OREANDA-NEWS. S&P Global Ratings said today that it lowered its corporate credit rating on Memphis, Tenn.-based residential HVAC and plumbing services provider American Residential Services LLC to 'B' from 'B+'. The outlook is stable. We also lowered our issue-level rating on the company's first-lien revolving credit facility and term loan to 'B+' from 'BB-'. Our recovery rating remains unchanged at '2', indicating our expectation for substantial (70%-90%, at the lower end of the range) recovery in the event of payment default. The second-lien term loan is not rated. We estimate the company's adjusted debt was approximately $385 million as of July 31, 2016, which includes our adjustments of approximately $50 million for operating leases, workers compensation, and purchase price payables. The downgrade reflects ARS' more aggressive financial policy as demonstrated by its debt financed dividend and our expectation that the financial sponsor will opportunistically extract cash from the business such that debt-to-EBITDA levels will not remain below 5x. We expect the company to continue to grow organically on the heels of a hot summer. Moreover, we expect the company to continue to grow by making acquisitions. The company has completed three acquisitions thus far in 2016 and has a pipeline of opportunities for the next 12 months. We anticipate debt-to-EBITDA to decrease to around 5x by the end of 2016. Our rating on ARS reflect its highly leveraged capital structure, narrow focus in the U. S. air conditioning and plumbing market (which is susceptible to economic cycles and volatility in the construction market as well as weather conditions) and aggressive growth strategy. We have also factored into our ratings our view that repair services for air conditioning and plumbing is not as discretionary as other residential services and can withstand some level of economic stress. The company operates nationally with the ARS/Rescue Rooter brand as well as a portfolio of strong local brands. We consider the domestic HVAC and plumbing market to be highly fragmented, which we view as an opportunity for the company to increase market share both organically and through bolt-on acquisitions. Although the company generates good cash flow, we anticipate it will use the majority of internally generated cash for acquisitions. Therefore, we project it will use very little cash to pay down debt, and that any additional distributions to shareholders or a material acquisition would require the company to raise additional debt. Other assumptions in our forecast for fiscal 2016 include:We expect revenue to grow around 10% in 2016 and 2017, outpacing the U. S. real GDP growth rate of 2% in 2016 and 2.4% in 2017, as the company continues to look for bolt-on acquisitions in its HVAC business. We assume the organic revenue in both the HVAC and plumbing segments grow at the rate of GDP. We are forecasting modest EBITDA margin improvement but that the margin will remain in the high-single digits in 2016 and beyond as the company integrates acquired businesses and consolidates some of the support functions. Cash flow from operations of about $50 million a year. Acquisitions of about $30 million a year. No further dividends or shareholder returns in the forecast in 2016 and 2017. Based on our assumptions, we forecast debt to EBITDA to be around 5x by the end of 2016, and low-double-digits funds from operations (FFO) to debt. This reflects a slight improvement from current levels, which include mid-5x debt to EBITDA. The stable outlook reflects our expectations that ARS will continue to be acquisitive, with financial leverage from time to time above 5x. We expect EBITDA will increase from good expense management, integration capability, and sharing of best practices with acquired companies. We expect debt-to-EBITDA will be around 5x in the next 12 months. We would lower our ratings if the company's operational performance deteriorates such that financial leverage approaches 7x, which could occur if EBITDA declines by 30% at the current debt level, caused potentially by prolonged unfavorable weather trends (mild summers, for example) that would impact their HVAC business segment. We could also lower the ratings if the financial sponsor becomes more aggressive and seeks to add leverage to the company, which could occur if the company adds $140 million of debt at current EBITDA levels. An upgrade is unlikely given the company's financial sponsor ownership and its willingness to releverage the company above 5x. However, we could reassess the ratings if we believe the company will sustain debt-to-EBITDA below 5x. For this to occur we believe the company would need to substantially change its capital structure, which would likely be predicated by a change in ownership; for example, if the company were to have an initial public offering and use the proceeds to pay down debt such that leverage is sustained below 5x. We would also consider an upgrade if we see material improvement in margins, possibly because of improved pricing while gaining market share. We would expect such improvements as a result of a transformative event.