(The following statement was released by the rating agency)
Dec 10 -
Summary analysis -- A.T.U Auto-Teile Unger Handels GmbH & Co. KG -- 10-Dec-2012
CREDIT RATING: B-/Negative/-- Country: Germany
Primary SIC: Motor vehicle
Credit Rating History:
Local currency Foreign currency
20-Dec-2010 B-/-- B-/--
24-Sep-2010 --/-- --/--
The rating on Germany-based auto parts retailer and integrated workshop operator A.T.U Auto-Teile Unger Handels GmbH & Co. KG (ATU), a subsidiary of A.T.U Auto-Teile-Unger Holding GmbH (ATU Holding), reflects Standard & Poor’s Ratings Services’ view of the company’s “highly leveraged” financial risk profile and “weak” business risk profile. Our financial assessment relies on accounts from Auto-Teile-Unger Investment GmbH & Co. KG, an intermediate holding company between ATU and ATU Holding, because ATU doesn’t publish financial accounts.
We believe that ATU’s high leverage limits its financial flexibility. ATU also has a challenging debt maturity profile, under which virtually all of the group’s financial debt of EUR593 million will fall due in 2014. We view this as a key risk for the company’s financial credit profile. We also consider cash generation, which depends on poor winter road conditions and cold temperatures for seasonal sales in the fourth and first quarters of the year, to be a key risk for the company. ATU’s seasonal business model, with high earnings’ fluctuations and working-capital needs within the year, and its exposure to pricing pressures in the highly competitive German automotive aftermarket, could, in our view, constrain ATU’s profitability over time.
Offsetting these negative rating factors somewhat is the company’s nationwide network coverage. This gives ATU considerable purchasing power, enabling it to compete on price to run its discount business model with some cost advantages over original equipment manufacturer dealers. The ratings are also supported by ATU’s high brand awareness and generally fairly low capital expenditure requirements that should support financial flexibility over time. We view ATU’s management and governance as “fair”.
S&P base-case operating scenario
In our base-case scenario for calendar year 2012 (ATU recently changed its reporting and now reports its financial year at the end of June), we anticipate ATU’s revenues will be flat. This is primarily due to a weakening economic climate in Germany (see “Economic Research: The Eurozone’s New Recession -- Confirmed,” published on RatingsDirect on Sept. 25, 2012) where ATU generates the vast majority of its revenues and earnings. This anticipation is in line with the development in the first three quarters of 2012 ending Sept. 30, 2012, where year-on-year sales were flat.
We still expect ATU to show a stronger fourth calendar quarter in 2012 when compared to the fairly weak fourth quarter in 2011, that was hit by unusually mild winter weather conditions that hampered its winter sales. This also rests upon our assumption that the performance of its servicing and repair business will continue to be relatively robust. For 2013, we assume the company to report low single-digit growth. However, a less favorable economy that dampened consumer spending could potentially add pressure to ATU’s performance.
Under our base case, we expect ATU’s reported EBITDA generation to stay at close to 7% of revenues in 2012 and 2013. This is about in line with the group’s average profitability over the past three years.
S&P base-case cash flow and capital-structure scenario
The group’s financial risk profile assessment is limited by ATU’s liquidity. In particular, we consider the group’s bulky maturity profile as a burden. All debt falls due in 2014, with the first large maturity of EUR450 million due in May of that year, following the maturity of its EUR45 million revolving credit facility (RCF) in March 2014. We also assess ATU’s free operating cash flow generation potential as relatively weak, owing to its high leverage and related interest payments of about EUR60 million and EUR65 million per year.
In our base case, we assume that ATU’s EBITDA for the calendar year 2012 will be slightly up from 2011, leaving funds from operations to debt and debt to EBITDA for 2011 at about 5% and 10x, respectively. We expect financial leverage to remain high over our forecasting period. As ATU has significantly slowed its network expansion since 2008, with no branch openings since 2009, maintenance capital expenditure needs are relatively low. We assume the group will incur about EUR10 million to EUR15 million in maintenance capital expenditures in line with the company’s guidance for 2012. In April 2012, the company paid another EUR10 million for a previously leased warehouse, with the last installment of about EUR10 million due in October 2013. Under our base case we assume the company will generate a low double-digit million amount of free operating cash flow due to some reduction in working capital levels on the previous year, assuming average winter conditions.
We view ATU’s liquidity as “less than adequate,” under our criteria. This is despite the extension and increase of the group’s RCF (to EUR45 million from EUR30 million previously with its new maturity in March 2014). ATU’s liquidity sources should exceed its forecast liquidity needs over the 12 months starting Sept. 30, 2012, according to our calculations. The “less than adequate” liquidity descriptor is primarily owing to what we view as a challenging repayment schedule with virtually all the company’s financial debt falling due in 2014.
At the end of September 2012, liquidity sources included:
-- Cash and equivalents of about EUR35 million; and
-- Access to its EUR45 million RCF, of which about EUR25 million was undrawn. The RCF will mature in March 2014.
The company has no debt maturities before 2014, but its refinancing needs for 2014 amount to about EUR593 million, virtually all the group’s outstanding financial debt. The company is currently financed with two bonds, EUR450 million of secured notes matures in May 2014, and EUR143 unsecured notes in October 2014. Its recently extended and increased RCF of EUR45 million now matures in March 2014. Considering the company’s highly leveraged financial risk profile and its volatile free cash generation, we see this maturity schedule as fairly challenging. Failure to address this proactively to avoid any of this debt becoming short-term would therefore put pressure on the rating.
We have assigned our ‘B-’ issue rating, in line with the corporate credit rating, to the existing EUR375 million 11% senior secured notes and EUR75 million floating rate notes issued by ATU. The recovery rating on both tranches is unchanged at ‘4’, indicating our expectation of average recovery (in the 30%-50% range) in the event of a payment default.
The recovery rating on the senior secured notes is supported by a fairly comprehensive security package consisting of share pledges, inventories and receivables, and by a favourable insolvency regime, Germany. At the same time, the recovery rating is constrained by the existence of a prior ranking RCF of EUR45 million, which would rank at the point of enforcement ahead of the notes, as established in an intercreditor agreement. The recovery rating is also constrained by the existence of several debt baskets in the documentation.
To calculate recoveries, Standard & Poor’s simulates a hypothetical default scenario. We believe that a default would most likely be triggered by a difficult operating environment resulting in lower revenues and negative cash flows with an inability to refinance the maturing debt in 2014. We have therefore simulated our hypothetical default scenario in 2014.
We believe that on the hypothetical path to default, profitable branches of the business would be reorganized on a going-concern basis, reflecting ATU’s well-recognized brand name in Germany, whereas unprofitable branches could be sold on a liquidation basis.
In our liquidation valuation, the stressed asset valuation results in a stressed book value of about EUR220 million. Our going-concern valuation yields a stressed enterprise value of about EUR290 million, equivalent to about 4.0x EBITDA at default. We weight our valuation based on two-thirds going concern and one-third liquidation, leading to a blended stressed valuation of about EUR270 million at the hypothetical point of default. From this valuation, we then deducted prior ranking RCF of EUR45 million and priority obligations comprising enforcement costs, to arrive at the residual amount of about EUR205 million available for the senior secured noteholders. At the point of default, we assume EUR476 million of senior secured notes outstanding (including six months of prepetition interest) resulting in recovery prospects in the 30%-50% range for the senior secured notes.
The negative outlook reflects the possibility of a downgrade over the next 12 months should ATU’s currently “less than adequate” liquidity profile deteriorate further. This could stem from failure to proactively address its challenging debt maturity profile over the coming months, including a refinancing of its EUR450 million secured notes until May 2014.
We also see potential pressure on the rating should the group’s profitability deteriorate in a potentially more challenging economic environment in 2012 and 2013. A potential deterioration of profitability and failure to generate positive free operating cash flows would further reduce the group’s chances of achieving the necessary refinancing in the coming three to six months, in our view. We consider an EBITDA margin of less than 6% and failure to release a significant amount of cash through the reduction of working capital levels as inconsistent with the current ratings, since we assume negative free operating cash flow generation at that level for 2012.
Until we have clarity on the debt maturity we see a stable outlook as unlikely.
Related Criteria And Research
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers’ Speculative-Grade Debt, Aug. 10, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Standard & Poor’s Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008