Fitch Downgrades ARAMARK's IDR to 'B' & Rates Sr. Notes 'B-/RR5'.
-- $600 million revolving senior secured credit facility due 2013 'BB-/RR2';
-- $4.15 billion senior secured term loans due 2014 'BB-/RR2';
-- $250 million senior secured synthetic letter of credit facility due 2013 'BB-/RR2';
-- $1.78 billion senior unsecured notes due 2015 'B-/RR5'.
In addition, the rating for the $250 million senior unsecured notes due 2012 was lowered to 'CCC+/RR6' from 'BB-'. The ratings are removed from Rating Watch Negative. The Rating Outlook is Stable.
This action follows ARAMARK's recent announcement that its leveraged buyout (LBO) had been completed. This action finalizes Fitch's review of the rating following the company's August 8, 2006 announcement that the company's board of directors had agreed to accept a management buyout offer from a group of investors led by chairman and CEO, Joseph Neubauer. The merger, valued at approximately $8.6 billion, was financed through approximately $2 billion in equity commitments with the remainder consisting of various debt instruments noted above. Fitch expects to withdraw its 'BB-' unsecured bank facility rating and withdraw its 'BB-' senior unsecured rating for ARAMARK's existing notes due 2007 and 2008 with the successful completion of debt tender offers planned for late February.
The ratings reflect ARAMARK's substantially higher leverage ratio and debt service requirements following the completion of its LBO and Fitch's expectations for significantly reduced free cash flow. Pro forma September 29, 2006 total adjusted leverage (adjusted for rents and A/R securitizations) is expected to be approximately 7.2 times (x) with interest coverage at approximately 1.9x. Fitch expects credit protection measures to remain near pro forma levels through the intermediate term. The ratings also incorporate potential margin pressure from competitive pricing and higher operating costs.
The ratings and outlook reflect ARAMARK's leading positions in its core services, brand recognition, a well diversified customer portfolio, and high customer retention rates. In addition, ARAMARK's operating performance has been relatively stable through various market conditions, including the company's exposure to unforeseen events over the last couple of years.
The Stable Outlook is also supported by the company's adequate liquidity position pro forma the proposed transaction, which includes $103 million of pro forma cash and approximately $450 million available under its revolving credit facility ($150 million was drawn at closing for seasonal working capital purposes). The company also has a $250 million accounts receivable securitization program. Fitch believes that ARAMARK will have limited ability to improve its credit protection measures in the next few years. However the company's stable organic revenue growth and solid market positions should limit any significant deterioration of credit measures.
According to company filings, the 2012 notes are only guaranteed by ARAMARK's holding company and will not be guaranteed by ARAMARK's operating subsidiaries, thereby resulting in structural subordination of these notes in relation to all of the new debt issuances which will be fully and unconditionally guaranteed by substantially all of the company's domestic material operating subsidiaries. The indenture for the 2012 bonds generally provides no protection from a change in control event and does not limit the company's ability to incur additional indebtedness.
The recovery ratings and notching reflect Fitch recovery expectations under a distressed scenario. ARAMARK's recovery ratings reflect Fitch's expectation that the enterprise value of the company, and hence, recovery rates for its creditors, will be maximized in a restructuring scenario (going concern), rather than a liquidation. The 'RR2' recovery rating for the company's credit facilities reflects Fitch belief that 71%-90% recovery is reasonable given its priority position. The recovery rating of 'RR5' for the $1.78 billion of senior unsecured notes due 2015 reflects that 11%-30% recovery is reasonable and 'RR6' for the $250 million 5% senior unsecured notes due 2012 reflects Fitch's estimate that negligible recovery would be achievable due to their position in the capital structure.
Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors can be found at www.fitchratings.com/recovery.
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|Date:||Feb 9, 2007|
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