Investment-grade status for its unsecured loans has allowed AutoNation to decrease pricing and improve maturities on a new $600 million unsecured credit facility. "In addition to improved pricing, we have a much more flexible set of covenants; more flexibility on how we redeploy our capital," explained Craig Monaghan, senior v.p. and cfo.
The automotive retailer based in Fort Lauderdale, Fla., produces a tremendous amount of cash flow, Monaghan said, and has worked to clean up its balance sheet and divest assets no longer required to run the business. When AutoNation sold its used car mega stores, it was able to liquidate the properties and put that cash to work. The result has been a reduction of true debt by over $1 billion in the last five years. The company calculates economic debt, as net debt, plus the obligation of leases it has in place and tax liabilities.
With a portion of the company's facility approaching maturity next year, AutoNation thought it was time to go back to the market. With improved financials, it approached Fitch Ratings for a first time rating, and received a BBB- assessment. Standard & Poor's had previously assigned a BBB- to the company's debt. "With two of the three rating agencies giving us those ratings, we thought we could go to the market and achieve investment-grade pricing and terms," Monaghan explained.
The company asked for $500 million but received $600 million during syndication because the deal was so oversubscribed. Pricing was cut to LIBOR plus 60 basis points from LIBOR plus 1% on the previous facility. "We were very pleased with the rates we were able to achieve and we thought we might be able to take advantage of the additional capacity," he said. The company had previously had in place a five-year, $300 million facility due in 2006 and a $200 million 364-day facility due August 2005.
The company has no immediate use for the money and the prior facility was never drawn upon. However, it is considering using the facility to pay down higher cost debt it has in place, specifically $300 million in mortgages priced at LIBOR plus 2%. "Replacing these mortgages or a portion of them with the revolver offers two benefits," Monaghan said. "First it replaces debt at LIBOR plus 2% with debt at LIBOR plus 60 basis points and furthermore, mortgages by nature, are secured. This frees up those assets and basically puts them back into pools of assets that we could use elsewhere." The company also has about $350 million in bonds outstanding.
JPMorgan leads the deal, Bank of America is the syndication agent and 13 other lenders are involved. "We have a long-standing relationship with them and they do a great job," Monaghan said about his lead. BofA had led the previous facility, but the cfo explained that AutoNation has a philosophy of rotating business with relationship lenders. "We have a good relationship with a number of banks and one of the things we try to do is, share the business we have with our lead relationship [banks]," he said.