(The following was released by the rating agency)
-- The Carlyle Group is acquiring Landmark Aviation for $625million, funded mostly with debt.
-- We are assigning our 'B-' corporate credit rating to LMU.S. Member LLC.
-- At the same time, we are assigning our 'B-' issue ratingand '3' recovery rating to the company's proposed first-liencredit facility, and 'CCC' issue rating and '6' recovery ratingto the proposed $130 million secured second-lien term loan.
-- The stable outlook reflects our expectation that creditratios will remain quite weak but improve gradually over thenext year mostly as a result of earnings growth as high capitalexpenditures will constrain free cash flow.
On Oct. 10, 2012, Standard & Poor's Ratings Servicesassigned its 'B-' corporate credit rating to LM U.S. Member LLC(along with co-borrower LM U.S. Corp Acquisition Inc. [LandmarkAviation]). The outlook is stable. At the same time, we areassigning our 'B-' issue rating and '3' recovery rating to thecompany's proposed $335 million first-lien credit facility,which consists of a $75 million revolver due 2017 and a $260million term loan due 2019. The '3' recovery rating indicatesour expectation of meaningful (50%-70%) recovery in the event ofpayment default. We also assigned our 'CCC' issue rating and '6'recovery rating to the proposed $130 million second lien termloan that matures in 2020. The '6' recovery rating indicates ourexpectation for negligible (0%-10%) recovery.
Our ratings on Landmark Aviation reflect our expectationsthat leverage (debt to EBITDA) will be very high following theproposed leveraged buyout of the company, with only modestimprovement likely in the next 12 months because of limited freecash flow. We believe revenues and earnings will show modestgrowth over the next year because of recently acquired locationsand increasing business jet usage. We assess the company'sbusiness risk profile as "weak," reflecting its position as thethird-largest provider of fixed base operations (FBO) servicesto the cyclical general aviation market and good customer andgeographic diversity. The FBO market has high barriers to entry,but this also limits expansion opportunities. We assess thecompany's financial risk profile as "highly leveraged" based onthe company's high debt leverage and very aggressive financialpolicy, but "adequate" liquidity.
The Carlyle Group plans to purchase Landmark Aviation fromits current private equity owners for $625 million plus fees andexpenses. The transaction will be financed with $264 million ofcommon equity from Carlyle and $390 million of new debt. Thecompany will have a fairly complex organizational structure as aresult of limits on foreign ownership and other considerations,but we evaluated the various legal entities as one economicentity in our ratings analysis. We believe that the transactionwill result in very weak credit ratios, with 2012 total adjusteddebt to EBITDA of 8x and funds from operations (FFO) to totaladjusted debt about 5%. Debt to capital, however, is not ashigh, at about 70%, because of the relatively large equitycontribution from Carlyle. The company leases almost all of itsfacilities from the airport where each is located, resulting inthe present value of operating leases comprising about 40% oftotal adjusted debt. We expect gradual improvement in creditratios over the next year, primarily as a result of earningsgrowth, as high capital expenditures over the next few years toexpand and improve recently acquired sites will constrain freecash flow. Therefore, we do not expect much debt reduction in2013, resulting in debt to EBITDA above 7x and FFO to debt below10%.
Landmark Aviation primarily provides FBO services (92% ofgross profit for the 12 months ending June 30, 2012) to thegeneral aviation market, mostly business jets owned bycorporations or individuals. FBO services include aircraftfueling, hanger rental and parking, de-icing, aircraft cleaning,catering, and other passenger services. Landmark also providesmaintenance, repair, and overhaul (MRO) services and charter andaircraft management as an ancillary business to their FBOoperations (8%). Fuel sales are primarily to the generalaviation market (49% of 2012 FBO net revenues) and, to a smallerextent, to airlines. For its general aviation customers,Landmark owns the fuel, so managing inventory levels and pricingare key to maintaining attractive profit margins. A smaller partof the business, referred to as "Into-Plane" fuel sales, refersto sales made at smaller airports where the company fuelsaircraft for airlines, but the customer owns the fuel and thecompany receives a fee for pumping it.
The 2008 financial crisis had a significant impact on thebusiness aviation market, resulting in a large number of ordercancellations, deferrals, and an absence of new orders, as wellas a large decline in business jet flight hours. Business jetutilization started to improve in 2010 and continued to displaymodest signs of life through 2012, although renewed economicweakness could stall the recovery.
Landmark is the third-largest provider of FBO services inNorth America, with 50 locations in the U.S., Canada, andFrance. Although two larger firms have 65 locations each, theFBO industry is otherwise highly fragmented, with mostcompetitors having only a few locations. The company has apresence at 11 of the top 50 general aviation airports in theU.S., but not at the largest, in Teterboro, N.J. The FBO markethas very high barriers to entry because of scarce airportproperty and leases that can last up to 30 years. This resultsin limited competition at most airports (more than 75% of thecompany's locations have none or only one competitor) but alsolimits expansion opportunities. Landmark has been able to growits sites to 50 from 29 in 2007 mostly through acquiring smallercompetitors. Customer diversity is good with the top 20customers comprising less than 25% of sales.
Fuel sales are the primary driver of revenues and profits,so effective management of fuel inventory, purchases, andpricing is crucial to the company's earnings. Fuel pricing isbased on competitor's prices, customer relationships, volumespurchased, and payment method. Landmark purchases the fuel fromdistributors under long-term agreements and sells it tocustomers with a dollar margin, which eliminates exposure toswings in the price of jet fuel. Reported operating margins canvary widely because of changes in the base price of jet fuel,but Landmark has been successful in maintaining the dollarmargin it adds, despite high fuel prices. The company does notuse financial instruments to hedge its fuel price exposure butmaintains less than a week's inventory. The company utilizes anERP system, which provides real-time data regarding fuel usageand allows for a deeper understanding of customer needs,enabling better management of inventory and costs.
We assess Landmark Aviation's liquidity as adequate, proforma for the proposed transaction. We expect sources ofliquidity to exceed uses by at least 1.2x over the next 12months, the minimum level for adequate designation under ourcriteria. We also expect that sources would exceed uses even ifEBITDA were to decline by 15%.
We expect cash to be minimal, pro forma for the proposedtransaction, but the company will have access to a $75 millionrevolving credit facility that matures in 2017, which we expectto be initially undrawn.
Landmark has relatively high capital spending requirementsin 2013 and 2014 to improve and expand certain locations.Therefore, free cash flow will be modest for the next few yearsbut likely increase significantly thereafter as projects nearcompletion and spending requirements normalize. Near-term debtmaturities are minimal through 2018, primarily consisting of$2.6 million yearly amortization on the term loan. There are nomaintenance financial covenants in the proposed creditfacilities. However, the revolver does have a covenant thatlimits net first-lien debt to EBITDA (as defined) to 6x if thecompany uses more than 20% of the revolver commitment.
Recovery analysis Please see the recovery report to bepublished shortly on RatingsDirect.
Outlook The outlook is stable. We expect credit ratios to bevery weak following the leveraged buyout and only improvegradually, as high capital expenditures over the next few yearswill constrain free cash flow, and therefore debt reduction.Revenue and earnings should grow modestly as a result of newlocations and stable-to-improving business jet usage. We couldlower the rating if the weak economy or a spike in fuel pricesresults in declines in business jet usage, constraining thecompany's liquidity such that we would revise our assessment to"less than adequate" or "weak." Although unlikely in the nextyear, we could raise the ratings if cash flow is greater than weexpect and dedicated to debt reduction, resulting in debt toEBITDA below 5.5x.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk MatrixExpanded, Sept. 18, 2012
-- Standard & Poor's Standardizes Liquidity Descriptors forGlobal Corporate Issuers, July 2, 2010
-- Key Credit Factors: Methodology and Assumptions On RisksIn The Aerospace And Defense Industries, June 24, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April15, 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