-- 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
-- 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.
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.
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
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
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
-- 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.
For the recovery analysis, see Standard & Poor's recovery report on
AutoTrader.com, published April 17, 2012, RatingsDirect.
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 Affirmed; Outlook Revision
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