S&P puts AutoNation on negative watch

Standard & Poor's said it placed AutoNation Inc.'s BBB corporate credit rating and BBB- senior unsecured debt rating on CreditWatch with negative implications following the company's announcement that it will complete a recapitalization, including a repurchase of 50 million shares of common stock for about $1.2 billion, that will be primarily financed with new debt.

Following the recapitalization transactions, S&P said it will lower the corporate credit rating to BBB- and lower the senior unsecured rating to BB+ and the outlook will be stable. Total debt, excluding floor-plan liabilities and including capitalized operating leases, will increase to about $1.8 billion from $825 million.

S&P said the planned recapitalization will weaken AutoNation's financial risk profile by more than doubling debt levels and reducing equity. With the recapitalization, AutoNation's pro forma debt to EBITDA will increase to 2.3x from 1x. Furthermore, the plan indicates that the company is pursuing a slightly more aggressive financial policy than it has in the past, when share repurchases were financed primarily with internally generated cash flow, the agency said.

Still, S&P said it believes that AutoNation has a moderate financial profile characterized by fair profitability and good cash-flow protection. The company is expected to achieve slight improvements in its credit statistics during the next few years and keep debt to EBITDA below 2.5x.

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