S&P: SK HoldCo LLC Downgraded To 'B-' From 'B' Following $75 Million Senior Unsecured Note Add-On; Outlook Stable
At the same time, we lowered our issue-level rating on the company's senior secured debt to 'B' from 'B+'. The '2' recovery rating remains unchanged, indicating our expectation for substantial (70%-90%; lower half of the range) recovery in the event of a payment default.
In addition, we lowered our issue-level rating on SK HoldCo's $375 million senior unsecured notes to 'CCC' from 'CCC+'. The '6' recovery rating remains unchanged, indicating our expectation for negligible recovery (0%-10%) in the event of a payment default.
"SK HoldCo operates light-vehicle collision repair shops in the U. S.," said S&P Global credit analyst David Binns. "The company's economically resilient business model is offset by its aggressive expansion strategy--which entails significant integration risk--and its narrow scope, scale, and geographic and business diversity (the company only operates in certain locales in the U. S. and its business is solely focused on collision repair services)."
The stable outlook on SK HoldCo reflects our belief that the company will maintain or improve its recent gross margin levels, allowing it to generate a small amount of positive FOCF and maintain sufficient liquidity despite its aggressive growth strategy.
We could lower our ratings on SK HoldCo in the next 12 months if the company's operating prospects reverse and its gross margins decline, potentially due to integration risks associated with its acquisitions or technical labor wage pressure caused by heightened competition. We could also consider downgrading the company if is unable to consistently generate positive free cash flow for multiple quarters, adversely affecting its liquidity, or if we consider its capital structure to be unsustainable.
We could raise our ratings on SK HoldCo over the next 12 months if the company's debt-to-EBITDA metric falls well below 8.0x and its FOCF-to-debt ratio approaches 5% on a sustained basis. This could occur if the company's acquisitive strategy leads to better-than-expected revenue growth and EBITDA margins and we believe that there is a low likelihood for further sizeable debt-financed acquisitions.