Moody's downgrades ATU's CFR to Caa3; outlook remains negative
Global Credit Research - 21 Aug 2013
Approximately EUR 590 million rated debt affected
Frankfurt am Main, August 21, 2013 -- Moody's Investors Service has today downgraded the corporate family rating ("CFR") of A.T.U. Auto-Teile-Unger Investment GmbH & Co. KG ("ATU") to Caa3 from Caa2 and the probability of default rating ("PDR") to Caa3-PD from Caa2-PD; the rating of the issuer's EUR 143 million senior subordinated floating rate notes has been changed to Ca from Caa3. At the same time, Moody's has downgraded the rating of the EUR 375 million senior secured notes as well as the EUR 75 million senior secured floating rate notes issued by A.T.U. Auto-Teile-Unger Handels GmbH & Co. KG to Caa2 from Caa1. The outlook remains negative.
The following ratings are affected:
Downgrades:
..Issuer: A.T.U. Auto-Teile-Unger Invtmt GmbH & Co. KG
.... Probability of Default Rating, Downgraded to Caa3-PD from Caa2-PD
.... Corporate Family Rating, Downgraded to Caa3 from Caa2
....EUR150M Senior Subordinated Regular Bond/Debenture Oct 1, 2014, Downgraded to Ca from Caa3
....EUR150M Senior Subordinated Regular Bond/Debenture Oct 1, 2014, Downgraded to a range of LGD5, 87 % from a range of LGD5, 86 %
..Issuer: ATU Auto-Teile-Unger Handels GmbH & Co. KG
....EUR75M Senior Secured Regular Bond/Debenture May 15, 2014, Downgraded to Caa2 from Caa1
....EUR75M Senior Secured Regular Bond/Debenture May 15, 2014, Downgraded to a range of LGD3, 37 % from a range of LGD3, 36 %
....EUR375M 11% Senior Secured Regular Bond/Debenture May 15, 2014, Downgraded to Caa2 from Caa1
....EUR375M 11% Senior Secured Regular Bond/Debenture May 15, 2014, Downgraded to a range of LGD3, 37 % from a range of LGD3, 36 %
Outlook Actions:
..Issuer: A.T.U. Auto-Teile-Unger Invtmt GmbH & Co. KG
....Outlook, Remains Negative
..Issuer: ATU Auto-Teile-Unger Handels GmbH & Co. KG
....Outlook, Remains Negative
RATINGS RATIONALE
"Today's rating action has been triggered by the assessment that ATU's capital structure is not sustainable anymore driven by the continued decline of the group's operating performance during the first six months of 2013, the ongoing cash burn resulting in a tightened liquidity position, reduced covenant headroom under the group's revolving credit facility as well as by the reduced timeframe to solve the question how to refinance the outstanding bonds totaling EUR 593 million, falling due between May and October 2014." says Oliver Giani, lead analyst at Moody's for ATU.
Despite of numerous restructuring measures taken -- personnel and other expenses have been reduced by EUR 31 million year-over-year -- ATU's EBITDA fell by more than 40% to EUR 61.9 million in fiscal year 2012/13 ending in June 2013. ATU is exposed to a very high interest burden of around EUR 66 million per year. This is a result of the high debt load of more than EUR 610 million (as reported, before Moody's debt adjustment for operating leases), which even increased further by more than EUR 30 million during FY 2012/13 reflecting the ongoing cash burn and seasonal swings of the business. The company's profitability and cash flow generation ability can be negatively influenced by unfavorable weather conditions such as a mild winter or an extended winter season as seen in 2013. Combined with its weak capital structure this makes ATU highly vulnerable. Including Moody's adjustments, ATU's leverage based on the preliminary financial results per June 2013 was estimated to be at a very high level of 11.2x.
However, according to ATU's latest quarterly reporting the group's operating result is improving reflecting various measures taken and positive effects improving the margin. We note that a turnaround in EBITDA is key in order to avoid a covenant breach under ATU's loan documentation.
ATU claims that efforts to establish a long-term refinancing concept are in an advanced stage. Given the unsustainable capital structure we believe that there is a high likelihood of a transaction to refinance upcoming debt maturities that could qualify for a distressed exchange. Management now expects to be able to present a long-term viable concept by end of October at the latest.
Liquidity has weakened significantly due to the poor performance during H1 / 2013. As of June, ATU's main source of liquidity was a cash position of EUR 15.5 million. The company's EUR 45 million super-senior revolving credit facility ("RCF") maturing in March 2014, was fully drawn. We note that drawings under this facility are dependent on a minimum EBITDA covenant, headroom under which reduced to a minimum given the decline in operating performance. In addition, the need to build up working capital to be prepared for the winter season will require substantial additional liquidity.
The negative outlook reflects Moody's ongoing concerns about ATU's ability to secure a long-term financing structure ahead of final maturity. It also mirrors the increased risk that the group's lenders may be required to participate in a potential restructuring, which could qualify as a distressed exchange.
Any indication, that the refinancing cannot be achieved before final maturity, or the company plans to engage in a distressed exchange, would put further pressure on the ratings. Downward pressure would also intensify if the group's restructuring efforts prove to be insufficient to maintain an appropriate earnings level and the leverage would continue to increase.
We would revise the outlook to stable if ATU is able to timely and sustainably refinance its upcoming debt maturities, and avoid any further deterioration in its leverage ratio and liquidity profile. The rating could be upgraded in case of a reduction in the overall debt level leading to a more sustainable capital structure.
The principal methodology used in these ratings was the Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on
www.moodys.com for a copy of these methodologies.
Based in Weiden, Germany, ATU is Germany's leading operator of brand-independent car workshops with integrated specialist auto retail stores. As of June 2013, ATU operated a network of 646 branches, 598 of which are located in Germany, others in Austria, the Czech Republic, the Netherlands, Switzerland and Italy. In fiscal year 2012/13, ATU generated €1.16 billion revenues through its 10,879 employees. The vast majority of sales (around 80%) are generated in the vehicle workshops through servicing and repairs, with the remaining approximately 20% generated through the sale of auto parts and accessories in stores and online. ATU is owned by private equity firm KKR and management.
