S&P: Sonic Automotive Inc. Corporate Credit Rating Lowered To 'BB-' On Weak Free Op. Cash Flow; Sub Notes Lowered To 'B+'
S&P GLOBAL RATINGS BASE-CASE SCENARIOAssumptions:U. S. sales of new light vehicles will move up to 17.5 million units in 2016 (a year-over-year increase of about 4%) and 17.8 million units in 2017 (about 2%) because the average age of the typical car on the road is more than 11 years old, credit availability is high, interest rates are at historical lows, and there are some cash rebates available for purchases. The U. S. economy should continue its slow and steady recovery, with a baseline forecast for GDP growth of 2.0% in 2016 and 2.4% in 2017.European light vehicle production will rise year-over-year to 2.3% in 2016.Revenue will grow at a compound annual rate of about to 2% through fiscal-2017. Sonic was in compliance with the covenants under its credit facilities as of June 30, 2016, and we expect that it will remain in compliance through 2016 and into 2017. The covenants on the company's credit facilities include a required liquidity ratio of at least 1.05x through the remainder of the term of the facilities, a fixed-charge coverage ratio of at least 1.2x, and a total lease-adjusted leverage ratio of no more than 5.5x. Sonic participates in a multi-employer pension plan in California, but this contingent liability does not affect our rating on the company. In addition to ongoing contributions for its own employees, Sonic's participation potentially exposes it to increased liability if a major contributing employer were to become insolvent or if several other participants exit the plan at once. We believe that Sonic's potential liability associated with this plan is relatively small and that it could be managed with the company's normal cash flow and borrowings from its revolving facilities if it were required to fund the liabilities for all of the participants in the plan. The stable outlook reflects our assumption that Sonic will maintain credit measures that are in line with our expectations for the current rating, particularly debt leverage below 5.0x and an FOCF-to-debt ratio of at least 5% on a sustained basis. We assume that Sonic will pursue a financial policy that focuses on the building out of its EchoPark business. Downside scenarioWe could lower the ratings if aggressive financial policies cause Sonic's leverage metric to exceed 5.0x for an extended period or if we believe that the company will be unable to maintain an FOCF-to-debt ratio of 5%. This could occur if, for example, aggressive investment in dealer upgrades, acquisitions, or stand-alone used vehicle stores leads to increased debt or if the company's operating efficiencies erode and cause its FOCF to decline. We could also lower the ratings if the slow U. S. economic recovery reverses course, causing the company's EBITDA to decline because it is unable to offset the decrease in its revenue with cost controls. Upside scenarioAlthough not likely over the next year, we could raise the ratings if the company is able to achieve an FOCF-to-debt ratio of at least 10% on a sustained basis. We would also need to believe that Sonic could generate a sufficient level of FOCF as it expands its business by investing in stand-alone used vehicle stores and new vehicle dealerships.