S&P: Pinnacle Operating Corp. Downgraded To 'CCC' From 'CCC+' On Increased Liquidity Risk; Outlook Negative
We are also revising the issue-level rating on the company's first-lien debt to 'CCC' from 'CCC+. The associated recovery rating remains '4,' indicating our expectation of average (upper half of the 30%-50% range) recovery in the event of payment default. At the same time, we are lowering the issue-level rating on the company's second-lien debt to 'CC' from 'CCC-.' The associated recovery rating remains '6,' indicating our expectation of negligible (0%-10%) recovery in the event of payment default.
We believe that Pinnacle's liquidity position has deteriorated from previously expected levels. A further weakening of the operating environment, including weaker-than-anticipated pricing, has contributed to a weakening of liquidity. As a result, we are revising our liquidity assessment to less than adequate. This, combined with our expectation that operating performance will be slow to recover from a historically weak 2015, has resulted in the downgrade of the company to 'CCC'. Also, the rating outlook is now negative.
The negative outlook reflects our belief that there are added refinancing risks associated with the company's debt maturity profile, with the asset-based loan (ABL) coming due in November 2017, given the company's current liquidity needs and high leverage. Despite improvements from acquisition-related EBITDA, we expect our adjusted credit metrics to be weak in 2016 due to industry risks, including adverse pricing.
Although our expectations for 2016 include a full year of contribution from the company's many acquisitions undertaken in 2015, we are not expecting fundamental improvement to the company's core businesses because we believe that the operating environment will be more depressed than we previously expected. At the current rating, we expect that debt to EBITDA (on a weighted average of historical and projected numbers) will remain slightly above 10x over the next 12 months. We now factor in the possibility that leverage could be higher for brief periods due to short-term borrowings the company may undertake to shore up liquidity. We continue to expect the ratio to be in the high-single digits in 2016 and 2017, a level we consider to be unsustainable in the current operating environment. We assume that management and the company's owners will support credit quality and, therefore, we have not factored into our analysis any distributions to shareholders or significant debt-funded capital spending.
The company's ABL is due in November 2017 and we believe that the company's current liquidity situation has elevated the company's refinancing risk.
We could lower ratings further if the company is unable to refinance or extend its ABL maturity in a timely manner. We could also lower ratings should the company face any problems pertaining to covenant compliance.
We could also lower ratings further if the company increases its leverage, which could be prompted by the undertaking of any debt-funded acquisitions or if earnings were to weaken due to erosion in margins, which could result from product mix shifts, operating inefficiencies related to acquisitions, higher selling, general, and administrative expenses, or a prolonged period of severe weather or other adverse industry conditions, to name a few possible causes. We could also lower the ratings if we no longer deem management or financial-sponsor ownership to be supportive of the company's overall credit quality.
We could raise ratings on the company if they are able to successfully refinance their ABL in a timely manner and if the company is able to improve its liquidity position to levels that we consider adequate, with sustainable sources equal to or greater than 1.2x uses. This could happen either through an improvement in operational cash flow or through an equity infusion from the parent. It is unlikely that we would raise ratings if the company is unable to refinance or replace its ABL facility.