment of Penske's business profile is its
relatively low volatility of revenues and EBITDA over the past several years,
including during the 2008-2009 economic recession.

We believe Penske can sustain, and possibly improve, its financial credit
measures in the currently favorable climate for the retailers. Tight new and
used vehicle supply is likely to keep vehicle pricing strong for now and
automaker incentives at or below historical levels in the year ahead. In
addition, consumers have shown renewed willingness to spend on new or nearly
new vehicles despite continuing high unemployment, and credit availability for
auto purchases appears to be unconstrained.

Penske is the second-largest of several large consolidators in the highly
competitive U.S. auto retailing industry. With 166 franchises in the U.S. and
154 abroad, primarily in the U.K., as of Dec. 31, 2011, Penske is more
geographically diverse than its peers. We estimate it earns about 40% of its
EBITDA in the U.K. and Germany, where the company sells premium and luxury
brands. We believe that light vehicle sales will be lower in Europe in 2012,
and while luxury may hold up better than the overall market, a significant
downturn in Penske's foreign operations would pressure improvements in credit
quality. We expect only modest changes to this geographic diversity and brand
mix in the next few years. Although publicly traded, the company is controlled
by founder Roger S. Penske Sr.

Penske's revenues comprise sales from vehicle units, parts and service (P&S)
work, and finance and insurance. The company's P&S operations provide
relatively stable revenue and higher margins than new- and used-vehicle
margins, which fluctuate and have slim margins in our view. P&S operations
accounted for 43.7% of Penske's total gross profit for 2011, and gross profit
from P&S covered 51% of the company's sales, general, and administrative
expenses.

Penske's revenue stream consisted of new-vehicle retail sales (49% for the
first quarter of 2012), used-vehicle sales (30%), P&S (11%), fleet and
wholesale sales (8%), and finance and insurance (F&I; 2%), broadly consistent
with our expectation for this year and beyond. Same-store gross profit margin
by operation for the first quarter was 8.3% for new-vehicle sales, 8.2% for
used-vehicle sales, 58% for P&S, and 100% for F&I. In the first quarter of
2012, Penske sold 1.1 new vehicles for each used vehicle it sold; margins on
new exceeded the margin on used-vehicle sales and new vehicles remain more
profitable on a cash basis because of the higher price.

Penske's credit measures have improved in the past year, with lease-adjusted
debt to EBITDA of 5.4x for the 12 months ended March 31, 2012, compared with
6.1x for the prior 12 months. The leverage decline resulted from higher
EBITDA, since debt remained relatively flat. Reported EBITDA, per our
calculation, rose 18% period over period to $500.8 million for the 12 months
ended March 31, 2012. Adjusted debt to total capital stood at a high 69.4% as
of March 31, 2012, down from 70.3% as of March 31, 2011.

The rated auto retailer group faces business challenges that differ somewhat
from those of the automaker supplier segment, including:
-- Ongoing structural evolution (evolving recovery in sales and changing
vehicle mix) to the domestic new light-vehicle market;
-- Recent auto sales declines deeper than in historical cycles and a slow
recovery;
-- Continuing poor consumer confidence and high unemployment, which we
expect will persist for the foreseeable future;
-- Tough competition for retail sales fostered by excess production
capacity, product proliferation, and auto retailers' difficulty in
differentiating products;
-- Thin profit margins, typical of retail businesses, that require high
revenue turnover; and
-- Retailers' weak bargaining power with automakers because of the
industry's fragmented nature and retailers' heavy dependence on a few large
manufacturers.

The retailers have benefited from stabilization of new light-vehicle sales in
the U.S. We estimate new-vehicle sales will improve to 14 million units in
2012, a 10% year-over-year increase, and to 14.7 million units in 2013,
despite the continuing weak economy, because the current SAAR remains near the
high end of our scrappage rate estimate of about 13 million units.

Liquidity
Penske's liquidity is "adequate" under our criteria. We believe the company
has adequate sources of liquidity to cover near-term needs, even in the event
of an unforeseen EBITDA decline.

Our assessment of Penske's liquidity profile incorporates the following
expectations and assumptions:
-- We expect sources of liquidity, including cash and credit facility
availability, to exceed uses by 1.2x or more over the next 12 to 18 months.
-- We expect net sources of liquidity to remain positive, even if EBITDA
declines more than 15%.
-- In our opinion, Penske could absorb a low-probability, high-impact
market or operating shock, given its good conversion of EBITDA to cash flow.

As of March 31, 2012, Penske had $261.1 million and GBP70 million ($111.7
million) available for borrowing under its $375 million U.S. credit agreement
(due Sept. 30, 2014) and its GBP100 million U.K. credit agreement, respectively.
The U.S. credit agreement, part of a credit agreement with lenders
Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corp., funds
working capital, acquisitions, capital expenditures, investments, and other
general corporate purposes. The agreement provides for an additional $10
million available for letters of credit, and a non-amortizing term loan with a
balance of $127 million as of March 31, 2012. As of March 31, 2012, Penske had
outstanding loans under its U.K. credit agreement of GBP40 million ($63.8
million). This facility with the Royal Bank of Scotland PLC and BMW Financial
Services (GB) Ltd. expires November 2015, as does a demand overdraft line of
credit for up to GBP10 million.

The company had balance-sheet cash of $31.8 million as of March 31, 2012, and
generated $288 million of free operating cash for the 12 months up to that
date. We expect free operating cash flow (FOCF) to remain positive--about $100
million--in 2012 and 2013. For the March-ended trailing 12 months, we
calculate that Penske's capital expenditures were $138.5 million; we expect
about $100 million in capital spending for each of the next two years. The
company pays a quarterly common dividend that equates to about $40 million
annually; we expect the dividend to be raised in line with earnings growth.
Penske is also using cash to buy back stock; as of March 31, 2012, $98 million
of authorization remained available. We expect the company to spend in the
range of $50 million to $100 million each year for targeted acquisitions; in
the first quarter of 2012, the company acquired properties for $60 million.

Debt maturities are manageable. Penske recently called for redemption the
$63.3 million outstanding, as of March 31, 2012, of its 3.5% convertible
notes; it will fund the redemption with cash and the U.S. revolver. The
company's $375 million of 7.75% senior subordinated notes are due in 2016. As
of March 31, 2012, the company also had long-term obligations of $75 million
of principal under various mortgage facilities, although the majority of
Penske's property is held under operating leases (which we view as debt for
purposes of calculating our credit ratios).

Auto retailers make heavy use of floorplan loans to finance vehicle inventory.
We consider the floorplan borrowings of auto retailers analytically akin to
trade payables rather than to debt because of the borrowings' indefinite
maturities (other than facility expiration), high loan-to-value ratios, and
widespread availability and also because long-established manufacturer
subsidies largely offset borrowing costs.

Penske's floorplan borrowings totaled $1.8 billion as of March 31, 2012. In
the U.S., the company is required to repay floorplan borrowings when it sells
the vehicles; in the U.K., it must repay principal balances outstanding for 90
days. Penske finance substantially all of its new and a portion of its used
vehicle inventories under revolving floorplan arrangements with various
lenders, including a majority through captive finance companies associated
with automotive manufacturers. The availability on these facilities is a
function of the amount of inventory required.

The company derives some financial flexibility from its many dealerships,
which it could sell with lender approval, although we expect market
transactions--including acquisitions and new dealership openings--to occur at
a measured pace.

Recovery analysis
For the complete recovery analysis, please see Standard & Poor's recovery
report on Penske, to be published following this report, on RatingsDirect.

Outlook
Our stable rating outlook on Penske reflects our belief that its financial
policy and operating expertise will enable it to sustain its improved credit
measures. Specifically, we assume Penske will pursue a financial policy that
will balance business expansion and shareholder returns with lease-adjusted
leverage trending toward 4.5x-5x in the next two years. The company's adjusted
leverage decreased to 5.4x for the 12 months ended March 31, 2012, with EBITDA
of $500.8 million. For the rating we also expect free operating cash flow
(FOCF) to adjusted total debt of 4% or greater; the company's FOCF to debt was
10.9% for the 12 months ended March 31.

We could lower the rating if aggressive financial policies lead to higher
leverage and we believe that the company cannot sustain 4.5x-5x leverage. This
could occur if the U.S. economy falls into another recession, causing demand
for vehicles and maintenance to decline rather than expand as we project, or
if Penske's European operations become much less profitable given the weak
economy in the U.K. This could cause Penske to generate adjusted EBITDA well
below our expectation of about $525 million and cause leverage to exceed 5x,
assuming debt remains at current levels. We could also lower the rating if we
believe higher-than-expected capital spending on dealer upgrades will hinder
free cash flow and reduce the company's FOCF to debt ratio.

We do not expect an upgrade in the year ahead. However, we could raise the
rating if we assessed the financial risk profile as significant (stronger than
our current assessment). This could occur if Penske adopted a less aggressive
financial policy, reducing adjusted leverage to near 3x and raising FOCF to
total debt to about 10.5%, and we believed it would sustain this improvement
in credit measures.

Related Criteria And Research
-- Pause Or Warning? The May U.S. Auto Sales Annual Rate Fell Below
Standard & Poor's 2012 Full-Year Expectations, June 5, 2012
-- U.S. Auto Retailers Are Ready To Brave Today's Economy With Improved
Credit Measures And More Focused Strategies, June 16, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Auto Component
Suppliers Industry, Jan. 28, 2009
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List
Upgraded
To From
Penske Automotive Group Inc.
Corporate credit rating BB-/Stable/-- B+/Positive/--
Subordinated B B-
Recovery rating 6 6

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