NEW YORK (S&P Global Ratings) Feb. 7, 2019--S&P Global Ratings today took the rating actions listed below. The downgrade reflects the increased leverage, to about 4.5x over the next 12 months from about 2.7x, and S&P Global Ratings' expectation that aggressive financial policy decisions from the new ownership could increase leverage further. These decisions could take the form of future growth initiatives, acquisitions, or shareholder rewards.

  • Birmingham, Mich.-based disaster recovery services provider Belfor Holdings Inc. (Belfor) is being acquired by American Securities, a middle-market private equity firm.
  • We assigned a 'B' issuer credit rating to Belfor Holdings Inc.
  • We assigned issue-level and recovery ratings to the company's proposed $200 million revolving credit facility due 2024 and $585 million first-lien term loan due 2026, with which the company will partially fund the transaction. The issue rating is 'B' and the recovery rating is '3', indicating our expectation of meaningful (50%-70%; rounded estimate: 55%) recovery in the event of a default.
  • We also lowered the issuer credit rating on operating company Belfor USA Group Inc. and the issue-level ratings related to its existing debt by two notches, to 'B' from 'BB-'.
  • The stable outlook reflects our view that favorable operating trends should be supportive of the current ratings and the new owners will maintain leverage at appropriate levels.

The stable outlook reflects our expectation that adjusted debt to EBITDA will remain between 4x to 6.5x; that future operating trends should be relatively predictable; and that debt levels should be manageable even with potential deterioration in operating trends or aggressive financial policy decisions from the financial sponsors.

We could lower our ratings on Belfor if deteriorating operating trends or aggressive financial policy decisions result in adjusted debt to EBITDA increasing toward 7x with no clear prospects for recovery. This could happen in 2019 if Belfor's revenue contracted by at least 25% while its EBITDA margin weakened by more than 200 basis points (bps). While we believe a portion of Belfor's business is recurring, demand for its damage restoration services is difficult to predict, and circumstances could force the company to reduce pricing to stay competitive. We could also lower our ratings if tight headroom under the company's proposed financial covenants or negative free cash flows translates into constrained liquidity.

While less likely in the next year, we could raise our ratings on Belfor if operating trends continue to improve and if leverage remains below 5x, inclusive of acquisitions and shareholder rewards.