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

August 09, 2013, 07:28 AM
Filed Under: Industry News

Fitch Ratings expects to rate Spectrum Brands, Inc.'s 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.

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.

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