Bangkok--9 Aug--Standard & Poor's
- Duluth, Ga.—based auto retailer Asbury Automotive Group reported earnings expansion and free cash flow generation, which have resulted in lower leverage and we believe this positive credit trend will continue.
- We are affirming our 'B+' corporate credit rating on the company.
- We are revising our outlook on Asbury to positive from stable, indicating that there is a one-in-three chance that we could raise the rating one notch in the year ahead if Asbury's credit measures improve sufficiently.
Standard & Poor's Ratings Services said today that it revised its outlook on Duluth, Ga.—based Asbury Automotive Group Inc. to positive from stable and affirmed the ratings, including the 'B+' corporate credit rating.
"We believe Asbury's demonstrated ability to expand earnings and lower leverage while it builds out infrastructure to gain scale benefits in its core light vehicle retail business, and signs of stabilizing new-vehicle demand, could help Asbury bring its key credit measures in line with our assumptions for a higher rating during the next year," said Standard & Poor's credit analyst Nancy Messer. For an upgrade, we need to have higher confidence that Asbury will not engage in material debt-financed acquisitions or share repurchases that could erode credit measures.
We believe Asbury can control costs; it typically generates free cash flow after capital spending. In the next two years, we assume the company will reduce leverage as demand recovers, EBITDA improves, and cash becomes available for permanent debt reduction and lease buyouts. However, we recognize that Asbury will use cash to repurchase shares on an opportunistic basis.
Asbury's financial and credit measures have improved in the past year. The EBITDA margin rose to 4.5% for the 12 months ended June 30, 2011, compared with 3.7% for the prior 12 months. Lease-adjusted debt (excluding floorplan liabilities) to EBITDA has improved to 4.5% for the 12 months ended June 30, 2011, compared with 5.6x for the prior 12 months. Reported EBITDA for the past 12 months, by our calculation, rose by about 26% period over period to $180.4 million, although adjusted balance-sheet debt rose 1% to $806 million. Still, adjusted debt to total capital fell to 72.2% as of June 30, 2011, down from 75.2% as of June 30, 2010. We expect the auto retailers, in general, to report positive free cash flow after capital spending. However, Asbury reported negative $35 million of free cash flow for the 12 months ended June 30, 2011 and negative $23 million for 2010. We recognize that Asbury's discretionary use of cash to pay down floorplan borrowings is resulting in negative cash flow and expect, for an upgrade, that cash flow excluding these discretionary payments would be positive for most 12-month periods.
RELATED CRITERIA AND RESEARCH
July U.S. Auto Sales SAAR Rises Above June, Sales Up Year Over Year; But SAAR Remains Below Standard & Poor's Full-Year Expectations, Aug 3, 2011 U.S. Auto Retailers Are Ready To Brave Today's Economy With Improved Credit Measures And More Focused Strategies, June 16, 2011 Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 Key Credit Factors: Business And Financial Risks In The Auto Component Suppliers Industry, Jan. 28, 2009 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
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Media Contact:
Mimi Barker, New York (1) 212-438-5054,
[email protected]
Analyst Contacts:
Nancy C Messer, CFA, New York (1) 212-438-7672
Robert Schulz, CFA, New York (1) 212-438-7808