Fitch to Rate Spectrum’s Proposed New Term Loans ‘BB-‘

NEW YORK–(BUSINESS WIRE)–Fitch Ratings expects to rate Spectrum Brands, Inc.’s (Spectrum) two new

term loans ‘BB-‘ when the loans close in September 2013. Spectrum is

expected to refinance its existing $950 million 9.5% senior secured note

due in 2018 with an approximately $1.1 billion senior secured term

loans. The additional $150 million will primarily be used to fund the

make-whole and transaction fees. The $1.1 billion is comprised of a $700

million four-year term loan priced at LIBOR + 250 basis points (bps) and

a $400 million six-year term loan at LIBOR + 300bps with a 1% floor.

https://twitter.com/gatorhoops/status/425697699799646208

The new term loans are pari passu with and have the same terms and

conditions as the existing $800 million term loan due in 2019. The loans

are guaranteed by SB/RH Holdings, LLC (Spectrum’s immediate parent

company) and each of Spectrum’s domestic subsidiaries. There is a first

lien on substantially all assets (excluding A/R and inventory) plus a

65% pledge of equity from first-tier foreign subsidiaries. All of the

term loans have a second lien on A/R and inventory with the $400 million

asset-based loan having the first lien on these assets. There are no

financial maintenance covenants and there is a $350 million accordion

feature subject to a senior secured leverage covenant of 3.25x.

In addition to significantly lower interest rates, the company gains

further flexibility for shareholder friendly actions. The restricted

payment basket on the $950 million senior secured notes was smaller than

the existing $800 million term loan and had less carve outs. The

refinancing should comfortably allow the company to execute its newly

announced 24 month, $200 million share repurchase program. Nonetheless,

Fitch expects the company to adhere to its stated goal of debt reduction

with leverage at or below 4x by the end of 2014 and to operate in the

2.5x to 3.5x leverage band over the long term.

The company anticipates that fiscal 2013 EBITDA to be in the $640

million to $650 million range. Fitch expects the company to achieve this

goal. Pro forma leverage for this transaction should be approximately 5x

on Sept. 30, 2013. Leverage should decline further in 2014 with a full

year of the Stanley Black & Decker’s Hardware & Home Improvement Group

(HHI) acquisition additional EBITDA and cash flow. The HHI acquisition

closed in December 2012.

Fitch will withdraw the rating on the existing $950 million senior

secured notes upon repayment.

Rating Rationale:

Spectrum’s ‘BB-‘ rating and Stable Outlook is supported by its solid

track record of improving margins, low single-digit organic growth rates

since 2009, ample levels of free cash flow (FCF) that has been used to

reduce debt, and appropriate value-based market strategy which resonates

well with challenged consumers in developed markets. Spectrum remains

committed to deleveraging.

Rating Outlook:

There is no room in Spectrum’s rating for any further material debt or

leveraging transaction. At the end of 2014 EBITDA and cash flow should

improve with a full year of the HHI acquisition, lower interest expense

and the absence of 2013 transaction fees related to the acquisition and

this refinancing. Additionally, the company has strong cash flow and

will be directing a substantial portion towards debt reduction. Most

other credit protection measures, operating performance, and qualitative

factors solidly support the current rating. Fitch’s expectation that the

company will continue to de-lever supports the Stable Outlook and rating.

Financial Performance and Liquidity:

Spectrum’s revenues for the nine months ended June 30, 2013 increased

22% to $2.9 billion due to the HHI acquisition. Reported adjusted

operating income improved to $304 million from $271 million. The company

announced that FCF (excluding dividends and HHI transaction costs) is

expected to be $240 million in 2013 vs. $202 million last year.

Spectrum’s liquidity is good. The company revealed in an 8-K filing

yesterday that on July 28, 2013 there was approximately $100 million

undrawn on its $400 million ABL and approximately $91 million of cash on

hand. Separately, current debt maturities are minimal at less than $10

million through 2016.

Rating Action Triggers:

Negative: Any change in management’s strategy to de-lever to the 2.5x to

3.5x range within 24 months after the HHI acquisition or executing any

sizeable leveraging transaction that would keep leverage above the

mid-4x range could have negative rating implications.

Positive: Unlikely in the near term. However, Fitch expects to notch the

facilities to adjust for varying collateral levels in its next review

cycle.

Fitch currently rates Spectrum’s existing debt as follows:

–Long-term Issuer Default Rating ‘BB-‘:

–Asset-Based Revolver ‘BB-‘;

–Secured Term Loan ‘BB-‘;

–Senior Secured Note ‘BB-”; and

–Senior Unsecured Notes ‘BB-‘.

Additional information is available at ‘www.fitchratings.com‘.

Applicable Criteria and Related Research:

–Corporate Rating Methodology (August 2012);

–Spectrum Brands: Full Rating Report (July 2013);

–Fitch Affirms Spectrum’s IDR at ‘BB-‘ Upon Acquisition Announcement

(October 2012).

Applicable Criteria and Related Research:

Spectrum Brands, Inc.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=711535

Corporate Rating Methodology: Including Short-Term Ratings and Parent

and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798988

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