Kodiak BP, LLC -- Moody's assigns B1 CFR to Kodiak BP operating as Kodiak Building Partners, senior secured term loan rated B2; outlook stable
Rating Action: Moody's assigns B1 CFR to Kodiak BP operating as Kodiak Building Partners, senior secured term loan rated B2; outlook stableGlobal Credit Research - 19 Feb 2021New York, February 19, 2021 -- Moody's Investors Service (Moody's) assigned a first time B1 Corporate Family Rating (CFR) and B1-PD Probability of Default Rating (PDR) to Kodiak BP, LLC, operating as Kodiak Building Partners Inc. (Kodiak), a national distributor of building materials. Moody's also assigned a B2 rating to Kodiak's proposed senior secured term loan. The outlook is stable.Kodiak's capital structure will consist of a $200 million asset based revolving credit facility (not rated by Moody's) and a $540 million senior secured term loan. Proceeds from the term loan and available cash will be used to refinance Kodiak's existing debt of about $367 million, to fund a dividend to equity holders, affiliates of Court Square Capital Partners (CSC) and management, and to pay related fees and expenses.Governance characteristics Moody's considers in Kodiak's credit profile include an aggressive financial policy evidenced by its high leverage and debt financed dividend. CSC will have monetized nearly all of its investment in Kodiak with the payment of the proposed dividend after acquiring a majority ownership in Kodiak in December 2017. Moody's believes that the likelihood of a sale of the company is high since CSC is in its fourth year of its investment in Kodiak. Such action or further debt financed dividends that result in significant deterioration of credit metrics could affect Kodiak's long-term ratings.The following ratings are affected by today's action:Assignments:..Issuer: Kodiak BP, LLC.... Corporate Family Rating, Assigned B1.... Probability of Default Rating, Assigned B1-PD....Senior Secured Term Loan, Assigned B2 (LGD4)Outlook Actions:..Issuer: Kodiak BP, LLC....Outlook, Assigned StableRATINGS RATIONALEKodiak's B1 CFR reflects Moody's expectation that the company will remain highly leveraged. Moody's projects adjusted debt-to-LTM EBITDA will approximate 4.0x at year-end 2021. At the same time Kodiak faces strong competition and may face challenges integrating future bolt-on acquisitions. Providing an offset to Kodiak's leveraged capital structure is good profitability. Moody's forecasts adjusted EBITDA margin in the range of 7.5% - 10% for 2021, which is the company's greatest credit strength. Moody's also calculates interest coverage, measured as EBITA-to-interest expense, will be around 4.0x in late 2021.Additionally, Moody's forecasts that Kodiak will have good liquidity over the next twelve to 18 months. Good cash flow, ample revolver availability and no near-term maturities provide more than ample financial flexibility for Kodiak to integrate future bolt-on acquisitions and to contend with competition.Residential new construction (both single family and multi-family), from which Kodiak earns about 75% of revenue, is a source of strength. Moody's has a positive outlook for US Homebuilding with good growth expected. Non-residential construction (combined new construction and infrastructure), representing approximately 18% of revenue, is exhibiting relative long-term stability with opportunities even though new construction has contracted modestly. Moody's expects repair and remodeling activity, representing the remaining 7% of revenue, to remain strong over the twelve to 18 months.The stable outlook reflects Moody's expectation that leverage will not deteriorate over the next 18 months. A good liquidity profile and Moody's expectation that end market dynamics support growth further support the stable outlook.The B2 rating assigned to Kodiak's senior secured term loan, one notch below the Corporate Family Rating, results from its subordination to the company's asset based revolving credit facility. The term loan has a first lien on substantially all noncurrent assets and a second lien on assets securing the company's asset based revolving credit facility (ABL priority collateral).The senior secured term loan is expected to contain certain covenant flexibility for transactions that can adversely affect creditors. The documents governing the company's senior secured term loan gives Kodiak the ability to incur incremental indebtedness with a free and clear basket of the greater of $133 million, 100% of LTM consolidated EBITDA, plus additional amounts so long as: first lien net leverage ratio does not exceed 4.00x (for pari passu indebtedness); secured net leverage ratio does not exceed 6.00x (for junior secured indebtedness); and total net leverage ratio does not exceed 6.00x (for unsecured indebtedness). Alternatively, the ratio tests can all be satisfied so long as leverage does not increase on a pro forma basis if incurred in connection with a permitted acquisition or investment. Collateral leakage is permitted through the transfer of assets to unrestricted subsidiaries, subject to carve-out capacity; there are no additional "blocker" protections restricting such transfers. Only wholly-owned material subsidiaries must provide guarantees, raising the risk of potential guarantee release; partial dividends of ownership interests could jeopardize guarantees. Kodiak's obligation to prepay loans with the net proceeds of asset sales steps down to 50% and 25% at 3.50x and 3.00x first lien net leverage ratio, respectively.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgrade:» Debt-to-LTM EBITDA sustained below 4.0x» Preservation of its good liquidityFactors that could lead to a downgrade:» EBITA-to-interest expense trending towards 1.5x» Debt-to-LTM EBITDA remains above 5.0x» The company's liquidity profile deteriorates» Aggressive acquisition or shareholder initiativesKodiak Building Partners Inc, headquartered in Littleton, Colorado, is a national distributor of building materials and provider of construction services. Court Square Capital Partners, through its affiliates, has a majority ownership in Kodiak and management has a minority interest.The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.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. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.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 www.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 www.moodys.com.Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Peter Doyle Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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