The downgrade is unwelcome news for the New York-based firm, which bought the company, Ozburn-Hessey Holding Co. LLC, in 2005 for an undisclosed amount with its tenth fund, a $3.4 billion fund closed in 2005 that is not performing strongly. The company provides logistics and related services to big companies, including warehouse management, truck brokerage, customs brokerage and freight forwarding.
Since Welsh Carson’s acquisition, the company has completed three add-on acquisitions. As recently as June, sister news service Reuters reported the Nashville, Tenn.-based company, which posted $1.2 billion in gross revenue in 2010, and $650 million in net revenue, was looking at going public.
But Moody’s said a weak liquidity profile, negative free cash flow and tight covenants, among other factors, led to the downgrade. Ozburn-Hessey’s debt-to-EBITDA ratio was 7x, Moody’s said. Another downgrade is in the offing if the company can’t fix its covenants concerns in the next year, Moody’s said.
A source close to Welsh Carson said the buyout shop firmly believes in the investment and blamed the challenges on a series of unexpected and, the firm hopes, one-time challenges.
First off, the source said, toward the end of 2010, when the economy seemed to be improving, the firm encouraged the company to invest in growth, which generated significant selling, general and administrative expenses. Simulteneously, its contract logistics business won a lot of new business–which is good news, but it generated significant one-time set-up costs for each new customer. Then, in August 2010, the Transportation Security Administration implemented new rules for screening cargo, which led to costs for the company’s freight forwarding businesses.
At the end of this year, the company’s debt covenant calls for its total debt to drop to 4.75x EBITDA. Moody’s estimates the company’s debt-to-EBITDA at 7x, although the source said it is currently 5.25x.
Our source said Welsh Carson sees the issues as a “short term problem” that “will get fixed over the next 12 months.” For now the firm is working on cutting costs and executing a plan to increase profits. In August, it also replaced the company’s CEO.
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Asked whether Welsh Carson is still thinking about bringing the company public, the source said “certainly in the future,” but not any time soon.
Moody’s downgraded the company’s corporate family and probability of default from Caa2 from Ba3; its $35 million first lien revolver due in 2014 to B2 from Ba3; its $275 million first lien term loan due in 2015 to B2 from Ba3; and a $75 million second lien term loan due in 2016 to Caa2 from B3.
Welsh Carson, founded in 1979, focuses on health care and information and business services. The firm is investing out of its 11th fund, a $3.7 billion fund closed in 2009.