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Midas Intermediate Holdco II, LLC — Moody’s affirms all ratings of Service King; outlook positive

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Rating Action: Moody’s affirms all ratings of Service King; outlook positive

Global Credit Research – 09 Dec 2020

New York, December 09, 2020 — Moody’s Investors Service, (“Moody’s”) today affirmed all ratings of Midas Intermediate Holdco II, LLC (dba “Service King”), including its Caa1 corporate family rating and Caa2-PD probability of default ratings. At the same time, Moody’s assigned a B2 rating to the company’s proposed $700 million term loan and $91 million revolving credit facility. The outlook was changed to positive from negative.

“The change in outlook to positive recognizes the favorable impact on liquidity from the proposed refinance of the bank credit facilities,” stated Moody’s Vice President Charlie O’Shea. “The affirmation of the Caa1 CFR and Caa2-PD PDR reflects Moody’s concern that work remains with Service King’s capital structure, with the proposed new facilities subject to a “springing” maturity inside the October 2022 notes maturity in the event these notes have not been reduced below $135 million by July 1, 2022,” added O’Shea.

Assignments:

..Issuer: Midas Intermediate Holdco II, LLC

….Senior Secured Bank Credit Facility, Assigned B2 (LGD2)

Affirmations:

..Issuer: Midas Intermediate Holdco II, LLC

…. Probability of Default Rating, Affirmed Caa2-PD

…. Corporate Family Rating, Affirmed Caa1

….Senior Secured Bank Credit Facility, Affirmed B2 (LGD2)

….Senior Unsecured Regular Bond/Debenture, Affirmed Caa3 (LGD4)

Outlook Actions:

..Issuer: Midas Intermediate Holdco II, LLC

….Outlook, Changed To Positive From Negative

RATINGS RATIONALE

Service King’s ratings reflect the company’s weak credit metrics, with pro forma debt/ EBITDA for the LTM period ended September 2020 of around 11 times and EBIT/interest well below 1 time (including 50% credit for unrealized cost savings from front-office restructuring initiatives executed in early 2020). Supporting the ratings is its solid market position in the highly fragmented collision repair sub-sector, its mutually-beneficial relationships with national and major insurance carriers which represents the vast majority of revenue, and strong industry fundamentals which should support stable demand for its services. While demand fundamentals are expected to normalize to historically stable levels in FYE 2021, recent pricing pressure with certain carriers along with higher costs has resulted in an erosion in margins, EBITDA and free cash flow. New assignment volumes are showing signs of normalization, with Moody’s expectation that this, in tandem with the company’s cost reductions and other operating efficiency initiatives, will result in debt/EBITDA trending towards 8 times and EBIT/interest rising above 1 time during 2021. Assuming the refinance is completed as outlined, Service King’s presently weak liquidity will improve, however Moody’s notes that the looming October 2022 note maturity will create significant pressure if not addressed in due course. The positive outlook recognizes the favorable impact on Service King’s credit profile of the proposed refinance, as well as the potential for an improvement in credit metrics from the various operating initiatives.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be upgraded once the company addresses the 2022 notes maturity under reasonable terms, and it is able to drive meaningful revenue and EBITDA growth such that debt/EBITDA is below 7.5 times with EBIT/interest sustained materially above 1.25 times. An upgrade would also require the company to maintain at least good liquidity, and the expectation that financial policies will sustain metrics at these levels.

Ratings could be downgraded if the proposed refinance transaction does not close under the indicated terms, or if the 2022 note maturity is not addressed during 2021. Ratings could also be downgraded if “steady state” operating performance does not show signs of stabilization or if financial strategy becomes more aggressive such that debt/EBITDA remains above 7.5 times or EBIT/interest remains below 1.0 time.

Service King is exposed to environmental risk as the company is subject to governmental laws and regulations regarding hazardous waste. Service King could be impacted if they are found to be in purported violation of or subject to liabilities under any of these laws or regulations, or if new laws or regulations are enacted that adversely affect the operations, business, reputation, financial condition, or results of operations. Service King was recently fined by the State of California for failure to adhere to hazardous waste regulations. However, the fine was reduced to an immaterial amount, $1.8 million, following Service King’s early adoption of remediation efforts. Service King has put in a place an ongoing training program to ensure that its employees comply with all hazardous waste requirements going forward. Service King’s overall corporate governance risk is high given its financial sponsor ownership. Financial strategy and leverage policy are a key concern with sponsor-owned companies, and in the case of Service King, the key risk is that the sponsor’s pursuit of an aggressive pace of debt-funded acquisitions, which has increased total funded debt by more than $300 million since 2014, has resulted in an elevated leverage profile that may limit the company’s financial flexibility in the event that earnings deteriorate from current levels.

Headquartered in Richardson, Texas, Midas Intermediate Holdco II, LLC is a leading provider of vehicle body repair services with annual revenue of over $1.1 billion. The company operates under the Service King brand name and operated 338 locations in 24 states as of September 30, 2020.

The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Charles O'Shea VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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Source: on 2020-12-09 13:32:26

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