Moody's Investors Service has assigned a Ba3 rating to J.P. Morgan and Credit Suisse First Boston's credit for CSK Auto--a new asset-backed credit facility, launched into the market at the end of November. Marie Menendez, v.p., senior credit officer, corporate finance group for Moody's, explained the $100 million term loan with three-year bullet maturity and $225 million revolver is totally secured and tied to a borrowing base, while the existing credit facility has a B1 rating. The new credit is larger and expected outstanding borrowings on the new credit are much less. A $225 million senior unsecured notes offering, has been rated B2.
There is very high leverage at CSK due to a series of debt-financed acquisitions such as Rossi, Big Wheel and the PACCAR acquisitions, Menendez said. Furthermore, the market has been stagnant for auto parts with the winter the worst month seasonally, she added. Without the refinancing, CSK may not have been able to meet debt payments from internally generated cash flow, she noted. The proposed financing, which includes the notes and a $50 million investment by Investcorp, CSK's sponsor, provides a cushion and eliminates CSK's most pressing challenge, the heavy amortization of the bank debt within the near term.
Prospects for the sector are good though. Demographics of cars entering their prime years are improving, Menendez commented, which should lift demand for the segment and when the integrations of the acquired companies are complete, CSK's margins should respond. There is the challenge of Autozone, but CSK can differentiate with product, service and location, Menendez noted. Increased expenditure is expected on customer retention, but expansion into new markets is expected to be minimal, she added. The ratings expect debt measures, which have deteriorated slightly this year, to improve with better operating results and the new equity. Calls to Don Watson, cfo, were not returned.