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 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
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