-- Issuer Default Rating (IDR) to 'BB+' from 'BBB-';
-- $600 million bank credit facility to 'BB+' from 'BBB-';
-- Senior unsecured notes to 'BB+' from 'BBB-'.
Fitch also expects to rate AutoNation's new senior unsecured notes and Term Loan A 'BB+'. The Rating Outlook is Negative.
This action follows AutoNation's announcement that it has tendered to repurchase 50 million of its common shares outstanding for $23 per share or about $1.15 billion and will redeem its $323 million of 9% senior unsecured notes. AutoNation intends to finance the transactions and with cash on hand, proceeds from a $300 million Term Loan A (which may be increased to $400 million), up to $450 million of senior unsecured floating-rate notes, up to $450 million of senior unsecured fixed-rate notes and borrowings on its revolver of approximately $125 million.
As a result, proforma debt as of Dec. 31, 2005 (including floorplan notes payable) will increase by $1 billion to about $4 billion and proforma total adjusted debt to EBITDAR would increase to about 4.8 times (x) from 3.8x. In addition, this transaction signals a shift in management's strategy to a more shareholder friendly posture.
The Negative Rating Outlook considers the weakness of the domestic automotive manufacturers and the impact further weakness could have on AutoNation. Domestic branded franchises represent 57% of AutoNation's total franchise base and about 43% of new vehicle revenue in fiscal 2005, down from 58% and 49% in 2004, respectively. While AutoNation has worked to reduce its exposure to the domestic brands through divestitures of domestic franchises and acquisitions of luxury and import banded dealerships, the pace of this store base shift is slow and the domestic manufacturers continue to lose market share over time. AutoNation's ability to sustain operating margins and cash flow generation in the face of declining sales of domestic brands could result in a stabilization of the rating outlook.
Nonetheless, while credit measures are anticipated to weaken following this transaction, Fitch expects that AutoNation will continue to work to reduce inventory and outstanding floorplan notes payable over time and will strengthen operating margins through the consolidation of accounting, administrative, and operational functions and a focus on the profitable parts and service business. Therefore, credit measures are anticipated to improve over time while non-floorplan debt levels are expected to remain relatively steady.
AutoNation continues to benefit from its position as the largest automotive retailer in the U.S., operating 346 franchises across 17 states, which provides it with economies of scale and financial flexibility. In addition, the diversity of its operations, with 57% of gross profit from the parts and service and finance and insurance businesses, adds stability to its operating results. New vehicle sales accounted for about 60% of 2005 revenues, but this low margin business represented only about 27% of gross profit for the same period while the higher margin and historically more stable parts and service and finance and insurance businesses represented 57% of gross profit. Lastly, AutoNation continues to benefit from the high level of support from the automotive manufacturers, through incentives and floorplan assistance. However, higher interest rates are expected to negatively affect AutoNation's operating results given that floorplan interest expense is at a variable rate.
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