TEXT-S&P revises AutoTrader.com outlook to stable from negative

Wed Dec 12, 2012 4:25pm EST

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Overview
     -- U.S. online automotive advertising company AutoTrader Group Inc. has 
performed well over the last two quarters and its cushion of compliance with 
financial covenants has increased.
     -- We expect that the company will maintain at least a 20% cushion of 
compliance with its financial covenants, including scheduled step-downs in the 
next 12 months, and continue to reduce leverage with discretionary cash flow.
     -- We are revising our 'BB+' rating outlook on the company to stable from 
negative.
     -- The stable outlook reflects our view that AutoTrader.com will continue 
to exhibit strong operating fundamentals, reduced leverage, and an adequate 
cushion of compliance with financial covenants.
 
Rating Action
On Dec. 12, 2012, Standard & Poor's Ratings Services revised the rating 
outlook on Atlanta, Ga.-based AutoTrader.com Inc. to stable from negative. At 
the same time, we affirmed all ratings, including our 'BB+' corporate credit 
rating, on the company.

Rationale
The outlook revision reflects AutoTrader Inc.'s solid operating performance, 
which has restored covenant headroom to more than 20%. The company has filed 
an SEC Form S-1 for an initial public offering (IPO), and intends to use the 
proceeds to repay debt and fund general corporate purposes. We have not 
factored any IPO proceeds in our 2013 assumptions.

AutoTrader.com's leading market share, strong brand, and high conversion of 
EBITDA into discretionary cash flow support our view that the company's 
business risk profile is "fair," (based on our criteria). We assess 
AutoTrader.com's financial profile as "aggressive" because of its acquisitive 
growth strategy and recent debt-financed dividend. We view the company's 
management and governance as "fair."

We continue to factor into the rating implied support from Cox Enterprises 
Inc., which maintains operating control. We would rate AutoTrader.com in the 
'BB' category on a stand-alone basis. While we do not view the AutoTrader.com 
debt as a Cox obligation, given the significant value of Cox's ownership 
position, we believe it has incentives to provide some degree of credit 
support to AutoTrader.com.

AutoTrader.com is the world's largest automotive classifieds marketplace and 
consumer information Web site and is a leading provider of marketing and 
software solutions for automotive dealers in the U.S Its business is subject 
to intense competition in the online automotive classifieds market from other 
online sites, and also from traditional print and newspaper classified 
advertising. AutoTrader.com's concentration of earnings from this market and 
some cyclicality in the business are also key risks. Although the company has 
benefited from the shift in advertising toward online platforms and away from 
print, traditional media still captures the majority of automotive 
advertising. AutoTrader.com generates almost 65% of its revenues from auto 
dealers, largely from relatively stable monthly subscriptions. The next 
largest source of AutoTrader.com's revenue is Kelley Blue Book (accounting for 
about 13% of revenues), which provides vehicle pricing information and 
operates KBB.com. The company has a diverse revenue stream, with no client 
accounting for more than 2% of revenues, and a strong EBITDA margin that we 
expect will remain steady, if not expand.

For 2013, we expect revenue and EBITDA to grow at a high-single-digit to 
low-double-digit percent rate, reflecting growth across all segments. We 
estimate high-single-digit percentage growth in the Digital Media segment as a 
result of 2%-3% growth in dealer penetration and an increase in revenue per 
dealer from the sale of additional services. We expect Software Solutions' 
revenue to increase at a double-digit percent rate as the number of 
subscribers grows. We believe the EBITDA margin will remain in the low-30% 
area, but that it could potentially expand slightly because of the company's 
operating leverage.

For the quarter ended Sept. 30, 2012, revenue and EBITDA (before stock 
compensation expense) increased 15% and 25%, respectively, year over year. 
Revenue from the Digital Media segment grew 13% due to an increase in the 
average monthly subscription rate paid by dealers and growth in advertising 
from original equipment manufacturers while revenue from the Software 
Solutions segment jumped 36% with an increased number of subscriptions and an 
increase in subscription fees per dealer. For the 12 months ended Sept. 30, 
2012, the EBITDA margin increased to 31.5%, up slightly from 29.7% for the 
same period in 2011, due to benefits of cost containment measures.

Lease-adjusted leverage was 3.4x as of Sept. 30, 2012, down from 4x in March 
2012, pro forma for the debt-financed divdidend, as a result of debt repayment 
and EBITDA growth. We believe that debt leverage will decline to 3x or less 
over the next 12 to 18 months from EBITDA growth and a decline in debt 
balances. Pro forma for the recent debt-financed dividend, EBITDA coverage of 
interest expense was around 9x. We expect interest coverage to increase to the 
10x area in 2013. Conversion of EBITDA to discretionary cash flow has been 
high, at around 50% (but negative when including the special dividend in the 
second quarter of 2012), and we expect the conversion rate to remain in this 
area.

Liquidity
AutoTrader.com has "adequate" liquidity to cover its needs in the 
near-to-intermediate term, even in the event of moderate unforeseen EBITDA 
declines. Our assessment of the company's liquidity profile incorporates the 
following expectations and assumptions:
     -- We expect sources to cover uses for the upcoming 12 to 24 months by at 
least 1.2x.
     -- We also expect net sources to be positive, even if EBITDA drops 
15%-20% over the next 12 months.
     -- Headroom under the company's financial covenants could withstand a 15% 
drop in EBITDA.
     -- Because of AutoTrader.com's high conversion of EBITDA to discretionary 
cash flow, we believe it could absorb low-probability, high-impact shocks.
     -- In our opinion, the company has a generally satisfactory standing in 
the credit markets.
 
Sources of liquidity include our expectation of roughly $240 million in funds 
from operations in 2012 and $270 million in 2013. An additional source of 
liquidity as of Sept. 30, 2012, is its borrowing availability of $185 million 
under the revolving credit facility due 2015. We believe AutoTrader.com will 
generate good discretionary cash flow of around $150 million in 2012 and $190 
million in 2013, despite an increase in interest expense.

As of Sept. 30, 2012, the company had 28% headroom with its debt-to-EBITDA 
covenant, its tightest covenant. Based on our 2013 EBITDA assumptions and 
modest debt repayment, we expect the company to maintain an adequate cushion 
of compliance of over 20% with this covenant over the next 12 to 18 months, 
including the covenant step-down to 4x in the fourth quarter, and the final 
step-down to 3.5x on Dec. 31, 2013. We believe debt maturities are manageable, 
based on our discretionary cash flow expectations over the next few years. 
Annual amortization of debt is between $45 million and $61 million, until the 
term loan A matures in 2015.

Recovery analysis
For the recovery analysis, see Standard & Poor's recovery report on 
AutoTrader.com, published April 17, 2012, RatingsDirect.

Outlook
The rating outlook is stable, reflecting our expectation that AutoTrader.com 
will continue to reduce debt leverage with discretionary cash flow, maintain 
an adequate margin of compliance above 20% while meeting covenant step-downs, 
and demonstrate satisfactory liquidity over the intermediate term. We could 
lower the rating if, notwithstanding the IPO, the margin of covenant 
compliance narrows to less than 20% (taking into account the fourth quarter 
2012 leverage test step-down), as a result of operating performance trends. 
Specifically, this could occur if the company resumes debt-financed 
acquisitions or experiences increased competition or economic pressures that 
cause EBITDA to decline 3% while the company pays down only the mandatory 
amortization on its debt.

Conversely, we do not expect to raise the rating. While, in our opinion, the 
AutoTrader.com rating benefits from the majority ownership by Cox, the 
magnitude of that implied credit support is limited and not sufficient, by 
itself, to raise the AutoTrader.com corporate credit rating into the 
investment-grade category. Accordingly, a potential upgrade for AutoTrader.com 
would be predicated on a substantial improvement in its stand-alone credit 
metrics, something that, in our view, is not likely in the foreseeable future 
given management's growth and shareholder return objectives.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
 
Ratings List

Ratings Affirmed; Outlook Revision
                                        To                 From
AutoTrader.com Inc.
 Corporate Credit Rating                BB+/Stable/--      BB+/Negative/--
 Senior Secured                         BB+                
   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.
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