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New York, June 17, 2022 -- Moody's Investors Service ("Moody's") assigned ratings to Burgess Point Purchaser Corporation (d/b/a BBB Industries), including a B3 corporate family rating (CFR) and a B3-PD probability of default rating. Moody's also assigned a B2 rating to the company's proposed first-lien credit facilities, consisting of a $100 million revolving credit facility and a $1,190 million secured term loan. The rating outlook is stable.
Proceeds from the first-lien term loan along with second-lien debt (unrated) and common equity will be used to finance the purchase of a majority stake of BBB by the private equity firm Clearlake Capital Group, L.P. Following the close of this transaction, outstanding debt at the currently rated entity GC EOS Buyer, Inc. will be repaid and Moody's will withdraw all existing ratings for that entity.
..Issuer: Burgess Point Purchaser Corporation
.... Corporate Family Rating, Assigned B3
.... Probability of Default Rating, Assigned B3-PD
....Gtd Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3)
....Gtd Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3)
..Issuer: Burgess Point Purchaser Corporation
The ratings reflect BBB's high debt leverage, moderate scale in a competitive industry and expectation for an aggressive financial policy under private equity ownership. BBB's ratings are supported by the company's strong market position in the automotive aftermarket, high profit margins from its remanufacturing process, and good liquidity.
Following the leveraged buyout by Clearlake, Moody's expects BBB's debt/EBITDA to be high at about 7x by the end of 2022 compared to about 6.1x debt/EBITDA at end of March 31, 2022 (pro forma for recent acquisitions). Moody's expects debt/EBITDA to return toward 6x by end of 2023 through a combination of earnings growth and moderate debt repayment. However, Moody's does not anticipate BBB to reduce leverage much further as the company will likely pursue partially debt-funded acquisitions over the next couple of years. Moody's expects BBB to target acquisitions to further expand its geographic presence and build out its product and service offerings in the electric vehicle aftermarket and renewable energy markets.
Moody's expects BBB's organic revenue growth to be steady with at least 5% growth in 2022 and 2023 as an aging U.S. car parc and a return to pre-covid vehicle miles traveled should support demand. BBB's process, in which it remanufactures existing parts (i.e. starters, alternators, brake calipers), provides a competitive advantage to the company and produces a strong EBITA margin. In addition, the use of existing products cores in its remanufacturing process has insulated BBB from many inflated material input costs.
The stable outlook reflects Moody's view that steady demand, strong earnings margin and moderate cash flow applied toward debt repayment will result in financial leverage improving toward 6x in 2023.
Moody's considers BBB's liquidity to be good, supported primarily by an expectation for strong free cash flow over the next couple of years. Moody's expects BBB to generate free cash flow as a percentage of total debt of around 5% in 2022 and 2023. The company's free cash flow is reflective of its good earnings, efficient working capital management and low capital expenditure requirements. In addition, Moody's expects the company's investment in channel growth initiatives to subside from higher levels historically. The company's proposed $100 million revolving credit facility and $100 million asset-based lending facility (ABL) are expected to remain largely undrawn.
In terms of corporate governance, the buyout by Clearlake for a majority stake in BBB reflects a higher level of financial risk since it increases financial leverage by at least one turn from current pro forma levels. Further, Moody's expects financial policy to remain relatively aggressive under new ownership, especially as BBB looks to invest and expand its presence in adjacent markets, such as renewable energy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if BBB demonstrates stability in its earnings profile and a measured approach toward debt-funded acquisitions to support expectations for debt/EBITDA to be maintained below 5.5x. In addition, Moody's would also expect BBB to maintain good liquidity and demonstrate consistently positive free cash flow to support an upgrade.
The ratings could be downgraded if BBB's liquidity deteriorates, including an inability to generate positive free cash flow. The ratings could be downgraded if weakening operating results or debt-financed acquisitions or shareholder returns result in an expectation for debt/EBITDA to be sustained above 7x or EBITA/interest expense below 1.5x.
Following are some of the preliminary terms in the marketing term sheet that are subject to change during syndication:
As proposed, the credit facilities are expected to contain covenant flexibility for transactions that could adversely affect creditors. Notable terms include the ability to incur incremental first lien facilities in an aggregate amount not to exceed the greater of $237.5 million and 1x EBITDA on a pro forma basis, plus unused capacity reallocated from the general debt basket, plus unlimited amounts subject to first lien leverage not exceeding 5.0x (if pari passu secured).
Amounts up to the greater of $237.5 million and 1x EBITDA may be incurred with an earlier maturity date than the initial term loans.
The above are proposed terms and the final terms of the credit agreement may be materially different.
The principal methodology used in these ratings was Automotive Suppliers published in May 2021 and available at https://ratings.moodys.com/api/rmc-documents/72204 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Headquartered in Daphne, Alabama, Burgess Point Purchaser Corporation (d/b/a BBB Industries) is a supplier of primarily remanufactured non-discretionary replacement parts for automotive, industrial, energy and solar markets in North America and Europe. The company's main products include alternators, starters, brake calipers, power steering components and turbochargers. For the twelve-month period ended March 31, 2022 the company's net revenues are approximately $948 million.
For 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 .
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At least one ESG consideration was material to the credit rating action(s) announced and described above.
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