SK HoldCo LLC Downgraded To 'CCC+' From 'B-' On Elevated Refinancing Risk; Outlook Negative

  • SK HoldCo LLC (Service King) faces heightened refinancing risk on its term loan B, which matures in August 2021, given deterioration of margins in 2019, currently challenging capital markets, and uncertainty over the impact of the coronavirus outbreak on its business.
  • As a result, we are lowering our issuer credit rating on Service King to 'CCC+' from 'B-', as well as our ratings on its senior secured debt to 'B-' from 'B', and its senior unsecured notes to 'CCC-' from 'CCC'.
  • The negative outlook reflects these factors as well as uncertainty regarding the company's ability to stabilize its revenues while increasing margins.
NEW YORK (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above.
The downgrade reflects Service King's increased refinancing risk due to tough credit market conditions, recently weaker operating performance, and potentially weaker revenues due to the spread of COVID-19. Even before the coronavirus pandemic emerged, Service King had been experiencing operating issues that caused margin erosion and weak same-store sales. The source of these issues is a combination of high labor turnover, lower parts margins, and increasingly stringent operating metrics required by the insurance industry. Although the company has executed a business transformation designed to increase shop throughput and right-size location overhead by centralizing estimates, it is not yet clear whether this approach will be successful. The company noted that the transformation in the first quarter has led to weaker operating metrics, which has lowered business directed by insurance carriers. It is not yet clear that the large cost savings expected by optimizing its workforce will translate into better key performance indicators (KPIs) and thus higher revenues from the insurance companies.
The negative outlook reflects increased refinancing risk around the near-term debt maturities given the pandemic as well as uncertainty regarding the company's ability to stabilize its revenues while increasing margins.
We could downgrade Service King if the group is unable to refinance its term loan in the next six months. We could also lower the rating if we foresee an increased likelihood the company could engage in a refinancing or restructuring transaction that we would consider distressed, whereby existing debtholders receive less than par. This could occur if the new business approach proves unsuccessful or if further spread of COVID-19 reduces business, or if capital market conditions prevent the group from refinancing.
We could revise the outlook to stable if Service King refinances its term loan and increases margins sufficiently so that it at least breaks even on free cash flow. This could occur if the cost savings of the new business approach can be maintained while still allowing the company to grow revenues.
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