APCO Holdings LLC Ratings Lowered To 'B-' On Severe Operating Challenges, Placed On CreditWatch Negative

  • APCO faces severe operating challenges from COVID-19-related shelter-in-place and social distancing measures, which have led to a significant drop in light-vehicle sales and ultimately warranty administration revenue.
  • We expect APCO's adjusted leverage to remain elevated, and the company could face covenant and liquidity pressures within the next two quarters without a return to economic and business normalcy.
  • We are lowering our issuer credit rating on APCO to 'B-' from 'B', lowering our issue rating on the first-lien term facility to 'B-' from 'B', and placing both ratings on CreditWatch with negative implications.
  • The CreditWatch placement reflects our view that the impact of COVID-19 on light-vehicle auto sales and ultimately warranty contract sales will lead to significantly lower revenue and EBITDA.
NEW YORK (S&P Global Ratings) March 26, 2020--, S&P Global Ratings today lowered its long-term issuer credit rating on auto warranty administrator APCO Holdings LLC to 'B-' from 'B' and placed it on CreditWatch with negative implications.
At the same time, we lowered our rating on APCO's $240 million first-lien credit facility ($20 million revolver due 2023 and $220 million term loan due 2025) to 'B-' from 'B' and placed it on CreditWatch negative. The recovery rating of '3', indicating our expectation that lenders would receive meaningful (50%-70%; rounded estimate: 55%) recovery of their principal in the event of a payment default, remains unchanged.
The downgrade reflects our expectation that APCO's adjusted leverage will remain above 9x for the next 12 months if the current economic fallout and subsequent impact to light-vehicle sales persist for the next two months. APCO is a marketer and third-party administrator of vehicle service contracts and other finance and insurance products sold by franchise and nonfranchise auto dealers throughout the U.S. on new and used vehicles. Therefore, the company is exposed to risk associated with light-vehicle sales.
The CreditWatch placement reflects our view that the impact of COVID-19 on auto warranty administration sales could last until June. As such, we expect APCO's adjusted leverage and coverage will worsen to minimum 9x and to 1x-1.5x, respectively, impairing our view of the credit fundamentals.
The CreditWatch also reflects that if the economic fallout drags out past June, the company could begin to face both liquidity and covenant pressures. In resolving our CreditWatch, we could lower our rating if we do not see revenue stabilize from normalized light-vehicle sales and lead to margin improvement, positive cash flow, and stabilized leverage and coverage levels with reduced risk of a covenant breach.
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