The other investigation.
Did anyone else take notice when Jimmy Haslam (in the press conference embedded below) sought to allay concerns about PFJ’s health by noting that none of his stores closed in the immediate aftermath of the FBI/IRS action? That PFJ was able to maintain a supply of diesel fuel to all its shops (although something something Minneapolis something something)?
Were you – like me – thinking: Wait.. WHAT? Isn’t that your business? How is this even on the table? And, NO, I do not feel better about the health of your company for having had this assurance. I’m going to circle back to this point, but first:
That was a flag and there have been others.
- Its largest competitor in the
truck-stoptravel center business, Flying J, went bankrupt in 2009.
- Not buying the Browns outright with 35% (~$367,500,000) due to Randy Lerner in 2016.
- Wresting the ‘player lowest salary cap hit’ crown away from the Bengals’ Mike Brown.
- And now a Moody’s review of all its PFJ ratings, including the previously-downgraded Probability of Default rating.
I’m not a financial analyst or an MBA; open invite to any in the audience who can add insight to this.
But let’s take a look at what – for Browns fans worried about whether or not Jimmy Haslam will be the owner long-term – is the more serious investigation.
A Moody’s action will do more to force a Browns sale than rebate fraud.
All the data I’m putting forward is straight from Moody’s. You can access the same data, you just have to register. Screen-cap above is linked to the research reports found dating back to the Flying J acquisition in 2009.
The initial report says:
Proceeds from the proposed bank revolver and term loans will be used to re-finance existing debt and partially fund Pilot’s acquisition of the travel center assets of Flying J Travel Centers (Flying J) for approximately $1.845 billion.
That’s $2,000,000,000 in debt for the Flying J ‘merger.’ I’ve been unable to find the cost to Pilot for taking on bankrupt Flying J. The FTC did order PFJ to sell 20 travel centers to competitor Love’s but I have no idea on the cash that would bring in.
First downgrade: Probable Default Rating (PDR).
Probable Default Rating? That’s a fairly ominous term, no?
In 2011, two years AFTER the Flying J merger we see an update of the listing of PFJ’s debt and downgrade of PFJ’s PDR.
… Moody’s lowered Pilot’s Probability of Default Rating (PDR) to Ba3 from Ba2 and changed its rating outlook to stable from positive.
The downgrade of the PDR to Ba3 is driven by Pilot’s proposed all bank capital structure which increases the company’s overall probability of default as well as expected recovery in a distress scenario.
Corporate Family Rating of Ba2
- $500 million senior secured revolving credit facility expiring 2014 at Ba2 (LGD 4, 59%)
- $500 million senior secured term loan A due 2014 at Ba2 (LGD 4, 59%)
- $666.5 million senior secured term loan B due 2016 at Ba2 (LGD 4, 59%)
- $345 million senior secured term Loan C due 2017, at Ba2 (LGD 4, 59%)
I don’t know why PFJ would want to an all bank capital structure. I don’t know what could have PFJ worth $2.9B that would satisfy the security side of this transaction. But we wouldn’t be doing our job if we didn’t note that Knoxville banking practices have been suspect in the past.
40% Y/Y bump on debt.
The next notable Moody’s report comes in July 2012, apparently coincidental with the Browns purchase. I don’t know whether this 7/2012 report was prompted by NFL ‘due-diligence’ or if was a routine review. There is no downgrade but it is notable that PFJ’s debt has increased markedly.
Ratings affirmed and LGD (Loss-Given-Default Assessment, FAQs here.) point estimates adjusted are:
- $800 million senior secured revolving credit facility expiring 3/30/2016 at Ba2 (LGD 3, 38% from LGD 3, 39%)
- $800 million senior secured term loan A due 3/30/2016 at Ba2 (LGD 3, 38% from LGD 3, 39%)
- $1.0 billion senior secured term loan B due 3/30/2018 at Ba2 (LGD 3, 38% from LGD 3, 39%)
- $343 million senior secured term Loan C due 9/30/2018 at Ba2 (LGD 3, 38% from LGD 3, 39%) <– approximate amount still due Randy Lerner.
It’s hard to look at this and not think that at least a billion of these monies were earmarked for the Randy Lerner sandbox. The flag with this, for me, remains, why not buy outright? Why postpone $305,000,000 portion of the Browns purchase until 2016? Why is that capital needed so much that you’re willing to eat the [apparent] 343-305= $38,000,000 in interest for use of that money through 2016?
Last week’s notice of review.
Here’s the Moody’s release and I’ll just highlight the areas of concern.
New York, April 16, 2013 — Moody’s Investors Service today placed all ratings of Pilot Travel Centers LLC (Pilot) on review for downgrade, including its Ba2 senior secured bank ratings, Ba2 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating (PDR).
The following ratings are placed on review for downgrade
- Corporate Family Rating of Ba2
- Probability of Default Rating of Ba3-PD
- Senior Secured Bank Ratings of Ba2 (LGD 3, 38%)
The review for downgrade is prompted by the recent announcement that Pilot is the subject of an ongoing federal investigation. The review will focus on the details of the investigations as they become available and any potential impact the investigation or its findings could have on the company’s overall operations, supply or its liquidity, including maintaining orderly access to its bank revolver.
Pilot’s Ba2 CFR reflects the company’s relatively good debt protection measures, good liquidity, meaningful scale, geographic reach, and relatively diverse profit stream. The ratings are constrained by Pilot’s reliance on high volume, low margin fuel sales, some regional concentration, and concern that financial policies with respect to dividends and acquisitions could become more aggressive.
A downgrade could occur in the event that liquidity contracted beyond current levels or debt protection metrics weaken. The adoption of an aggressive financial policy or growth strategy that negatively impacted debt protection metrics or liquidity could also pressure the ratings. Specifically, ratings could be downgraded if debt to EBITDA exceeded 4.5 times, EBITA coverage of interest fell below 1.75 times, or liquidity deteriorated.
What does a downgrade mean?
If we look on the PFJ secured loans is subject to the same market rules as a bond: what happens when a bond is downgraded? Its price goes down meaning the seller (PFJ in this case) must stipulate a higher yield to get the cash. I’m not tuned into the workings well enough to know whether yields are adjusted automatically in the event of a downgrade. (So I can’t say whether a downgrade would automatically force PFJ in increase their current debt servicing obligations.) Obviously though, it will be more expensive for PFJ to get more cash when the next round of financing happens in 2016.
Obviously, this increases liquidity problems.
Or in other words, “We kept our travel centers open this weekend” becomes a bullet point in the Monday morning con calls.
Liquidity is a word that we’re seeing way too often in relation to the PFJ/Haslam financial discussions.
Putting together some of the pieces now: you’ve got a business that runs on an operating margin of under 3%. Your business relies on high volume, low margin sales. You have an $800,000,000 revolving credit account but you felt compelled to assure the world that your stores are staying open.
I’m sensing a house of cards and I wish I weren’t. We know it was liquidity that forced Art Modell’s hand. This has the potential to dwarf any problems Modell had.
We don’t know with certainty whether the Browns and PFJ debt is co-mingled. Frankly, for all we know, the liquidity provided by the printing press that is the NFL is being eyed to prop up PFJ.
If I might ask a favor of our paid reporters: could someone ask Haslam at the next opportune time whether any of the PFJ senior secured term loans are being using to purchase the Browns? Perhaps a specific question on the seeming coincidence of senior secured term Loan C being roughly equivalent to the remaining amount due Randy Lerner.
On the plus side.
The Moody’s investigation is a problem.
But this does not change my perspective on the FBI-IRS interdiction. What I see is a probable cause based on intimidation of witnesses to enforce contracts whose terms are unknown to prosecute an alleged theft/fraud of some unknown amount of money. This seems soft to me; this seems dangerously close to police state stuff.
I also need to correct on myself on an earlier Haslam criticism concerning the talking publicly about the investigation. Initially I found it hubris-laden and legally speaking, unwise. But leaders need to lead. I give Haslam high marks for getting out front of the criminal investigation and taking the reins. That’s his job, yes, but a lot of CEOs would struggle to find their courage here.
UPDATE, DECEMBER 2013: Moody’s confirms ratings of Pilot Travel Center; outlook negative.
Moody’s finished the review started in April and confirmed a negative outlook. PFJ debt ratings were not lowered. Highlights:
The confirmation reflects Moody’s view that Pilot’s overall operations continue to perform well and that the company will maintain adequate liquidity and relatively good credit metrics. The confirmation also reflects the final approval of the class action settlement in November 2013, that incorporates the substantial majority of Pilot’s customer base and the final judgment of around $80 million, of which about $60 million has been paid to date.
The negative outlook reflects the ongoing federal investigation and pending litigation and the uncertainty and timing that both of these events could have, if any, on Pilot’s overall operations, fuel and merchandise supply or its liquidity.
Pilot’s Ba2 CFR reflects the company’s relatively good debt protection metrics, meaningful scale, geographic reach, relatively diverse profit stream, and adequate liquidity. The ratings are constrained by Pilot’s reliance on high volume, low margin fuel sales, some regional concentration, and concern that financial policies with respect to dividends and acquisitions could become more aggressive.
A downgrade could occur in the event that liquidity contracted beyond current levels or debt protection metrics weaken due in part to a sustained deterioration in operating performance or an adverse judgment from the pending investigation or litigation. The adoption of an aggressive financial policy or growth strategy that negatively impacted debt protection metrics or liquidity could also pressure the ratings. Specifically, ratings could be downgraded if debt to EBITDA exceeded 4.5 times, EBITA coverage of interest fell below 1.75 times, or liquidity deteriorated.
Given the pending investigation and litigation any upward rating pressure is unlikely. However, a stable outlook would require greater clarity towards a final resolution to the ongoing criminal investigations and pending litigation that did not materially impact the company’s liquidity, operations or debt protection metrics. In addition, an upgrade would require a sustained improvement in debt protection metrics driven in part by stronger operating performance of its fuel business, with gross margins from Pilot’s non- fuel businesses remaining stable. A higher rating would also require good liquidity. Quantitatively, an upgrade would require sustained debt to EBITDA below 3.5 times, EBITA coverage of interest of above 4.0 times, and retained cash flow to net debt of about 25%.
Other Kanick posts on Haslam PFJ:
- They dont call. ‘Probable cause’ conjecture.
- Cleveland Schadenfreude. On the seeming soft-ness of the FBI’s probable cause and rushes to judgement.
Haslam’s first presser, 4/19.