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Investing.com -- Moody’s Ratings updated its outlook for Valvoline Inc (NYSE:VVV). to negative from stable today. Simultaneously, Moody’s confirmed Valvoline’s Ba2 corporate family rating (CFR), Ba2-PD probability of default rating (PDR), and Ba3 senior unsecured notes rating. Valvoline’s speculative grade liquidity rating (SGL) remains unchanged at SGL-2.
The shift in outlook to negative from stable comes in light of Valvoline’s plan to acquire Breeze Autocare, a significant operator of approximately 200 quick lube stores, for a purchase price of around $625 million. This acquisition will be entirely debt-funded with a new Term Loan B. The outlook alteration also considers governance factors, including a financial policy that shows a greater tolerance for leveraged transactions than previously estimated.
The debt-funded acquisition of Breeze Autocare will result in pro forma LTM December 30, 2024 lease-adjusted debt/EBITDA of about 4.7x. Moody’s expects the debt/EBITDA to stay above their 3.5x downgrade trigger for Valvoline’s fiscal years ending September 30, 2025, and 2026.
Valvoline has committed to suspending share repurchases to focus on repaying acquisition debt. This commitment, coupled with higher EBITDA, will result in a reduction in leverage. Nevertheless, Moody’s does not foresee leverage returning to below their 3.5x downgrade trigger until fiscal 2027.
The affirmations reflect Moody’s expectation that industry fundamentals will continue to support Valvoline’s growth, resulting in improving credit metrics and good liquidity over time with positive free cash flow. The Breeze Autocare acquisition is expected to close by the end of June 2025, subject to customary closing conditions and regulatory approvals.
Valvoline’s Ba2 CFR is bolstered by its leading position in the "do-it-for-me" (DIFM) instant oil change market, a proven business model that yields high revenue growth, high margins, and good operating cash flow. The rating is also supported by solid industry fundamentals, including increasing vehicle miles traveled, an aging car parc, and growing vehicle registrations.
However, the planned debt-funded acquisition of Breeze Autocare will result in debt/EBITDA remaining elevated at about 4.4x through the end of fiscal 2025 pro forma for the acquisition and 3.7x through the end of fiscal 2026. Positively, Moody’s expects EBITA/interest to be in the high 3x range during this timeframe. By the end of fiscal 2027, they expect leverage to fall to 3.0x while coverage to be in the 4x-5x range.
Ratings could be upgraded if the company is able to increase systemwide revenue to over $4 billion, keep adjusted debt/EBITDA below 2.5x, sustain EBITA/interest above 4.0x, generate at least $250 million of free cash flow on a consistent basis and maintain very good liquidity. Conversely, ratings could be downgraded should the integration of Breeze Autocare or the integration of other large acquisitions not be successful, should adjusted debt/EBITDA be sustained above 3.5x, if EBITA/interest falls below 3.0x or if liquidity deteriorates.
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