Moody's Maintains Quality Distribution's (QLTY) B3 Corporate, Second Lien; Outlook to Positive from Stable
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Moody's affirmed the B3 corporate family rating and second lien note rating of Quality Distribution, LLC (Nasdaq: QLTY) and revised the rating outlook to positive from stable. The SGL-3 speculative grade liquidity rating was also affirmed.
The revision of the outlook to positive reflects Moody's expectation that credit metrics will continue to be strong for the B3 rating category stemming from anticipated EBITDA growth, positive cash flow generation and increased participation in the high growth energy logistics sector. However, the outlook also reflects uncertainty related to the timing, scale and funding of future acquisitions, particularly in the energy logistics sector, and the attendant integration risks.
The following ratings were affirmed:
The change in outlook to positive acknowledges the improvement in Quality's credit metrics with Moody's adjusted debt/EBITDA improving to 4.6x at March 31, 2012 versus the roughly 5.5x range in early 2011. However, the financing used to fund recent and anticipated acquisitions as well as incurrence of acquisition related costs could result in a slight weakening in credit metrics in the near-term. The positive outlook recognizes that the acquisitions the company has been making, particularly in oil-related fracking is a high growth sector with higher margins than the company's core chemical logistics business. As the energy logistics business grows and the company continues to benefit from its well-established position in its core chemical logistics sector, metrics in the longer-term could be reflective of a higher rating.
The B3 corporate family rating reflects Quality's still high financial leverage, susceptibility to domestic economic cycles and driver turnover in the chemical logistics business as well as exposure to oil and natural gas prices in the company's growing energy logistics business. These factors are balanced by the company's adequate liquidity profile, strong position within its market niche, blue chip customer base and diverse end markets served.
The SGL-3 rating denotes the expectation of an adequate liquidity profile over the next twelve to eighteen months. The company's liquidity profile is characterized by reliance on the company's $250 million ABL facility, no meaningful near-term debt maturities, expected continued positive free cash flow and maintenance of minimal cash balances.
Factors that could lead to a higher rating include demonstrating an ability to expand the top line excluding fuel surcharges, while sustaining current margins and free cash flow levels, lowering debt/EBITDA towards 4.3 times and demonstrating EBIT/interest coverage at or above 1.9 times on a sustained basis.
Developments that could lower the rating include meaningfully increased debt levels or a deterioration in operating performance that increases debt/EBITDA towards 6.0 times or lowers EBIT/interest to the 1.0 times level. A deterioration in the company's liquidity profile could also result in downward ratings pressure.
Quality Distribution, LLC's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Quality Distribution, LLC's core industry and believes Quality Distribution, LLC's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA, published June 2009.
The revision of the outlook to positive reflects Moody's expectation that credit metrics will continue to be strong for the B3 rating category stemming from anticipated EBITDA growth, positive cash flow generation and increased participation in the high growth energy logistics sector. However, the outlook also reflects uncertainty related to the timing, scale and funding of future acquisitions, particularly in the energy logistics sector, and the attendant integration risks.
The following ratings were affirmed:
- Corporate family rating, at B3
- Probability of default rating, at B3
- $225 million second lien notes due 2018, at B3 (LGD-4, 58%)
- Speculative Grade Liquidity rating of SGL-3
The change in outlook to positive acknowledges the improvement in Quality's credit metrics with Moody's adjusted debt/EBITDA improving to 4.6x at March 31, 2012 versus the roughly 5.5x range in early 2011. However, the financing used to fund recent and anticipated acquisitions as well as incurrence of acquisition related costs could result in a slight weakening in credit metrics in the near-term. The positive outlook recognizes that the acquisitions the company has been making, particularly in oil-related fracking is a high growth sector with higher margins than the company's core chemical logistics business. As the energy logistics business grows and the company continues to benefit from its well-established position in its core chemical logistics sector, metrics in the longer-term could be reflective of a higher rating.
The B3 corporate family rating reflects Quality's still high financial leverage, susceptibility to domestic economic cycles and driver turnover in the chemical logistics business as well as exposure to oil and natural gas prices in the company's growing energy logistics business. These factors are balanced by the company's adequate liquidity profile, strong position within its market niche, blue chip customer base and diverse end markets served.
The SGL-3 rating denotes the expectation of an adequate liquidity profile over the next twelve to eighteen months. The company's liquidity profile is characterized by reliance on the company's $250 million ABL facility, no meaningful near-term debt maturities, expected continued positive free cash flow and maintenance of minimal cash balances.
Factors that could lead to a higher rating include demonstrating an ability to expand the top line excluding fuel surcharges, while sustaining current margins and free cash flow levels, lowering debt/EBITDA towards 4.3 times and demonstrating EBIT/interest coverage at or above 1.9 times on a sustained basis.
Developments that could lower the rating include meaningfully increased debt levels or a deterioration in operating performance that increases debt/EBITDA towards 6.0 times or lowers EBIT/interest to the 1.0 times level. A deterioration in the company's liquidity profile could also result in downward ratings pressure.
Quality Distribution, LLC's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Quality Distribution, LLC's core industry and believes Quality Distribution, LLC's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA, published June 2009.
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