(The following statement was released by the ratings agency)
MOODY'S ASSIGNS Caa1 RATING TO ADVANCED ACCESSORY SYSTEMS' PROPOSED HOLDING CO. SR. UNSEC. NOTES; LOWERS OPERATING CO. RATINGS IN CONJUNCTION WITH PROPOSED DIVIDEND TO SHAREHOLDERS
Approximately $210 Million Of Debt Obligations Affected
NEW YORK, Jan 22 - Moody's Investors Service took the following rating actions in conjunction with the announcement by Advanced Accessory Systems, LLC ("Advanced Accessory") that its newly-created intermediate holding company Advanced Accessory Holdings Corporation ("Holdings") plans to issue $60 million of incremental debt for the purpose of funding a dividend to shareholders. Following these rating actions, the rating outlooks for Advanced Accessory and Holdings are stable. The rating actions include: - Assignment of Caa1 rating for Holdings' proposed $60 million of unguaranteed senior unsecured discount 5-year-PIK notes due December 2011, to be initially issued under Rule 144A; - Assignment of B2 senior implied rating for Holdings, which will replace the existing B1 senior implied rating for Advanced Accessory; - Assignment of Caa1 senior unsecured issuer rating for Holdings, which will replace the existing B2 senior unsecured issuer rating for Advanced Accessory; - Downgrade to B3, from B2, of the rating for Advanced Accessory's $150 million of guaranteed senior unsecured notes due June 2011 Advanced Accessory additionally has in place an approximately $60 million guaranteed senior secured credit agreement which is not rated by Moody's. This consists of a $35 million asset-based US revolving credit facility, a Euro 15 million asset-based European revolving credit facility, and a Euro 10 million term loan facility. The senior secured credit agreement matures in May 2008, prior to any cash payment requirements for principal or interest associated with Holdings' proposed senior unsecured discount notes. Castle Harlan Partners IV, LP ("Castle Harlan") acquired Advanced Accessory from JPMorgan Partners during April 2003 for total consideration of $260 million, including about $92 million for the purchase of equity and $168 million for the assumption of debt. The total equity contribution which funded the acquisition approximated $101 million, including Castle Harlan's cash investment and management's rollover of existing equity. Castle Harlan, its affiliates, and management continue to control in excess of 80% of the common stock of Advanced Accessory's ultimate parent company, CHAAS Holdings, LLC. The rating actions reflect that the estimated $57.5 million of net proceeds from the proposed notes issuance by Holdings which will fund a dividend to Castle Harlan represents a return of the majority of the private equity firm's less-than-eight-months-old investment. It is Moody's opinion that Castle Harlan's ongoing incentive to support Advanced Accessory's growth strategy with incremental equity investments is diminished. Moody's also believes that the equity firm may be more willing to forfeit its remaining investment rather than provide additional support for the company in the event that Advanced Accessory performs significantly below expectations. The proposed transaction will result in substantially higher leverage for this relatively small niche automotive supplier. While the interest on the proposed notes will not be payable in cash for the first five years and will provide the company with time to both grow and improve the efficiency of its operations, Holdings will be subject to a mandatory redemption of an estimated $20-$25 million of accreted interest on June 15, 2009 in order to satisfy Internal Revenue Code AHYDO rules for the ongoing deductibility of interest. The only PIK interest which will not have to be redeemed at that point is equal to the amount of one year's simple interest on the aggregate original issue price of the Holdings notes. Moody's additionally notes that Advanced Accessory's cash flow performance since the acquisition of the company by Castle Harlan has fallen slightly below expectations. This is attributable to a combination of the impact of the recent product mix, greater pressures to provide increased customer price concessions, less favorable fixed cost absorption due to lower production volumes, the impact of recent exchange rates, vehicle content reduction, stepped up healthcare and other corporate expenses, and greater working capital and capital expenditure investments. The impact of these negative factors was partially offset by productivity improvements and material cost reductions. The ratings more favorably reflect that Holdings' proposed notes will not have any cash payment requirements for interest or principal during approximately the first five years post-closing; that these notes will be structurally subordinated to Advanced Accessory's existing operating company debt; and that these notes have limited recourse in the event of a default, given that they are expected to remain unguaranteed by Advanced Accessory and its subsidiaries. Advanced Accessory will also benefit from annual cash tax savings ranging from $2.4-$3.5 million resulting from interest deductions on the new notes, which will slightly offset the impact of converting almost $60 million of common equity to debt. Moody's additionally notes that Advanced Accessory maintains leading market positions for all of its business lines, has identified opportunities to broaden its product lines with complementary products and increase geographic distribution across existing product lines, has been awarded several new original equipment contracts with a broadened customer base following Castle Harlan's acquisition of the company, and has substantially completed investments in the expansion of capacity in France and the reorganization of the Netherlands facility. Liquidity is expected to remain good, with the $50 million of revolving credit commitments substantially unused and the November 2003 completion of a sale/leaseback transaction of three Michigan facilities which generated $10.6 million of cash to effectively pre-fund 2004 capital expenditures. Annual operating lease expense will increase by approximately $1 million as a result of this transaction. Future events that could potentially drive down the outlook or ratings for Advanced Accessory and Holdings include the initiation of provisions under any of the existing debt agreements to loosen restrictions on upstream distributions to Holdings; increasing leverage due to either poor performance, increased customer price compression, material investment in growth, or the initiation of additional debt obligations either on- or off-balance sheet; failure to improve operating margins above 2003 levels; loss of market share; OEM delays in the roll-out of meaningful new program launches; or insufficient liquidity. Future events that could potentially improve the outlook or ratings for Advanced Accessory and Holdings include significant cash flow generation and debt reduction, continued improvements in operating efficiency, steady realization of new business awards including those with transplants, increases in market share, and successful expansion of the rack systems business into Europe. The Caa1 rating of Holdings' proposed senior discount notes reflects their structural subordination to all of the obligations of Advanced Accessory and its subsidiaries and their maturity six months following the maturity of Advanced Accessory's $150 million of existing guaranteed senior unsecured notes. These notes are not guaranteed, but will be subject to a springing guarantee that would be triggered in the unlikely event that additional debt is ever subsequently issued by Holdings and guaranteed by any subsidiaries. In the event that Holdings were to ever default on the proposed bonds and file for bankruptcy protection, Holdings is not expected to have any recourse to Advanced Accessory and its subsidiaries, except to the extent that Holdings indirectly owns the stock of these entities. However, Advanced Accessory's senior secured lenders are secured by pledges of this stock. Advanced Accessory's senior secured credit agreement benefits from cross default provisions with Holdings' proposed senior discount notes, but is expected to be repaid prior to any payment requirements under the new notes. The existing credit agreement does not permit any distributions upstream to Holdings to service interest or principal payment requirements under the proposed senior discount notes. Advanced Accessory's existing guaranteed senior unsecured notes would not cross default upon a Holdings' notes default. The operating company notes permit upstream distributions equal to up to 50% of cumulative net income, which could eventually support Holdings' debt service requirements beginning in 2009. Based upon the disclosures within the current offering memorandum for the Holdings senior discount notes, Moody's estimates pro forma September 30, 2003 LTM total debt/EBITDAR leverage at 5.6x, deducting the $3 million of Castle Harlan management fees from EBITDAR and including as debt the present value of off-balance sheet leases in place by year end. This compares to an estimated 4.4x total debt/EBITDAR ratio excluding the impact of the proposed transaction. Pro forma EBIT coverage of cash interest was adequate at 1.9x and the pro forma EBIT return on total assets was 8.7%. Moody's added back to EBIT and EBITDAR approximately $3.4 million of charges recorded for the period that were primarily associated with a product recall which is indemnified by the former owner of the company. Advanced Accessory, headquartered in Sterling Heights, Michigan, is a global designer and manufacturer of exterior accessories for the automotive original equipment market and aftermarket. Principal product lines are rack systems, towing systems and related accessories. Advanced Accessory's annual revenues approximate $360 million.