Moody’s declares Service King in limited default for non-payment of interest
Moody’s Investors Services found Service King in “limited default” for its failure to make an April 1 interest payment on its unsecured notes, despite an agreement the collision repair chain reached with its lenders to temporarily defer payments.
The bond rating company announced that it has added a limited default (LD) designation to the Caa3-PD probability of default rating of Midas Intermediate Holdco II, LLC (“Service King”), replacing it with Caa3 -PD/LD.
He called the company’s current capital structure “unsustainable” and predicted that Service King would restructure its short-term debt.
Neither Service King nor investment management firm Blackstone, which owns a majority stake in the company, responded to Repairer Driven News’ requests for comment by the publication deadline.
“The LD designation reflects Moody’s view that Service King’s continued failure beyond the grace period to make the interest payment that was due on April 1, 2022 on its unsecured notes is a limited default notwithstanding the Company’s forbearance agreement,” Moody’s said. in its May 6 announcement.
Service King invoked a 30-day grace period after missing the April 1 interest payment, Bloomberg reported last month, citing unnamed sources.
The corporate family’s rating remains unchanged at Caa3, reflecting the company’s “low liquidity”, and the outlook remains negative, Moody’s said.
The limited default designation will remain until Service King resolves the missed interest payment, he said.
Moody’s said Service King continues to make in-kind payments on the interest it owes on the $775 million senior term loan it took out in December 2020. Generally, in-kind payments nature are additional securities, the issuance of additional debt securities or increases in the principal of existing debt.
He noted that Service King is facing “propelled” deadlines that would begin on June 1 in the event that more than $135 million remains unpaid on its loans.
“Moody’s views Service King’s current capital structure as unsustainable given the company’s high financial leverage, low coverage and weak overall operating performance,” the company said. “Given these factors, Moody’s expects Service King to likely proceed with debt restructuring in the near term.”
Bloomberg reported last month that Service King was close to agreeing to an out-of-court resolution of its debt burden before the bonds mature in July.
Citing unnamed sources familiar with the situation, Bloomberg said the company was suffering from “rising costs and labor shortages”, like the rest of the industry. He said the plan calls on bondholders led by Clearlake Capital Group to take control and inject $100 million into the company.
Moody’s said its negative outlook highlights the risks in the event the refinancing or debt restructuring is not completed by the “convenient” June 1 deadline.
“The ratings could be upgraded once the company executes a refinancing of the October 2022 note maturity on reasonable terms,” he said. “The ratings will be lowered if the company fails to make its contractual principal payments on time, if the company files for bankruptcy, or if Moody’s lowers its recovery estimates.”
Fitch Ratings said Service King’s inability to resolve the missed interest payment represents “the first automotive default since The Hertz Corporation went bankrupt two years ago.”
Earlier this month, Service King announced that it was actively recruiting to fill hundreds of positions, including body technicians, painters, salespeople, parts managers, and more.
The company promised “market-leading salaries, competitive health benefits, 401K retirement plans, and paid time off,” along with a number of other perks.
Analysts have found that the collision repair industry’s capacity has fallen 18% from pre-pandemic levels, mainly due to labor shortages.
Service King declined requests from Repairer Driven News to discuss the challenges facing the company.
Based in Richardson, Texas, Service King operates 335 locations in 24 states and the District of Columbia.
Report: Service King nears out-of-court settlement to ease debt burden
Featured image courtesy of Service King.