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LKQ European Holdings B.V. — Moody’s upgrades LKQ Corporation’s CFR to Ba1 and the senior unsecured rating at LKQ European Holdings B.V. to Ba1; outlook stable

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Rating Action: Moody’s upgrades LKQ Corporation’s CFR to Ba1 and the senior unsecured rating at LKQ European Holdings B.V. to Ba1; outlook stableGlobal Credit Research – 26 Mar 2021New York, March 26, 2021 — Moody’s Investors Service (Moody’s) upgraded the ratings of LKQ Corporation (LKQ), including the corporate family rating (CFR) to Ba1 from Ba2 and the Probability of Default rating to Ba1-PD from Ba2-PD. At the same time, Moody’s upgraded the LKQ European Holdings B.V. senior unsecured notes to Ba1 from Ba2 and the LKQ Italia Bondco S.p.A. senior unsecured notes to Ba2 from Ba3. The Speculative Grade Liquidity Rating Rating was changed to SGL-1. The outlook is stable.RATINGS RATIONALELKQ’s ratings reflect its strong position as a distributor of vehicle collision and mechanical replacement parts, offering cost-effective alternatives to new OEM parts. The North American segment results are impacted by automobile insurance companies who heavily influence the types of products used for repairs — LKQ’s products, roughly 20% – 50% lower priced than OEM parts, reduce the cost of repairs in excess of deductible requirements. The Europe segment includes replacement and maintenance products to address the do-it-for-me driven market for vehicle repair and maintenance. Both segments benefit from large and growing used car parcs, supporting demand for products.Moody’s adjusted operating margin for LKQ has been near 10% over the past five years, with 2020 even demonstrating improvement, highlighting the benefits of cost saving initiatives and a mostly variable cost structure. Solid and resilient earnings have translated into increasing free cash flow though 2020’s level was boosted by a significant working capital unwind. With Moody’s expectation for top-line growth to return in 2021, free cash flow won’t match the record 2020 level (nearly $1.3 billion) but will remain strong due to the need for growth investments. Significant debt repayment during 2020 helped push debt-to-EBITDA below 3x where Moody’s expects leverage to comfortably remain as a result of limited debt-funded acquisition activity. LKQ has not pursued large acquisitions since the 2018 purchase of German wholesale distributor Stahlgruber GmbH. Since this acquisition, there has been limited build-out of the European distribution network. As a result, Moody’s does not anticipate large acquisitions.The stable outlook reflects Moody’s expectation that strong earnings and robust free cash flow will continue to sustain leverage near the current level for the next several years. The outlook also includes expectations for the company to remain committed to a more conservative financial policy with acquisitions more bolt-on in nature rather than large and debt-funded.LKQ’s SGL-1 Speculative Grade Liquidity Rating indicates very good liquidity supported by expectations to maintain a solid cash position (over $300 million at December 31, 2020) and significant availability under the $3.15 billion revolving credit facility even with funding a large percentage of the early redemption of the Euro 3.625% senior unsecured notes due 2026. Free cash flow should remain strong in 2021 with Moody’s expecting at least $600 million even with higher outflows for working capital and capital expenditures. The $110 receivable securitization facility, expiring in November, had zero outstanding at December 31, 2020.Moody’s took the following rating actions:Upgrades:..Issuer: LKQ Corporation…. Corporate Family Rating, Upgraded to Ba1 from Ba2…. Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD…. Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2..Issuer: LKQ European Holdings B.V…..Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 (LGD4) from Ba2 (LGD4)..Issuer: LKQ Italia Bondco S.p.A. ….Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 (LGD5) from Ba3 (LGD5) Outlook Actions: ..Issuer: LKQ Corporation ….Outlook, Remains Stable ..Issuer: LKQ European Holdings B.V…..Outlook, Remains Stable..Issuer: LKQ Italia Bondco S.p.A…..Outlook, Remains StableThe senior unsecured rating for the LKQ European Holdings B.V. notes at Ba1 is the same as the CFR. The LKQ European Holdings B.V. notes are issued by the holding company that owns LKQ’s European operations which generate a meaningful percentage of LKQ’s overall profits. The senior unsecured notes issued by LKQ Italia Bondco S.p.A are rated one notch lower at Ba2 since these notes do not benefit from a LKQ European Holdings B.V. guarantee. As a result, a one-notch override up for the LKQ European Holdings B.V. notes from the application of the LGD model reflects this difference.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:The ratings could be upgraded with an operating margin comfortably in excess of 10% as well as debt-to-EBITDA sustained in the mid-2x or below range. Retained cash flow-to-debt approaching 25% while maintaining a good liquidity profile would also be important for upward rating action.The ratings could be downgraded with an operating margin falling below 8.5% or debt-to-EBITDA moving back above 3.5x for an extended period. Resumption of a more aggressive financial policy, namely large debt-funded acquisitions, would also be viewed negatively.The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.LKQ Corporation is a leading provider of alternative and specialty parts to repair and accessorize automobiles and other vehicles. The company offers customers a broad range of replacement systems, components, equipment and parts to repair and accessorize automobiles, trucks and recreational and performance vehicles. Revenues for the year ended December 31, 2020 totaled $11.6 billion.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Eric Greaser Vice President – Senior Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Robert Jankowitz MD – Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY’S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​

Source: on 2021-03-26 18:30:00

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