Advance Auto Parts Inc. (NYSE:AAP) has amended its credit agreement, reflecting adjustments in financial covenants and borrowing capacity, according to a recent SEC filing. The automotive parts provider entered into the fifth amendment of its 2021 Credit Agreement on Wednesday, which introduces several significant changes to its debt structure and financial flexibility.
The amendment allows the company to add back up to $575 million in certain restructuring charges to its Consolidated EBITDAR, a measure of earnings, and to net out up to $800 million of unrestricted cash against debt when calculating its Leverage Ratio. These adjustments are aimed at providing Advance Auto Parts with more leeway in meeting its financial obligations.
Additionally, the amendment reduces the company's unsecured revolving credit facility from $1.2 billion to $1.0 billion. The pricing on loans will now be subject to an increase based on the company's credit ratings, with a maximum potential increase of 0.50%.
Interest rates on the revolving facility will vary with margins ranging from 0.795% to 1.525% for Term SOFR-based loans and 0.00% to 0.525% for alternate base rate loans, depending on the company's credit ratings. A quarterly facility fee, also based on the company's debt ratings, will be charged on the total commitment amount.
The amendment further tightens certain covenants and restrictions on Advance Auto Parts and its subsidiaries. This includes expanding debt-related covenants, restricting share repurchases and dividend increases, and requiring collateral in the form of liens on certain assets if the company's credit ratings fall below a specified threshold.
It also introduces a new minimum liquidity financial covenant and adjusts the maturity date of the credit agreement to precede any scheduled maturity of the company's senior unsecured notes by at least 91 days.
The changes come as the company takes steps to strengthen its financial position and maintain operational flexibility. The information is based on a press release statement from the company.
In other recent news, Advance Auto Parts has been undergoing significant changes. The company has reported a minor increase in comparable sales of 0.4%, with full-year sales forecasted to range between $11.15 billion and $11.25 billion. The company has also sold its Worldpac business to the Carlyle Group (NASDAQ:CG) for $1.5 billion, a move aimed at strengthening its balance sheet and facilitating reinvestment into core operations.
Advance Auto Parts has also experienced a reshuffling within its executive team. Two senior executives, Anthony A. Iskander and Elizabeth E. Dreyer, have departed, and Ryan P. Grimsland has temporarily taken over the principal accounting officer's responsibilities.
Analyst firms including Roth/MKM, Mizuho (NYSE:MFG), Jefferies, and TD Cowen have revised their outlooks on the company in light of these developments.
Roth/MKM has resumed coverage on Advance Auto Parts with a Neutral rating and a price target of $40.00, citing the company's ongoing restructuring efforts. Mizuho also maintains a neutral stance with a price target of $38.00, reflecting the departure of key executives and the company's long-term recovery strategy.
Additionally, the company is currently under investigation by U.S. lawmakers over potential purchases from a Chinese company suspected of evading American tariffs.
InvestingPro Insights
Advance Auto Parts' recent credit agreement amendment aligns with its current financial challenges, as reflected in InvestingPro data. The company's market cap stands at $2.43 billion, with a concerning P/E ratio of -201.57, indicating negative earnings. This context explains the need for increased financial flexibility through the amended credit agreement.
InvestingPro Tips highlight that AAP has maintained dividend payments for 19 consecutive years, demonstrating a commitment to shareholder returns despite current difficulties. However, the stock price has fallen significantly over the last three months, with a -31.88% total return, underscoring the company's struggles.
The amendment's focus on EBITDA adjustments is particularly relevant given the InvestingPro data showing a -55.4% EBITDA growth in the last twelve months. This negative growth likely motivated the company to seek more favorable terms in its credit agreement.
For investors seeking a deeper understanding of AAP's financial position, InvestingPro offers 5 additional tips that could provide valuable insights into the company's prospects and challenges.
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