$425 million of debt securities rated
New York, July 19, 2012 -- Moody's Investors Service has assigned a B2 rating to the proposed senior secured, first-lien notes due 2020 of SPL Logistics Escrow, LLC and SPL Logistics Finance Corporation, and a B2 Corporate Family Rating (CFR) and Probability of Default Rating (PDR) to their parent company - SPL Logistics, LLC ('SPL Logistics' or 'the Company'). The ratings outlook is stable.
The B2 CFR reflects the sizeable amount of debt that results from the leveraged acquisition of a controlling interest in the Company, which is a carve-out of the existing third party logistics segment of Caterpillar, Inc. ('Caterpillar'), by private equity sponsor Platinum Equity. With almost $900 million of total debt at closing (including Moody's standard adjustments, primarily for leases and pensions), we estimate pro forma 2012 metrics of the following: Debt to EBITDA at approximately 5 times; EBIT to Interest of about 1.6 times; and Retained Cash Flow to Debt of 11%. These metrics are consistent with a B2 rating level. We do not anticipate any substantial improvement in these metrics over the near term, as revenue growth is expected to be muted by soft economic conditions affecting many of the Company's key customer industries. In particular, the automotive sector drives approximately 60% of the Company's revenues.
Partially offsetting the high leverage, Moody's recognizes the strong underlying third-party logistics franchise that Caterpillar has created under this business unit which we expect will continue with SPL Logistics after the close of the acquisition. The Company employs a service parts logistics business model, whereby it can provide more value-added services to their customers than do their peers in the contract logistics segment. This allows the Company to enjoy relatively a relatively stable revenue base with long term customers on multi-year contracts. In addition operating margins are superior to those typically earned by many of its competitors. The stability of the Company's revenue base and margins will be an important factor in its ability to generate cash flow to repay debt and to improve its credit metrics over time. However, this also heightens the importance of the Company executing this strategy as a stand-alone operation. Any degradation in services levels, particularly where large, long-term customers are concerned, might result in a deterioration the Company's contract renewal rates, possibly resulting in weakening revenue growth and declining margins.
The senior secured notes are rated B2, which is the same as the CFR and PDR. Under Moody's Loss Given Default (LGD) methodology, the $425 million senior secured notes represent the majority of the Company's liability structure. Within the LGD waterfall, the notes have a senior claim relative to approximately $121 million in unsecured, non-debt liabilities that include pensions and lease obligations. The notes rank pari-passu with the Company's proposed $60 million senior secured, first lien revolving credit facility (unrated), but a first-out payment provision favors the revolving credit facility and lowers the implied recovery of the notes relative to the revolver. Moody's also notes that a substantial portion of the Company's operations are performed by foreign, subsidiaries that do not provide guarantees to the senior secured debt instruments. However, we believe that the proposed terms governing the notes provide sufficient protection against any substantial leveraging event at non-guaranteeing entities that would negatively affect holders of the proposed senior secure notes.
Moody's believes that the Company will maintain an adequate liquidity position. On close of the proposed refinancing, the Company will have modest cash balances -- less than $15 million. However, with strong operating margins on a sizeable revenue base, we expect that the company will generate operating cash flow well in excess of required investment levels. As such, the Company's cash levels are expected to grow over the near term, exceeding $50 million by the end of 2012. The Company will have a $60 million revolving credit facility on close of the financing, which we view as somewhat small for a company of this size. However, due to the limited amount of capital investment implied in its asset-light business model, we do not expect that the Company will make large use of this facility over the near term. We estimate that the Company will be compliant with financial covenants prescribed under its revolving credit facility.
The stable ratings outlook reflects Moody's expectations that the Company will be able to maintain a steady revenue base over the near term, renew contracts with long term customers as they expire and garner a modest amount of new business, while maintaining operating margins. This should allow it to maintain credit metrics at current pro forma levels through 2013, and to generate sufficient free cash flow over the longer term.
Ratings or their outlook could be adjusted downward if the Company were to lose a substantial portion of its current customer base and thereby suffer a material decline in revenue. Rating pressure could also occur with metrics of the following levels: a substantial reduction in operating margins; free cash flow that becomes substantially negative; Debt to EBITDA in excess of 6.0 times; EBIT to Interest of less than 1.2 times; or Retained Cash Flow to Debt of less than 8%. In addition, any material tightness to financial covenants prescribed under the revolving credit facility, possibly resulting from weaker than expected operating performance, could pressure the ratings downward.
Upward rating consideration could be warranted if the Company reduces leverage while demonstrating steady revenue growth at strong operating margins. In particular, Debt to EBITDA of less than 4.5 times or EBIT to Interest of over 2 times could warrant a ratings upgrade.
..Issuer: SPL Logistics, LLC
.... Probability of Default Rating, Assigned B2
.....Corporate Family Rating, Assigned B2
..Issuer: SPL Logistics Escrow, LLC (to be merged with and into Caterpillar Logistics Services, LLC, an operating subsidiary of SPL Logistics, LLC)
....Senior Secured Regular Bond/Debenture, Assigned B2, LGD3 - 46%
SPL Logistics' ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside SPL Logistics' core industry and believes SPL Logistics' ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
SPL Logistics, LLC, headquartered in Downers Grove, IL, is a global provider of service parts logistics.
The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.
Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
David Berge VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael J. Mulvaney MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED,DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error negligent or otherwise or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."
Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.
Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody's Japan K.K. ("MJKK") are MJKK's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, "MIS" in the foregoing statements shall be deemed to be replaced with "MJKK". MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO.
This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.