Fitch IBCA Rates $1.5 Billion Safety-Kleen Secured Credit Facilities - Fitch IBCA Financial Wire -
23 January 1998
Fitch IBCA Rates $1.5 Billion Safety-Kleen Secured Credit Facilities - Fitch IBCA Financial Wire -
NEW YORK, Jan. 23 -- Safety-Kleen Corp.'s (SK) proposed $1.2
billion senior secured credit facility and $300 million second secured credit
facilities are rated 'BB-' and 'B', respectively, by Fitch IBCA. Proceeds of
the facilities are earmarked for support of the announced $1.97 billion
acquisition of SK by Apollo Advisors, L.P., Blackstone Management
Associates III, L.P. and Philip Services Corp. from existing public
shareholders.
The proposed senior secured credit facility is comprised of a $150 million
seven-year revolving credit facility, a $300 million tranche A term loan that
amortizes over seven years, a $400 million non-amortizing tranche B term loan
that matures in eight years and a $350 million non-amortizing tranche C term
loan that matures in nine years. The facility is collateralized by a first
lien on all assets and pledge of the company's capital stock. The $300
million second secured term loan facility is structured as a ten-year,
non-amortizing facility with a second lien on assets and capital stock.
The ratings reflect the seniority of the rated facilities, with higher
downside recovery expectation ascribed to the senior secured credit facility.
The ratings recognize the strong annuity characteristics of the company's core
industrial parts cleaning and fluid recovery businesses, the consistency of
its operating profit margins and the substantial cash equity investment by the
three equity sponsors. Primary concerns include the financial leverage
implied by the proposal, the low growth industries served and price volatility
associated with the company's oil recovery segment.
SK is principally engaged in low quantity fluids cleaning, waste recovery
and parts cleaning services provided to industrial and automotive repair
concerns located in North America and Europe. Demand for this core business
largely stems from environmental regulations passed in the mid- to late 1970s.
SK has a high concentration of repeat customers among its 400,000+ account
base, given the environmental necessity, convenience and affordability of the
service provided. The company's extensive branch network enables it to
provide services to small and medium sized businesses at geographically
dispersed locations and serves as a formidable barrier to entry by new
competition.
The anticipated level of total indebtedness at the acquisition closing
date is $1.37 billion, which reflects a 6.9 times (x) multiple of the
company's trailing twelve month EBITDA. For the trailing twelve months ended
Sept. 30, 1997, SK reported $198 million in EBITDA on nearly $1 billion in
revenue for a margin of approximately 20%. Although revenue increased by 8.4%
from the preceding twelve month period, EBITDA was unchanged in absolute
dollar terms. The flat year-over-year earnings comparison partially reflected
margin compression in the company's oil recovery segment, as unit prices were
impacted by declining lube oil pricing in the spot market.
Partially offsetting the impact of the financial leverage implied by the
transaction is the equity sponsorship provided by Apollo and Blackstone, two
considerable financial buyers, and one strategic investor, Philip. The $600
million investment provided by these three partners represents 31% of the
pro forma capitalization implied by the proposed transaction. In addition,
Philip's experience in the waste recovery industry has enabled it
to identify operating efficiencies that, if realized, would lower the total
debt-to-trailing twelve month EBITDA ratio from 6.9x to 5.5x. Although these
efficiencies have been factored into the assigned ratings, Fitch IBCA may
consider a ratings upgrade if the implied pro forma earnings level is
maintained on a consistent basis. It is likely that in this case the
enterprise value implied by this earnings run rate could provide a floor
recovery expectation for the second secured credit facility above the average
historical recovery for unsecured debt securities.
Recently published reports explaining Fitch IBCA's secured bank loan
rating criteria and cash flow underwriting orientation are available on the
Internet at 'http://www.fitchinv.com'. Hard copies can be obtained by calling
800-85-FITCH.
SOURCE Fitch IBCA Financial Wire