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TEXT-S&P Assigns LM U.S. Member LLC 'B-' Rtg; Outlook Stable

Wednesday, 10 Oct 2012 | 6:29 PM ET

(The following was released by the rating agency)

Overview

-- The Carlyle Group is acquiring Landmark Aviation for $625 million, funded mostly with debt.

-- We are assigning our 'B-' corporate credit rating to LM U.S. Member LLC.

-- At the same time, we are assigning our 'B-' issue rating and '3' recovery rating to the company's proposed first-lien credit facility, and 'CCC' issue rating and '6' recovery rating to the proposed $130 million secured second-lien term loan.

-- The stable outlook reflects our expectation that credit ratios will remain quite weak but improve gradually over the next year mostly as a result of earnings growth as high capital expenditures will constrain free cash flow.

Rating Action

On Oct. 10, 2012, Standard & Poor's Ratings Services assigned its 'B-' corporate credit rating to LM U.S. Member LLC (along with co-borrower LM U.S. Corp Acquisition Inc. [Landmark Aviation]). The outlook is stable. At the same time, we are assigning our 'B-' issue rating and '3' recovery rating to the company's proposed $335 million first-lien credit facility, which consists of a $75 million revolver due 2017 and a $260 million term loan due 2019. The '3' recovery rating indicates our expectation of meaningful (50%-70%) recovery in the event of payment default. We also assigned our 'CCC' issue rating and '6' recovery rating to the proposed $130 million second lien term loan that matures in 2020. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery.

Rationale

Our ratings on Landmark Aviation reflect our expectations that leverage (debt to EBITDA) will be very high following the proposed leveraged buyout of the company, with only modest improvement likely in the next 12 months because of limited free cash flow. We believe revenues and earnings will show modest growth over the next year because of recently acquired locations and increasing business jet usage. We assess the company's business risk profile as "weak," reflecting its position as the third-largest provider of fixed base operations (FBO) services to the cyclical general aviation market and good customer and geographic diversity. The FBO market has high barriers to entry, but this also limits expansion opportunities. We assess the company's financial risk profile as "highly leveraged" based on the company's high debt leverage and very aggressive financial policy, but "adequate" liquidity.

The Carlyle Group plans to purchase Landmark Aviation from its current private equity owners for $625 million plus fees and expenses. The transaction will be financed with $264 million of common equity from Carlyle and $390 million of new debt. The company will have a fairly complex organizational structure as a result of limits on foreign ownership and other considerations, but we evaluated the various legal entities as one economic entity in our ratings analysis. We believe that the transaction will result in very weak credit ratios, with 2012 total adjusted debt to EBITDA of 8x and funds from operations (FFO) to total adjusted debt about 5%. Debt to capital, however, is not as high, at about 70%, because of the relatively large equity contribution from Carlyle. The company leases almost all of its facilities from the airport where each is located, resulting in the present value of operating leases comprising about 40% of total adjusted debt. We expect gradual improvement in credit ratios over the next year, primarily as a result of earnings growth, as high capital expenditures over the next few years to expand and improve recently acquired sites will constrain free cash flow. Therefore, we do not expect much debt reduction in 2013, resulting in debt to EBITDA above 7x and FFO to debt below 10%.

Landmark Aviation primarily provides FBO services (92% of gross profit for the 12 months ending June 30, 2012) to the general aviation market, mostly business jets owned by corporations or individuals. FBO services include aircraft fueling, hanger rental and parking, de-icing, aircraft cleaning, catering, and other passenger services. Landmark also provides maintenance, repair, and overhaul (MRO) services and charter and aircraft management as an ancillary business to their FBO operations (8%). Fuel sales are primarily to the general aviation market (49% of 2012 FBO net revenues) and, to a smaller extent, to airlines. For its general aviation customers, Landmark owns the fuel, so managing inventory levels and pricing are key to maintaining attractive profit margins. A smaller part of the business, referred to as "Into-Plane" fuel sales, refers to sales made at smaller airports where the company fuels aircraft for airlines, but the customer owns the fuel and the company receives a fee for pumping it.

The 2008 financial crisis had a significant impact on the business aviation market, resulting in a large number of order cancellations, deferrals, and an absence of new orders, as well as a large decline in business jet flight hours. Business jet utilization started to improve in 2010 and continued to display modest signs of life through 2012, although renewed economic weakness could stall the recovery.

Landmark is the third-largest provider of FBO services in North America, with 50 locations in the U.S., Canada, and France. Although two larger firms have 65 locations each, the FBO industry is otherwise highly fragmented, with most competitors having only a few locations. The company has a presence at 11 of the top 50 general aviation airports in the U.S., but not at the largest, in Teterboro, N.J. The FBO market has very high barriers to entry because of scarce airport property and leases that can last up to 30 years. This results in limited competition at most airports (more than 75% of the company's locations have none or only one competitor) but also limits expansion opportunities. Landmark has been able to grow its sites to 50 from 29 in 2007 mostly through acquiring smaller competitors. Customer diversity is good with the top 20 customers comprising less than 25% of sales.

Fuel sales are the primary driver of revenues and profits, so effective management of fuel inventory, purchases, and pricing is crucial to the company's earnings. Fuel pricing is based on competitor's prices, customer relationships, volumes purchased, and payment method. Landmark purchases the fuel from distributors under long-term agreements and sells it to customers with a dollar margin, which eliminates exposure to swings in the price of jet fuel. Reported operating margins can vary widely because of changes in the base price of jet fuel, but Landmark has been successful in maintaining the dollar margin it adds, despite high fuel prices. The company does not use financial instruments to hedge its fuel price exposure but maintains less than a week's inventory. The company utilizes an ERP system, which provides real-time data regarding fuel usage and allows for a deeper understanding of customer needs, enabling better management of inventory and costs.

Liquidity

We assess Landmark Aviation's liquidity as adequate, pro forma for the proposed transaction. We expect sources of liquidity to exceed uses by at least 1.2x over the next 12 months, the minimum level for adequate designation under our criteria. We also expect that sources would exceed uses even if EBITDA were to decline by 15%.

We expect cash to be minimal, pro forma for the proposed transaction, but the company will have access to a $75 million revolving credit facility that matures in 2017, which we expect to be initially undrawn.

Landmark has relatively high capital spending requirements in 2013 and 2014 to improve and expand certain locations. Therefore, free cash flow will be modest for the next few years but likely increase significantly thereafter as projects near completion and spending requirements normalize. Near-term debt maturities are minimal through 2018, primarily consisting of $2.6 million yearly amortization on the term loan. There are no maintenance financial covenants in the proposed credit facilities. However, the revolver does have a covenant that limits net first-lien debt to EBITDA (as defined) to 6x if the company uses more than 20% of the revolver commitment.

Recovery analysis Please see the recovery report to be published shortly on RatingsDirect.

Outlook The outlook is stable. We expect credit ratios to be very weak following the leveraged buyout and only improve gradually, as high capital expenditures over the next few years will constrain free cash flow, and therefore debt reduction. Revenue and earnings should grow modestly as a result of new locations and stable-to-improving business jet usage. We could lower the rating if the weak economy or a spike in fuel prices results in declines in business jet usage, constraining the company's liquidity such that we would revise our assessment to "less than adequate" or "weak." Although unlikely in the next year, we could raise the ratings if cash flow is greater than we expect and dedicated to debt reduction, resulting in debt to EBITDA below 5.5x.

Related Criteria And Research

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Standard & Poor's Standardizes Liquidity Descriptors for Global Corporate Issuers, July 2, 2010

-- Key Credit Factors: Methodology and Assumptions On Risks In The Aerospace And Defense Industries, June 24, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List New Rating; Stable Outlook LM U.S. Member LLC Corporate Credit Rating B-/Stable/-- Senior Secured $130 mil second-lien term ln due 2020 CCC Recovery Rating 6 $75 mil revolver bank ln due 2017 B- Recovery Rating 3 $260 mil term bank ln due 2019 B- Recovery Rating 3

Keywords: MARKETS RATINGS LANDMARKAVIATION