TEXT-S&P: KAR Auction Services 'B+' rating unchanged

Tue Nov 27, 2012 10:28am EST

Related Topics

Nov 27 - Standard & Poor's Ratings Services said today that its 'BB-' issue
rating on KAR Auction Services Inc.'s senior secured credit facility and
its 'B' rating on KAR's $150 million unsecured notes remain unchanged after the
company's announcement that a proposed amended and restated credit agreement
will relax certain financial covenants, revise the terms of the cash flow sweep,
and increase its restricted-payments basket. Standard & Poor's also said that
its 'B+' corporate credit rating and stable outlook on KAR remain unchanged. 

We believe KAR's financial performance in the year ahead will enable it to 
meet the amended financial covenants with adequate cushion. Although we expect 
the company's debt leverage will remain between 4.0x and 4.5x in the year 
ahead, which is adequate for the rating, this is modestly higher than we 
previously assumed. We had believed that leverage could fall below 4x in 2014 
if debt reduction had continued. Leverage for the 12 months ended Sept. 30, 
2012, was 4.3x, by our calculation. 

The company's financial policy appears to have become more aggressive, as the 
increased size of the restricted payment basket signals it may make restricted 
payments out of free operating cash flow to shareholders rather than using 
cash flow to reduce debt as was its policy as of early 2011.  Alternatively, 
the company may use cash to repurchase common shares in the market. 

The ratings on vehicle-auction company KAR reflect its "aggressive" financial 
risk profile, with high leverage and weak EBITDA interest coverage. The 
business risk profile is "fair," reflecting its established position in the 
competitive whole-car and salvage auction markets, demonstrated profitability 
with about 28% adjusted EBITDA margin (by Standard & Poor's calculation), and 
return on capital of 8.5% for the 12 months ended Sept. 30, 2012. We now 
assume KAR will use cash flow for a combination of permanent debt reduction, 
midsize acquisitions to expand market share as opportunities arise, and 
dividends to shareholders or share repurchases.


RELATED CRITERIA AND RESEARCH
     -- Summary: KAR Auction Services Inc., Oct. 24, 2012
     -- KAR Auction Services Inc.'s Recovery Rating Profile, April 2, 2012


RATINGS LIST

Ratings Remain Unchanged

KAR Auction Services Inc.
 Corporate Credit Rating           B+/Stable/--
 Senior Secured                    BB-
  Recovery Rating                  2
 Senior Unsecured                  B
  Recovery Rating                  5



Temporary telephone contact numbers: Nancy C. Messer, CFA (917-623-4910); 
Robert Schulz (347-782-3780).

 

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article