Moody's rates KAR Holdings loans Ba3, affirms Adesa

Moody's Investors Service said it assigned provisional B2 corporate family and probability-of-default ratings to KAR Holdings, Inc. and provisional Ba3 (LGD2, 26%) ratings to the company's proposed $300 million senior secured revolving credit facility due 2013 and $1.49 billion senior secured term loan B due 2013.

The agency also affirmed Adesa, Inc.'s corporate family and probability-of-default ratings at Ba2, $350 million senior secured revolver due 2010 and $120 million senior secured term loan due 2010 at Ba1 (LGD3, 33%), $125 million 7 5/8% senior subordinated notes due 2012 at B1 (LGD5, 87%) and speculative grade liquidity rating at SGL-1.

Finally, Moody's affirmed Insurance Auto Auctions, Inc.'s corporate family and probability-of-default ratings at B2, $50 million senior secured revolver due 2011 and $205 million senior secured term loan B due 2012 at Ba3 (LGD2, 23%), $150 million 11% senior unsecured notes due 2013 at Caa1 (LGD5, 79%) and speculative grade liquidity rating at SGL-2.

The outlook for each company is stable.

Adesa is being acquired by Kelso & Co., GS Capital Partners, ValueAct Capital and Parthenon Capital. Insurance Auto Auctions will be combined with Adesa upon closing, and KAR Holdings will be the holding company for both. The proceeds of the new loans, along with $1.1 billion of junior debt and $790 million of new cash equity, will be used to finance the acquisition of Adesa's equity, repay existing debt at Adesa and Insurance Auto Auctions and pay fees and expenses associated with the transaction.

Moody's said KAR Holdings' B2 corporate family rating primarily reflects very high financial leverage upon completion of the transaction, slightly negative pro forma free cash flow in 2006 for the combined entity, weak EBIT to interest coverage, a high level of integration risk and the competitive nature of the auto auction industry.

The ratings are supported by high barriers to entry, the size and national scale of the combined Adesa/Insurance Auto Auctions organization, recession-resistant revenue streams, favorable growth prospects across all business lines and low inventory risk, the agency said.

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