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.
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.
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.
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
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
Applicable Criteria and Related Research:
Spectrum Brands, Inc.
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
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