New York, November 26, 2012 -- Moody's Investors Service assigned first-time corporate family and probability of default ratings of B2 to Safway Group Holding LLC ("Safway"). In a related action, Moody's assigned a B2 rating to the company's proposed senior secured term loan, the proceeds of which will be used to refinance Safway's existing senior secured term loan due 2017, pay down borrowings under its existing revolving credit facility, and improve its cash position. The rating outlook is stable.
The following ratings will be affected by this action:
Corporate Family Rating assigned B2;
Probability of Default Rating assigned B2; and,
Senior Secured Term Loan due 2019 assigned B2 (LGD4, 56%);
Safway's B2 Corporate Family Rating reflects the company's high adjusted debt leverage. As a result of the proposed transaction, we calculate adjusted debt-to-EBITDA increasing to about 5.7 times, on a pro forma basis, from about 4.8 times as of September 30, 2012. According to our projections, debt leverage could improve slightly to approximately 5.5 times over the next 12 to 18 months, primarily as a result of improved profitability as opposed to debt reduction (all ratios incorporate Moody's standard accounting adjustments). We add approximately $330 million of additional debt to the balance sheet to adjust for off-balance sheet obligations, including operating lease commitments and about $180 million for potential US multi-employer pension plan liabilities. Offsetting our concerns about the company's debt burden are expectations for margin expansion as conditions in the refining and power sectors, key drivers of Safway's revenues, improve. Also, we believe that Safway will benefit from its exposure to the commercial construction sector, which is experiencing a modest rebound. Improving operating efficiencies and branch consolidation will aid in better margins as well. Furthermore, Safway's good liquidity profile, supported by an asset-based revolving credit facility with ample availability, is a key credit strength.
The stable rating outlook reflects our view that Safway's credit metrics will improve as it continues to leverage its scale and market position to compete for industrial maintenance and turnaround projects and as the North American construction sector continues to strengthen. The lack of near-term debt maturities until the revolver matures in 2017 will also provide financial flexibility until end markets experience a strong, sustainable recovery.
The B2 rating assigned to the proposed senior secured term loan is the same as the corporate family rating, as it represents the preponderance of debt in Safway's capital structure. The term loan will benefit from a first-priority interest in substantially all of Safway's domestic assets, excluding accounts receivable, and will be guaranteed by the company's future and existing domestic subsidiaries.
The ratings may improve if Safway is able to reduce leverage, either through improved operating profitability or debt reduction using free cash flow. Adjusted debt-to-EBITDA sustained below 5.0 times and improved debt service coverage such that adjusted (EBITDA-Capex)-to-interest expense exceeds 2.0 times could result in positive rating actions.
The ratings may be downgraded if the company fails to meet our expectations for improvement in debt leverage, with adjusted debt-to-EBITDA remaining above 5.5 times. Adjusted (EBITDA-Capex)-to-interest expense below 1.5 times could also pressure the ratings. In addition, if the company pursues large debt-financed acquisitions that do not prove sufficiently accretive relative to incremental debt, negative rating actions may be taken.
The principal methodology used in rating Safway Group Holding LLC was the Global Business and Consumer Services Industry Methodology published in October 2010. 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.
Safway Group Holding LLC, headquartered in Waukesha, WI, is a North American provider of work access with a growing presence in specialty services. Safway provides scaffolding, insulation, coatings and other services supporting the refining, chemical and power industries. It also provides scaffolding and other services for the commercial construction end market including the maintenance and renovation of commercial and multi-family buildings. Odyssey Investment Partners ("Odyssey"), through its respective affiliates, owns the company. Revenues for the 12 months through September 30, 2012 totaled about $887 million.
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Peter Doyle Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Brian Oak 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.
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