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Artera Services, LLC -- Moody's downgrades Artera's Corporate Family Rating to Caa1 from B3

·17 min read

Rating Action: Moody's downgrades Artera's Corporate Family Rating to Caa1 from B3Global Credit Research - 26 Aug 2022New York, August 26, 2022 -- Moody's Investors Service ("Moody's") has downgraded Artera Services, LLC's Corporate Family Rating ("CFR") to Caa1 from B3 and Probability of Default Rating to Caa1-PD from B3-PD. Moody's has also downgraded the company's senior secured first-lien revolver, notes and term loans to Caa1 from B3, and senior secured second-lien term loan to Caa3 from Caa2. The outlook has been changed to stable from negative."The rating downgrade reflects Artera's weak earnings, high debt leverage and increased liquidity risk. Although Artera has accelerated price increases and launched a restructuring program for its gas transmission and electric business, ongoing cost inflation, rising interest rates and an uncertain macroeconomy present challenges to the company swiftly improving its business fundamentals and credit metrics to be commensurate with a B3 CFR. Liquidity is deteriorating, as its revolver will mature in March 2023, and working capital needs are typically high for project rollouts in the first half of the year. The likelihood of a financial restructuring is increasing given the large amount of debt and lack of free cash flow generation," says Jiming Zou, Moody's Vice President and lead analyst for Artera.Governance consideration is a key driver for the rating downgrade. Recent business underperformance against guidance has undermined management creditability and track record. In addition, the current revolver maturity and increased uncertainty with regard to a timely refinancing increase financial risk. Governance considerations also incorporate aggressive financial policies under the private equity ownership.Downgrades:..Issuer: Artera Services, LLC....Corporate Family Rating, Downgraded to Caa1 from B3....Probability of Default Rating, Downgraded to Caa1-PD from B3-PD....GTD Senior Secured 1st Lien Notes, Downgraded to Caa1 (LGD3) from B3 (LGD4)....GTD Senior Secured 1st Lien Revolving Credit Facility, Downgraded to Caa1 (LGD3) from B3 (LGD4)....GTD Senior Secured 1st Lien Term Loan, Downgraded to Caa1 (LGD3) from B3 (LGD4)....Senior Secured 1st Lien Term Loan, Downgraded to Caa1 (LGD3) from B3 (LGD4)....GTD Senior Secured 2nd Lien Term Loan, Downgraded to Caa3 (LGD3) from Caa2 (LGD6)Outlook Actions:..Issuer: Artera Services, LLC....Outlook, Changed To Stable From NegativeRATINGS RATIONALEArtera's first half 2022 results were substantially below expectation due to the rising material and fuel costs across business lines, the decline in new gas transmission projects and losses in its electric business. Adjusted debt/EBITDA was close to 10x based on the results of the last twelve months ending June 2022. The Q2 2022 earnings were up sequentially from Q1, but still well below last year's level. The inflationary environment, rising interest rates and uncertain macroeconomic outlook dim the prospects for a swift improvement in the company's business fundamentals. The company's large balance sheet debt of $2.6 billion, lack of free cash flow generation and upcoming revolver maturity are among the key drivers for the downgrade.Management has recently indicated that it will increase prices to mitigate inflation. It also plans to exit the loss-making electric business and shift its focus to maintenance, repair and upgrade projects for the gas transmission segment, only two years after expanding these businesses through acquisitions. The size and timing of an improvement in financial performance from this strategic reorientation is uncertain. Its weak performance over the last 12 months is contrasted with the growth projection by management in mid-2021 when the company completed the acquisitions of Feeney and KRS.The refinancing risk for its revolver is increasing due to the weak business fundamentals and high debt leverage. We expect the company's current earnings, as measured by the last twelve months EBITDA, will barely cover its annual interest expenses and capital expenditure. Therefore, the company will mainly rely on its $350 million securitization program, which had $238.6 million availability at the end of June 2022, to cover its cash needs. The announced exit of its electric business by the end of 2022 and the expected receivables collection will support liquidity in the second half of 2022. However, liquidity risk is growing with the time elapsing to the revolver maturity in March 2023 and typically high working capital needs for project deployment in the first half of the year.Artera's rating continues to reflect its high debt leverage, execution risks associated with its expedited business expansions and limited end market diversity given its focus on maintenance, repair and upgrade services to gas and electric utilities. This work is typically covered by master service agreements and blanket contracts, but work order releases can fluctuate and exogenous factors such as weather can delay project completion, leading to periodic inefficiencies in labor and asset utilization and margin compression. Business risks include project safety and service quality, which will affect customer retention and operating results.Artera's credit profile is supported by the industry fundamentals as utilities focus on replacing aging infrastructure and outsourcing engineering and construction services to third parties. The recurring maintenance, repair and upgrade services for gas and electric distribution networks account for slightly above three quarters of Artera's sales. Exposure to fixed-price projects are about a quarter of its revenues.Artera's credit profile also reflects environmental, social and governance factors. In particular, there are execution risks associated with the aggressive growth through acquisitions over the past two years. The company more than doubled its sales through debt-financed acquisitions in the past two years. A number of the acquired companies had volatile performance histories. It will take time and efforts for Artera to integrate and realign acquired business to achieve the expected synergies.The stable outlook reflects our expectation that the company will take measures to prevent its credit profile from further deterioration while maintaining access to a sizable securitization program in the next 12-18 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSArtera's ratings could be downgraded, if the company fails to extend the revolver maturity and its liquidity profile weakens further. Downgrade could also be triggered by continued earnings weakness with negative free cash flow or debt leverage above 8.0x for an extended period of time.Artera's ratings could be upgraded, if the company safeguards its liquidity by extending the revolver maturity, improving earnings and cash flows. A reduction in debt leverage towards below 6.0x is also required for an upgrade.Headquartered in Atlanta, Georgia, Artera Services, LLC is an independent provider of repair, maintenance, replacement, and installation services to the distribution and small transmission segment of the utility industry. The company operates primarily in the East, South, Southwest, and Midwest regions of the United States. Its customers are natural gas and electric utilities and midstream operators. The company generated pro forma revenues of about $2.4 billion in 2021. Clayton, Dublier & Rice ("CD&R") acquired the majority ownership of the company in 2018.The principal methodology used in these ratings was Construction published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74957. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.At least one ESG consideration was material to the credit rating action (s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. 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