-- U.S.-based United Distribution Group Inc. (UDG) entered into $425
million senior secured credit facilities to acquire GHX Holdings LLC and
refinance existing debt.
-- We have assigned our 'B-' corporate credit rating to UDG. We have
assigned our 'B-' issue-level rating and '3' recovery rating to the company's
$290 million first-lien credit facilities, and a 'CCC' issue-level rating and
'6' recovery rating to the company's $135 million second-lien term loan.
-- The outlook is stable, reflecting our belief that UDG's credit
measures will remain in line with the 'B-' corporate credit rating given our
expectation that GHX's energy end markets will offset weakness in the coal
mining end markets of subsidiary United Central Industrial Supply LLC.
On Dec. 20, 2012, Standard & Poor's Ratings Services assigned its 'B-'
corporate credit rating to Bristol, Tenn.-based United Distribution Group Inc.
The outlook is stable.
At the same time, we assigned a 'B-' (the same as the corporate credit rating)
issue-level rating to UDG's $290 million first-lien credit facilities,
consisting of a $40 million revolving credit facility and a $250 million
senior secured first-lien term loan. The recovery rating on the credit
facilities is '3', indicating our expectation for meaningful (50% to 70%)
recovery in the event of payment default. We also assigned a 'CCC' (two
notches lower than the corporate credit rating) issue-level rating to UDG's
$135 million second-lien term loan. The recovery rating on the term loan is
'6', indicating our expectation for negligible (0% to 10%) recovery in the
event of payment default.
The company used proceeds from the credit facilities to acquire GHX Holdings
LLC and refinance existing debt. Prior to the transaction's closing, UDG was
known as ASP United Holding Co. The borrowers on the credit facilities are
United Central Industrial Supply LLC (United Central) and GHX Holdings LLC
(GHX), which are two subsidiaries of UDG.
The 'B-' corporate credit rating on UDG reflects our view of the company's
"vulnerable" business risk profile and its "highly leveraged" financial risk
profile. We believe key business risks include the company's relatively modest
size; a dependence on the cyclical mining and energy end markets for a large
portion of its revenues and earnings; and risks the mining supply company
faces integrating GHX. In October 2012 UDG acquired GHX, a fluid transfer and
sealed products distributor to companies participating in energy end markets,
for $240 million, or 8x trailing-12-month EBITDA. We consider UDG's financial
risk profile to be highly leveraged, based on our expectation that the company
will maintain leverage between 5x and 6x in 2012 and 2013.
Under our base-case scenario, we expect that UDG's revenues in 2012 and 2013
will be flat to slightly up over 2011 levels, pro forma for the transaction,
as well as for acquisitions that both United Central and GHX made in 2011.
This is driven by our assessment that United Central's currently weak coal
mining end markets will be flat to slightly down in 2012 and 2013, whereas
sales to GHX's energy end markets will be up modestly over that time period.
We estimate that ASP will generate between $65 million and $75 million of pro
forma EBITDA in 2012 and 2013.
We expect total debt (pro forma for the transaction and including adjustments
for operating leases) to approximate $390 million by year-end 2012. Given our
forecast for EBITDA to remain within the same range in 2012 and 2013, leverage
is likely to be maintained between 5x and 6x in 2012 and 2013, with interest
coverage of between 2x and 3x, metrics we would consider to be in line with
the 'B-' rating given the company's vulnerable business risk profile.
Pro forma for the transaction, approximately 65% of sales will be to mining
(predominantly coal) end markets, whereas 20% of sales will be to upstream oil
and gas end markets. Standard & Poor's believes that a warmer-than-normal
winter and natural gas substitution have accelerated what we view as a
sustained decline in the economic viability of thermal coal produced in the
Central Appalachia (CAPP) basin, where a majority of United Central's
customers are located. As a result, many of United Central's key customers
have closed mines, which we believe will negatively affect its sales growth
over the next several quarters. GHX's sales growth is affected by demand for
oil and gas. Standard & Poor's believes the longer-term outlook for crude oil
prices and improving natural gas prices in the U.S. should support strong
demand for rigs and related services. As a result, we believe GHX's sales
should modestly improve in 2012 and 2013.
Prior to the close of the transaction, UDG was known as ASP United Holding Co.
UDG is the parent holding company of United Central and GHX. United Central
distributes approximately 70,000 products from more than 1,200 manufacturers,
including mining bits, roof control products, and other maintenance, repair
and operations products to the $2.3 billion North American mine supply market.
GHX custom-fabricates more than 50% of its products, including hoses and
fittings, gaskets and sealing products, and valves. As a result of its custom
fabrications, GHX's margins are slightly better than United Central's.
In our view, UDG's liquidity position is "adequate". Our view of the company's
liquidity profile includes:
-- An expectation that liquidity sources will exceed uses by at least
1.2x over the next one to two years.
-- An expectation that liquidity sources will continue to exceed uses,
even if EBITDA were to decline by up to 15%.
-- An expectation that the company would not breach covenant test
measures even with a 15% drop in EBITDA.
Pro forma for the transaction, we estimate that the company will have between
$1 million and $2 million of cash on its balance sheet by year-end 2012. The
company's credit facilities have a maximum total leverage covenant of 7.5x,
which begins to step down in 2015. Based on our operating expectations, we
expect UDG to maintain adequate headroom on its covenant.
We expect working capital to be a modest use of cash in 2012 and 2013, and for
the company to generate between $25 million and $35 million of free operating
cash flow each year. The nearest debt maturity will occur in 2017, when the
company's $40 million revolving credit facility matures.
For a complete recovery analysis, please see the recovery report on UDG, to be
published on RatingsDirect following the release of this report.
The rating outlook is stable, reflecting our belief that UDG's credit measures
will remain in line with the 'B-' corporate credit rating, given our
expectation that GHX's energy end markets will partly offset weakness in
United Central's coal mining end markets. We expect the company to maintain
leverage between 5x and 6x over the next several quarters. Our ratings
incorporate the expectation that operating cash flow will remain adequate to
finance internal working capital needs and capital expenditures.
We could lower the ratings if the company's liquidity position deteriorates
such that we deem it to be "less than adequate". This could occur if market
deterioration, particularly in UDG's key coal mining end market, leads to
lower-than-expected EBITDA or higher-than-expected borrowings on the company's
revolving credit facility, which could result in reduced headroom on the
We view an upgrade as unlikely over the near term; however, we would consider
raising the ratings if leverage fell to below 5x and the company's liquidity
position strengthened. Specifically, we would consider an upgrade if revenues
increased in the double digits and if gross margins improve by about 200 basis
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Mining
Industry, June 23, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
New Ratings; Outlook Action
United Distribution Group Inc. (The)
Corporate Credit Rating B-/Stable/--
GHX Holdings LLC
United Central Industrial Supply Company LLC
US$40 mil 1st lien revolver bank ln due 2017 B-
Recovery rating 3
US$250 mil 1st lien term bank ln due 2018 B-
Recovery rating 3
US$135 mil 2nd lien term bank ln due 2018 CCC
Recovery rating 6
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left