TEXT-S&P affirms LM U.S. Member LLC (Landmark Aviation) 'B-' rating
Dec 7 - Overview -- Landmark Aviation plans to acquire First Aviation Services using the proceeds from additional bank debt and an equity contribution from its sponsor. -- We are affirming our ratings, including the issue and recovery ratings on the enlarged credit facilities. -- The stable outlook reflects our expectation that credit ratios will remain quite weak but improve gradually over the next year mostly as a result of earnings growth as high capital expenditures will constrain free cash flow. Rating Action On Dec. 7, 2012, Standard & Poor's Ratings Services affirmed its ratings on LM U.S. Member LLC (Landmark Aviation), including the 'B-' corporate credit rating. The outlook is stable. At the same time, we are affirming our 'B-' issue rating and '3' recovery rating on the company's first-lien credit facility, which consists of a $75 million revolver due 2017 and a $320 million term loan due 2019, which is being increased from $260 million. The '3' recovery rating indicates our expectation of meaningful (50%-70%) recovery in the event of payment default. We also affirmed our 'CCC' issue rating and '6' recovery rating on the $160 million second-lien term loan that matures in 2020, which is being increased from $130 million. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery. Rationale Our ratings on Landmark Aviation reflect our expectations that leverage will be largely unchanged, but still very high, following the proposed mostly debt-financed acquisition of First Aviation Services Inc. (FAS; not rated) from a subsidiary of Goldman Sachs for an undisclosed amount. The company plans to finance the acquisition with the proceeds from an equity contribution from its sponsor, the Carlyle Group, a $60 million add-on to the existing first-lien term loan, and a $30 million add-on to the existing second-lien term loan. The higher margins at FAS and the equity contribution from Carlyle will offset the higher bank debt and operating leases, resulting in credit measures for 2013 being unchanged from our previous expectations (debt to EBITDA above 7x and funds from operations to debt less than 10%) and supporting our "highly leveraged" financial risk profile assessment. The acquisition of FAS is a modest positive to Landmark's competitive position, but it is not enough to change our "weak" business risk assessment. FAS is the newest fixed-base operation (FBO) with the largest contiguous ramp at Teterboro Airport in New Jersey, which is by far the largest business aviation airport in the U.S. (more than twice as large as the next largest in White Plains, N.Y.). The acquisition will fill what was an obvious hole in Landmark's FBO network, but Landmark will still remain the third-largest FBO (by locations) in North America. FAS will be the company's largest site, contributing about 10% of expected 2013 revenues. FAS also has higher margins than Landmark, partly because of higher fuel margins, which should result in a modest increase in consolidated margins. We view Landmark's management and governance as "fair" under our criteria. Liquidity We assess Landmark Aviation's liquidity as "adequate," pro forma for the proposed transaction. We expect sources of liquidity to exceed uses by at least 1.2x over the next 12 months, the minimum level for adequate designation under our criteria. We also expect that sources would exceed uses even if EBITDA were to decline by 15%. We expect cash to be minimal, pro forma for the proposed transaction, but the company will have access to a $75 million revolving credit facility that matures in 2017, which we expect to be initially undrawn. Landmark has relatively high capital spending requirements in 2013 and 2014 to improve and expand certain locations. Therefore, free cash flow will be modest for the next few years but likely increase significantly thereafter as projects near completion and spending requirements normalize. Near-term debt maturities are minimal through 2018, primarily consisting of $3.2 million yearly amortization on the first-lien term loan. There are no maintenance financial covenants in the proposed credit facilities. However, the revolver does have a covenant that limits net first-lien debt to EBITDA (as defined) to 6x if the company uses more than 20% of the revolver commitment. Recovery analysis Please see the recovery report to be published shortly on RatingsDirect. Outlook The outlook is stable. We expect credit ratios to be very weak and only improve gradually, as high capital expenditures over the next few years will constrain free cash flow, and therefore debt reduction. Revenue and earnings should grow modestly as a result of new locations and stable-to-improving business jet usage. We could lower the rating if the weak economy or a spike in fuel prices results in declines in business jet usage, constraining the company's liquidity such that we would revise our assessment to "less than adequate" or "weak." Although unlikely in the next year, we could raise the ratings if cash flow is greater than we expect and dedicated to debt reduction, resulting in debt to EBITDA below 5.5x. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Standard & Poor's Standardizes Liquidity Descriptors for Global Corporate Issuers, July 2, 2010 -- Key Credit Factors: Methodology and Assumptions On Risks In The Aerospace And Defense Industries, June 24, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed LM U.S. Member LLC Corporate Credit Rating B-/Stable/-- LM U.S. Member LLC LM U.S. Acquisition Inc. Senior Secured $160 mil 2nd lien term ln due 2020 CCC Recovery Rating 6 $320 mil term ln due 2019 B- Recovery Rating 3 $75 mil revolver ln due 2017 B- Recovery Rating 3 Landmark Aviation FBO Canada Inc. Senior Secured B- Recovery Rating 3 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.