Service King’s liquidity strain incites investor thoughts on recovery valuations
All eyes are on Service King after the collision repair center operator yesterday (14 September) disclosed that it drew down on its revolver and will elect to PIK the interest payment on its term loan later this month. The double dose of bad news, combined with recent grim financial reports, has put the spotlight on the issuer’s recovery estimates, said four buysiders and a sellsider following the company. And as investors look to conduct due diligence on Service King’s true earnings potential, their conclusions could set the stage for a potential valuation fight down the road, they noted.
Investor valuations vary drastically due to the company’s heavily adjusted EBITDA numbers. On an LTM basis through 2Q21, the issuer recorded unadjusted EBITDA of negative USD 15.1m. Including adjustments, the LTM figure totaled USD 5.5m, while pro forma further adjustments EBITDA without a cap on addbacks — including USD 124.2m of COVID-related adjustments — amounted to USD 130.6m. Including the cap on adjustments, pro forma adjusted EBITDA came in at USD 22.7m, as reported.
On the higher end, sources use USD 128m of EBITDA as an average of 2017, 2018 and 2019 pro forma adjusted EBITDA numbers. On the lower end, sources take USD 70m-USD 90m of adjusted EBITDA.
With multiples of 7x-8x, the company’s valuation shakes out to USD 490m on the lower end and USD 1.024bn on the higher end. The argument that adjusted EBITDA falls closer to the north end of the range would put Service King’s USD 375m 7.875% noteholders in line to take control of the equity in a restructuring scenario. Meanwhile, if adjusted EBITDA falls at the lower end of the range, then lenders would stand impaired and emerge as the fulcrum security.
The multiple is based on industry comps Boyd Group Services and Caliber Collision Repair Services.
Investors place Service King at a deep discount to Boyd, where the current EV multiple stands at roughly 25x. The comp’s equity traded today at USD 244.56 with a market cap of USD 5.251bn. Two other sources pegged Caliber’s EV multiple at roughly 15x, again factoring a great discount for Service King given the latter’s elevated leverage and operational struggles.
Leading to expectations for a potential restructuring, Service King’s recent draws on its revolver leave the company – owned by The Blackstone Group and The Carlyle Group – with less breathing room to recover from pandemic troughs, the sources noted.
The collision center released a document yesterday stating that it intends to exercise the PIK toggle option for an upcoming 22 September interest payment on its term loan, as reported. In tandem with the disclosure, the borrower also said it will draw down the remaining USD 22m of availability under its revolver.
Service King ended 2Q with USD 71.8m in liquidity through USD 19.8m of cash and USD 52m of revolver availability, as reported. After the quarter ended, however, the company drew an additional USD 20m from its revolver, bringing liquidity down to USD 51.8m.
With the increased revolver draw translating to cash and assuming the 2Q USD 19.8m cash balance is unchanged, the company’s all-cash liquidity stands at USD 41.8m. For comparison, liquidity at 1Q21-end amounted to USD 89m.
Service King’s loan interest payment due this month is roughly USD 15m, half of which, or roughly USD 7.5m, can be PIKed. In addition, the company has a USD 14.8m interest payment on its 7.875% bond due 1 October.
Also a pressure point for the company is a minimum liquidity test of USD 35m as required under its revolver documents.
Pro forma the additional draw, Service King’s capital structure shakes out to USD 72m of revolver borrowings, USD 771m Libor+ 675bps term loan due 2025 and USD 375m 7.875% senior unsecured notes due 2022, bringing total debt to USD 1.218bn.
Following the draw, leverage stands at 9.3x, through the USD 1.218bn of total debt and USD 130.6m of LTM 30 June adjusted EBITDA without a cap. Including a cap on adjustments, leverage totals 53.7x through USD 22.7m of adjusted EBITDA.
For its part, Clearlake Capital, which has a significant stake in the borrower’s bonds, is working with law firm Paul Weiss, as reported. Meanwhile, an ad hoc group of term loan lenders, has reengaged Gibson Dunn as legal counsel.
The borrower’s loan is quoted 94/95, compared to a 91/93 context on 20 August and a 94.938/95.938 level pre-earnings, according to a buysider.
Its USD 375m 7.875% senior unsecured notes due 2022 last changed hands at 94.5 to yield 13.482% on 8 September, up from an 83 context on 17 August, according to MarketAxess.
In January, Service King placed a new USD 91m revolver and new USD 775m term loan B to refinance near-term maturities, including a term loan due August 2021 and revolver due 2021.
Service King did not respond to a request for comment. Blackstone and Carlyle did not respond to requests for comment.
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