Moody's changes Sonic Automotive outlook to negative

Moody's Investors Service confirmed the ratings of Sonic Automotive Inc., including the company's B2 senior subordinated guaranteed debt and B3 convertible subordinated notes, but changed the rating outlook to negative from stable.

The actions follow Sonic's weak performance in the third quarter relative to its peers, the agency said. Challenges in managing domestic dealerships and in integrating acquisitions caused Sonic's third-quarter operating performance to drop sharply and unexpectedly.

Sonic's ratings are weakly positioned and anticipate that leverage measures will improve in the near term based on the company's ability to repay debt from operating cash flow. Moody's said a continuation of recent performance trends, which were attributed in part to poor inventory management, could cause ratings to fall.

Helping to support the ratings is the announcement that Sonic intends to issue an additional $75 million of subordinated debt under its existing indenture. The new debt eases near-term liquidity concerns and extends Sonic's maturity profile but raises leverage by increasing the level of non-vehicle debt.

The rating outlook has been changed to negative. Moody's said ratings could fall if Sonic's financial measures weaken further due to increased leverage, a change to shareholder policies, or weaker operating performance.

Ratings could stabilize and potentially improve if Sonic is able to sustain debt protection measures through a change in financial and acquisition policies, substantially improved operating performance, or a reduction in debt.

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