A downgrade of Central Parking Corp. this month by Standard & Poor’s raises questions about how long its private equity backers, including
Central Parking Corp. is one of the world’s largest managers of parking lots and garages, managing about 1.2 million spaces in 2,500 facilities nationwide, including a parking garage in the Empire State Building.
But the heavily leveraged Nashville, Tenn.-based company appears to be running out of time. Based in part on the company’s declining EBITDA—which fell more than 20 percent in a recent 12-month period—S&P dropped Central Parking’s corporate credit rating and the rating on its $370 million first-lien debt from B- to CCC, meaning the company is vulnerable to adverse business and economic conditions.
Meantime, the rating on Central Parking’s $50 million second-lien debt was lowered from CCC to CC, just two notches above default. To add to the pressure, the company’s $183.5 million in securitized commercial mortgage debt, financed in a transaction led by Goldman Sachs, matures in June. Central Parking is in danger of breaking its leverage covenant within a year, according to S&P.
“If it does default, there’s a substantial probability that the firms will be heavily diluted in equity or wiped out totally,” said Dennis Drebsky, a bankruptcy specialist at Nixon Peabody in New York who is not working with Central Parking. “It’s expected that when you invest in these types of companies you have winners and losers,” added Drebsky. “You just want to be careful not to have too many losers.”
No doubt defaulting on debt was the farthest thing from the minds of buyout firms Kohlberg & Co.,
Separately, Goldman Sachs, with help from RBS Greenwich Capital, agreed to lend an additional $418 million in unrated commercial mortgage-backed securities debt (first mortgage and mezzanine financing, according to one source). The company was then divided into two parts: OpCo, which leases and manages parking facilities, and PropCo, which owns them. OpCo holds most of the bank debt, while PropCo—designed so that its assets are protected if Central Parking goes bankrupt—holds the mortgage-backed securities debt.
“I don’t think anyone anticipated this,” said Jerry Phelan, an analyst at S&P who’s been tracking the company. “I think they thought they were buying a healthy company. At the time, [Central Parking] was in better shape, but they’re going down a slippery slope.”
Just before the buyout, revenue growth had been stable at Central Parking, which then operated some 1.4 million spaces in 3,000 facilities. Leading the company since 2005 was Emanuel Eads, who established goals of focusing on national high-growth accounts and investing in technology, such as a system that lets customers pay for parking online.
The buyout shops, which kept Eads aboard as president and CEO, tasked him with the additional strategy of selling assets to pay off debt. “Growth for growth’s sake is no longer the order of the day,” Versa Capital Managing Partner Gregory Segall told the Philadelphia Business Journal in May 2007. Eads did not return calls seeking comment. Neither did Versa Capital’s Segall, Kohlberg Partner Gordon Woodward or Lubert-Adler Vice President Michael Trachtenberg, all of whom helped structure the buyout.
Central Parking, which has sold most of its international operations, has made progress in paying down debt. As of Sept. 30, its total consolidated debt stood at about $401 million, down from about $702 million at the time of the transaction, according to S&P’s Phelan, who declined to break down those numbers. (The $702 million estimate, issued in April 2007, was pro forma for the transaction and excluded operating lease obligations.) Since the buyout, however, conditions at Central Parking have deteriorated.
Operating cash flow has improved this year, and the company has hired three new managers of business development. But the company’s ability to sell assets appears to have stalled. And revenue and EBITDA have declined to the point that the company’s leverage multiple, which was 4.5x at the time of the deal, according to one source, had risen to 9.1x as of Sept. 30 2008, and 10.2x this past Sept. 30.
Revenue at Central Parking fell 13 percent in the year following the buyout, between June 30, 2007 and June 30, 2008, and fell another 11 percent in the 12 months ending Sept. 30, largely due to the recession and rising unemployment. EBITDA fell more than 20 percent in the 12 months ending Sept. 30.
According to S&P’s Phelan, Central Parking’s leverage covenant gets increasingly restrictive for each of the next five quarters, making it likely that the company will violate it and lose access to its $80 million revolving credit facility unless profits improve soon.
The PropCo debt, meanwhile, first matured last June and was supposed to be gone by now. Although two more extensions are still available, Central Parking needs to comply with conditions to obtain them, and with $875 billion of commercial mortgage-backed securities outstanding in the United States, according to Churchill Financial, and more than $200 billion of them issued in 2007, the parking garages will be tough to refinance or sell.
“You go to the investment vehicles that buy that kind of collateral, and they’re busy disgorging, not investing,” said one observer.
The sponsors and lenders to Central Parking are probably trying to hammer out a restructuring plan for Central Parking, Drebsky said. Options likely include some form of deleveraging, letting the debt holders swap debt for equity (S&P views this as a default), or bankruptcy, an option that would be complicated by the variety of investors holding the commercial mortgage-backed securities debt.
When the debt holders are scattered, Drebsky said, bankruptcy can be harder to work out.