Moody's downgrades ATU’s corporate family rating

Moody's Investors Service has downgraded the corporate family rating of Germany’s A.T.U. Auto-Teile-Unger Investment GmbH & Co. KG from Caa1 to Caa2 and the company’s probability of default rating from Caa1-PD to Caa2-PD, while affirming the Caa3 rating of the issuer's 143 million euro senior subordinated floating rate notes. At the same time, Moody's has downgraded the 75 million euro senior secured floating rate notes issued by ATU from B3 to Caa1. The outlook on all the existing ratings has been changed to negative from stable.

“The rating action has been triggered by the increased refinancing risk for the outstanding bonds totalling 593 million euros, falling due between May and October 2014 as well as the company’s weaker-than-expected operating performance in first half of its 2012/13 financial year ending June 2013,” stated Oliver Giani, lead analyst at Moody’s. “The weak operating performance during the past two years has not only resulted in elevated leverage ratios, but also makes ATU’s refinancing more challenging.”

Although Moody’s notes that ATU’s management has been “exploring various options to ensure a long-term financing structure ahead of final maturity,” it points out that “no viable and concrete refinancing plan is visible at this stage,” given the maturity of the 450 million euro notes in less than 15 months.

Driven by economic uncertainty and extremely weak consumer sentiment in the automotive aftermarket, ATU’s sales went down by 1.6 per cent to 1.22 billion euros for twelve months to 31 December 2012. ATU reported a net debt-to-LTM EBITDA ratio of 6.0x as of December 2012, compared to 6.2x a year earlier. However, due to weakened EBITDA as adjusted by Moody’s (which includes restructuring costs), adjusted debt/EBITDA has been deteriorating to 8.4x as of year-end 2012 from 7.9x a year earlier and 7.2x per year-end 2010. According to Moody’s base case projections, leverage will stay high at above 8.0x in the next few years, as it does not expect positive free cash flow generation which could be used to reduce debt, nor does Moody’s expect any significant improvement in EBITDA. “ATU’s weak performance in the past two years makes it more challenging to secure the necessary refinancing in the coming months,” Moody’s adds.

Announcing its decision to downgrade ATU’s corporate family rating, Moody’s stated: “We acknowledge that ATU gained some market shares and is well on track to improve its cost base, which has largely offset the decline in top-line to keep EBITDA in the range of 90-100 million euros (adjusted by ATU). However, this was not sufficient to cover the high interest burden and increased capex during the past two years. We expect ATU’s cash flow generation and debt service capacity to remain quite limited in the near term.”

As of December 2012, ATU had a cash position of 23 million euros and a super-senior revolving credit facility (RCF) maturing in March 2014, which was drawn from time to time to cope with the seasonal swing in working capital. As of December 2012, the 45 million euro RCF was not utilised. “We note that drawings under this facility are dependent on a minimum EBITDA covenant, under which the company had adequate headroom as of December 2012,” comments Moody’s. “The company had no short-term debt maturity except the 450 million euro notes due in May 2014. Moody’s cautions that it might be challenging for ATU to renew its RCF before the resolution of the refinancing issue, leading to a potential deterioration of ATU’s liquidity profile. Overall, we consider ATU’s liquidity profile to be rather weak.”

Moody’s says the negative outlook reflects its increased concerns about ATU’s ability to secure a long-term financing structure ahead of final maturity. It also reflects the deteriorating trend in leverage during the past two years, which is unlikely to recover in the next few years.

Any indication that the refinancing cannot be achieved before final maturity, or that the company plans to engage in a distressed exchange, would put pressure on the ratings, Moody’s adds. Downward pressure would also arise if the group’s restructuring efforts prove to be insufficient to maintain an earnings level and the leverage would continue to increase. Likewise a deterioration of ATU’s liquidity profile would create downward pressure.

“We would revise the outlook to stable if ATU is able to timely and sustainably refinance its upcoming debt maturities, and avoid any further deterioration in its leverage ratio and liquidity profile,” Moody’s continues. “The rating could be upgraded in case of a reduction in the overall debt level leading to a more sustainable capital structure.”

ATU is Germany’s leading operator of brand-independent car workshops with integrated specialist auto retail stores. As of December 2012, ATU operated a network of 645 branches, 598 of which are located in Germany, others in Austria, the Czech Republic, the Netherlands, Switzerland and Italy. In 2012, ATU generated 1.2 billion euros in revenues through its approximately 12,000 employees. Around 80 per cent of its sales are generated in the vehicle workshops through servicing and repairs, with the remaining amount generated through the sale of auto parts and accessories in stores and online. ATU is owned by private equity firm KKR and management.