OREANDA-NEWS. S&P Global Ratings affirmed its 'B+' corporate credit rating on Capital Automotive LLC and its subsidiary Capital Automotive L. P. (together, CARS). We revised the outlook to negative from stable.

We also raised the rating first-lien term loan due 2019 and revolving credit facility due 2018 to 'BB' from 'BB-'. We revised the recovery rating to '1' from '2' (lower end of the range). The '1' recovery rating indicates our expectations of a very high (90%-100%) recovery in the event of a payment default. At the same time, we affirmed our rating on the second-lien term loan due 2020 at 'B-'. The recovery rating is '6', which indicates expectations of negligible (0%-10%) recovery in the event of a payment default.

"The negative outlook revision reflects our view that covenant cushion for CARS will likely remain below 10% on its fixed charge covenant, which could lead to constrained liquidity if not remedied," said credit analyst Sarah Sherman. "Additionally, we expect narrow covenant cushion levels to potentially pressure the company's financial flexibility. One of CARS' 2017 asset backed security (ABS) note series has an accelerated amortization schedule that results in a $13 million payment per year. This note series is prepayable at par in 2017. If the company were to refinance the notes it would lower amortization expense by $12 million, and would result in fixed-charge coverage rising back to adequate levels."

The negative outlook reflects the company's tight covenant cushion on its fixed-charge covenant and our expectation for it to remain below 10% over the next 12 months absent additional steps taken by the company to restore coverage. This is despite our expectations of sustained to improving operational performance. We expect CARS' credit protection measures to remain in line with historical levels over the next year, with acquisitions financed by a combination of additional debt and free cash flow.

We could lower the ratings if we believe covenant cushion will not rebound in the next few quarters to 10% or better, or if we believe a covenant breach is likely without a credible plan in place to provide adequate relief. We would also consider a downgrade if some combination of increased debt or weaker financial performance causes debt to EBITDA to increase over 13x or fixed-charge coverage to decrease below 1.3x on a sustained basis.

We could revise the outlook to stable if the company is able to improve and sustain its covenant cushion above 10%. CARS could potentially restore the cushion on this covenant if it were to successfully refinance its ABS notes which are eligible for prepayment in March 2017, thereby significantly reducing amortization and improving cushion to prior levels.