On April 20, 2007, Standard & Poor's Ratings Services assigned its 'B+' bank loan rating and '1' recovery rating to
Swift Transportation Co. Inc.'s proposed first-lien credit facilities. The '1' recovery rating indicates expectation of full (100%) recovery of principal in the event of a payment default and the 'B+' bank loan rating is one notch above the 'B' corporate credit rating assigned to Saint Corp., which is in the process of buying Swift. Standard & Poor's also assigned its 'B-' bank loan rating and '3' recovery rating to the proposed second-lien note offering. The ratings are based on preliminary terms and are subject to review of final documentation. The senior secured credit facilities, as currently contemplated, consist of:
$1,740 million seven-year amortizing first-lien term loan B facility
$450 million five-year secured revolving credit facility (pari passu with the first-lien facility)
$835 million second-lien notes divided between eight-year nonamortizing floating rate notes and 10-year nonamortizing fixed-rate notes.
The borrower under the credit facilities will be Saint Acquisition Co. (Newco), a wholly owned subsidiary of Saint Corp. (Saint), which will use the proceeds to purchase the outstanding shares of Swift Transportation Co. Inc. (Swift) not held by the Moyes family. Newco will then merge with Swift, which will be the continuing borrower. In addition, Interstate Equipment Leasing Inc. (IEL), a lessor of trucks and trailers owned by Jerry Moyes, will be contributed to Saint. The balance of the transaction proceeds will refinance existing indebtedness of
Saint Corp., IEL, and Swift, and be available for general corporate purposes of Swift.
The first-lien term loan B will amortize 1% per year until maturity. The credit facility includes an excess cash flow sweep, initially set at 75% with the rate declining as leverage declines. However, Swift will be permitted to make distributions to Saint equal to Swift's historical tax liability and equal to the amount of interest expense that Saint owes to Swift on funds advanced at the closing. The tax distribution reflects Swift's status as an 'S' corporation, and the interest "dividend" to Saint will be returned to Swift as an interest payment on Saint's loan.
(For the corporate credit rating rationale on
Saint Corp. [to be renamed Swift Corp.], see Standard & Poor's research report published April 20, 2007, on RatingsDirect.)
Table 1
Swift Transportation Co. Inc./Saint Corp.* -- Credit Profile
Corporate credit rating
B/Stable/--
Facility/Issue
Issue rating
Recovery rating
Expected recovery
Term (years)
$450 mil. senior secured revolver
B+
1
100%
5
$1.740 bil. first-lien term loan B
B+
1
100%
7
$835 mil. second-lien notes
B-
3
50%-80%
Aug. 10
*Company will be renamed Swift Corp. upon close of transaction.
Recovery Analysis
Table 2
Swift Transportation Co Inc. - Simulated Default/Valuation Variables
As one of the nation's largest truckload carriers, Swift Transportation Co. Inc. is diversified across the country in its activity. However, in terms of customers, the company has significant concentration, with one customer representing 15% of revenues and the top 10 customers representing 41% of revenues. Therefore, Standard & Poor's simulated default scenario contemplates the loss of a major customer (or two significant customers) in 2009, in a general environment of increasing fuel prices, rising interest rates, and lower economic activity. As a result, revenue declines in 2009 and 2010 and coupled with margin pressure from rising costs leads to bankruptcy in 2010. Specifically, our scenario incorporates the following:
Revenue increases of 3% in fiscals 2007 and 2008 are followed by a 4.6% decline in fiscal 2009 and a 1.7% decline in fiscal 2010.
EBITDA margin falls from 17.8% in fiscal 2006 to 11.6% in fiscal 2009, recovering thereafter.
CAPEX is maintained at $200 million, net of capitalized leases.
LIBOR increases 150 basis points (bps) between fiscal 2006 and fiscal 2009
Credit risk premium increases 150 bps due to the borrower's declining performance.
No tax distributions are required but interest distributions to service Saint's loan are made and interest income of a similar amount is received.
Revolver availability to fund cash flow shortfalls is limited by the borrower's modestly increasing letter-of-credit requirements for self-insurance purposes. We assume that these letters of credit would not be drawn during bankruptcy but would be replaced by a debtor-in-possession (DIP) facility.
Our simulated default scenario results in the following:
A payment default in fiscal 2010;
Revenue (net of fuel surcharges) drops to $2.7 billion in fiscal 2010, 0.4% below pro forma combined fiscal 2006 actual revenue of $2.71 billion; and
EBITDA declines to $376 million in fiscal 2010, 22% below pro forma combined fiscal 2006 EBITDA of $484 million.
Valuation
Standard & Poor's believes that if the borrower were to experience a payment default, it would still have a viable business model driven by continued demand for its services, its extensive fleet, and nationwide network of terminals. Therefore we believe that lenders would achieve greatest recovery value through reorganization of the borrower rather than liquidation.
Furthermore, while the company controls an extensive fleet of tractors and trailers and owns valuable real estate around the country, emergence from bankruptcy would involve a valuation based on projected cash flow as the borrower emerges. Therefore, we based the borrower's valuation on its free cash flow in fiscal 2011, the year following default. Revenue in fiscal 2011 is assumed to grow a modest 2% and the EBITDA margin improves to 14.6% or $402 million and unlevered free cash flow reaches $217 million. Additional components of our valuation are:
Perpetual growth rate of 1%;
Weighted average cost of capital of approximately 8.6% assuming a reorganized company financed with 70% debt and 30% equity at the tax adjusted cost of debt of 7.0%;
Unlevered beta of 0.57 based on Ibbotson's beta data for this sector; and
Administrative expenses of approximately 5% of enterprise value representing professional fees and costs of bankruptcy that may be outstanding at the time of recovery.
Results
These discounted cash flow assumptions yield an enterprise value of approximately $2.75 billion, which equates to a multiple of 6.9x simulated emergence EBITDA of $402 million, which is comparable with recent transaction multiples in this sector. At default, it is projected that there would be approximately $1.7 billion of first-lien bank debt outstanding. This assumes a fully drawn revolver. After deducting approximately $138 million of administrative expenses and $420 million for capitalized leases, remaining enterprise value totals $2.2 billion. Therefore, we estimate 100% recovery on the first-lien credit facilities, which equates to a recovery rating of '1' and a bank loan rating of 'B+', one notch higher than the corporate credit rating. The residual value of $475 million available for the $835 million of second-lien notes would result in a recovery rating of '3' and a bank loan rating of 'B-'.
Table 3
Transaction Summary
First-lien senior facilities
Second-lien notes
Borrower
Swift Transportation Co. Inc.
Same
Guarantors
Parent company and all domestic subsidiaries
Same
Structure
No amortization on the revolver. For the term loan 1% annually, balance due at maturity.
No amortization; due in full on the 8th anniversary of closing of the transaction.
Security package
Secured by a perfected first-priority security interest in substantially all the borrower's tangible and intangible assets, including the capital stock of the borrower and each of its direct and indirect domestic subsidiaries and 65% of the capital stock of foreign subsidiaries. Collateral excludes leasehold and fee-owned real property, interest in certain joint ventures, and non-wholly owned subsidiaries, which cannot be pledged without the consent of one or more third parties.
Same collateral package but subject to an intercreditor agreement which affords second-lien priority.
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