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