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PODS LLC -- Moody's affirms PODS CFR at B2, assigns B2 ratings to new secured credit facility, outlook stable

·15 min read

Rating Action: Moody's affirms PODS CFR at B2, assigns B2 ratings to new secured credit facility, outlook stableGlobal Credit Research - 10 Mar 2021New York, March 10, 2021 -- Moody's Investors Service (Moody's) affirmed PODS LLC's (PODS) B2 corporate family rating and upgraded the Probability of Default rating to B2-PD from B3-PD. Concurrently, Moody's assigned B2 senior secured ratings to the company's proposed $1.165 billion first lien term loan and $100 million first lien revolving credit facility. The rating outlook is stable.The actions follow the company's announcement to refinance existing debt along with incremental borrowings to help fund a nearly $440 million dividend to shareholders.Ratings on the existing first lien term loans and revolving credit facility are unaffected at this time and will be withdrawn upon close of this transaction.Governance considerations acknowledge private equity ownership with this proposed, large dividend as well as risk that PODS could resume an aggressive debt-funded strategy to roll-up additional franchisee markets. As a result, financial policy was a key consideration in the rating outcome.RATINGS RATIONALEThe ratings reflect modest scale, high leverage and reduced financial flexibility following the largely debt-funded dividend to shareholders. The ratings also consider PODS' strong brand recognition and leading niche market position, a track record of steadily rising earnings and solid returns and free cash flow generation. Moody's believes portable moving and storage presents above-average growth prospects within a largely flexible cost structure. These positive considerations are tempered by the periodic roll-up of franchises, typically debt-funded, which reduces visibility into sustainable margin levels as well as Moody's expectation for higher growth capital expenditures that will weigh on 2021 free cash flow generation.PODS maintains a leading market position highlighted by its brand recognition for portable storage yet assisted moving and storage represent larger impacts on overall performance. With the niche focus, the company has over 200,000 containers in circulation within an integrated logistics infrastructure that facilitates flexibility for moving within or between locations, storage at a customer's site or storage at a PODS location.Moody's adjusted debt-to-EBITDA is expected to rise to over 6x with this transaction, falling to the mid-5x range by year-end 2021. Free cash flow will be negative in 2021 due to large compensation payouts as well as elevated capital expenditures for new containers - beyond 2021, free cash flow-to-debt is expected to settle in the mid-single digit range. Margins should modestly improve into 2022 even with muted year-over-year pricing growth.The rating outlook is stable, reflecting expectations for continued momentum in operating results that translates into restoration of the reduced financial flexibility. Improving earnings and modest debt repayment beginning in 2022 from a rebound in free cash flow should result in steady de-levering, notwithstanding potential debt-financed franchise roll-ups.The liquidity position is adequate supported by a run-rate cash position in the $40 million range, the upsized revolving credit facility (from $50 million) that is more appropriately sized for the growing revenue base and normalized free cash flow, beginning in 2022, that should approach $100 million annually. The revolving credit facility is subject to a springing first lien net leverage covenant tested when borrowings exceed a specified threshold - the term loan does not have financial maintenance covenants.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded with stronger than expected free cash flow that results in accelerated debt repayment and sustainably lower financial leverage. Debt-to-EBITDA maintained in the low-to-mid 4x range and free cash flow-to-debt consistently in the mid-to-high single digits would be important components for an upgrade. A stronger liquidity profile along with expectations for a more conservative financial policy would also be prerequisites for higher ratings.The ratings could be downgraded in the event of a debt-financed dividend or sizable franchise purchases prior to significantly improving the weaker leverage profile. Debt-to-EBITDA expected to remain above 6x or if margins fall meaningfully could also be a precursor for negative rating action. The inability for free cash flow to sharply rebound in 2022 thereby contributing to tightening liquidity and reliance on the revolving credit facility could also place downward pressure on ratings.Moody's took the following rating actions on PODS LLC:- Corporate Family Rating, affirmed at B2- Probability of Default Rating, upgraded to B2-PD from B3-PD- New Senior Secured First Lien Term Loan, assigned at B2 (LGD3)- New Senior Secured First Lien Revolving Credit Facility, assigned at B2 (LGD3)- Rating outlook, StablePODS LLC (Portable On Demand Storage) is a leader in consumer-focused containerized moving and storage. The company offers a full range of services including moving within or between cities, storage at a customer's site and storage at one of PODS' warehouses. Revenues for the year ended December 31, 2020 were approximately $800 million.PODS has been owned by Ontario Teachers' Pension Plan since 2015.The principal methodology used in these ratings was Surface Transportation and Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382. 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. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.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. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. 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. Eric Greaser Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Robert Jankowitz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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