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Moody's assigns first time CFR of B1 to OtterBox; Term loan at B1

Global Credit Research - 08 May 2013

$400 million term loan rated

New York, May 08, 2013 -- Moody's Investors Service, (Moody's) assigned first-time ratings to Otter Products, LLC (OtterBox) including a B1 corporate family rating (CFR) and a B1-PD probability of default rating (PDR). Moody's rated the proposed $400 million senior secured term loan facility at B1. Proceeds from the term loan offering will be used to fund the $325 million acquisition of TreeFrog Developments, Inc. d/b/a LifeProof (LifeProof) and for general corporate purposes. The rating outlook is stable.

The following ratings were assigned:

CFR at B1;

PDR at B1-PD; and

$400 million senior secured term loan due 2019 at B1 (LGD4, 52%)

RATINGS RATIONALE

The B1 CFR reflects OtterBox's recent success in meeting rising retail demand for its protective smartphone cases and solutions as demonstrated by its rapid sales growth over the past three years and strong margins, due in part to its asset-light manufacturing model, and improving cash generation. The acquisition of LifeProof, whose all-environment cases experienced similar top-line trends in 2012, will diversify OtterBox's product offering within the mobile phone accessory market. While initial leverage will be low at roughly 2.2x, on a Moody's adjusted basis, the rating incorporates OtterBox's limited operating history, its high business risk and a complex corporate structure which will likely favor equity owners.

Moody's views OtterBox as exposed to high business risk due to the infancy of the industry, existence of many smaller competitors and cheaper alternatives, and shifting consumer demands. There is also a possibility that over the longer term that smartphones will be built more durable which could reduce demand for OtterBox's protective cases. Moody's believes OtterBox and Lifeproof are early winners with regards to the deployment and branding of protective cases and have developed solid relationships with their respective distribution channels, including national and regional wireless carriers, big box retailers and other retailers and distributors. These relationships should continue to support growth over the next twelve to eighteen months as protective cases continue to penetrate the smartphone user population.

OtterBox is part of a larger corporate entity owned and controlled by the family that invented the OtterBox. There are material transactions between entities within the larger corporate family that are not part of the proposed borrowing group. These transactions include the leasing of OtterBox facilities, research and development and other corporate functions, which we believe weakens the credit profile of OtterBox and its overall financial transparency. Further, Moody's expects that OtterBox's dividends to the owners will exceed required tax distributions thus limiting debt reduction. While Moody's expects that a good liquidity profile and meaningful cash generation will support both the distributions and an appropriate level of growth capital expenditures, we view the distributions to be somewhat aggressive given the early stage of OtterBox's life cycle.

In addition to strong cash generation, the company's liquidity benefits from a $150 million unrated asset based revolver which matures in 3-years from the closing of this transaction (with the ability to extend an additional two years if conditions are met). We expect a maximum total leverage covenant of 2.5x and a minimum fixed charge coverage ratio of 1.25x to provide adequate cushion. Further, Moody's expects the terms to include an excess cash flow sweep that should aid debt reduction if leverage increases.

The B1 rating on the term loan is at the same level as the CFR reflecting its preponderance within the capital structure. The term loan is subordinate to the revolver since the ABL benefits from a first lien security interest in the AR and Inventory, which represents the most liquid assets. The term loan benefits from second lien on the AR and inventory as well as a first lien on the stock of OtterBox and all other assets.

Prior to an upgrade we would expect a track record demonstrating the sustainability of the company's profitability, cash flow generation and earnings growth as well as better product diversification. The ratings could be upgraded if the company continues to meet consumer demands while maintaining its high margins and also leverage below 1.5x for an extended period.

The ratings could be downgraded if the company were to experience operating difficulties due to either meeting customer needs or a reduction in demand that would affect the company's liquidity profile and cash generation. We would likely downgrade if shareholder distributions resulted in an increase in debt or if the company executed a transformational debt-financed acquisition.

The principal methodology used in this rating was the Global Consumer Durables Industry Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

OtterBox, headquartered in Fort Collins, Colorado, is a designer, manufacturer, marketer and distributor of protective solutions for the mobile accessory industry. OtterBox products include protective cases, screen protectors and dry boxes that protect for smartphones manufactured by most industry leading original equipment manufacturers.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Brian J. Grieser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns first time CFR of B1 to OtterBox; Term loan at B1
No Related Data.

 

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