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11 Dec 2001
CORRECTION TO HEADLINE: MOODY'S CONFIRMS SEALY'S DEBT RATINGS; CHANGES OUTLOOK TO STABLE FROM NEGATIVE (SHOULD READ CHANGES OUTLOOK FROM STABLE TO NEGATIVE)
New York, December 11, 2001 -- Moody's Investors Service confirmed the debt ratings of Sealy Mattress Company ("Sealy"), and revised the outlook on the ratings to negative from stable. The following ratings were confirmed by this rating action:
Senior Implied, at Ba3;
$250 million 9 7/8% senior subordinated notes due 2007, at B2;
$128 million senior subordinated discount notes due 2007, at B2;
$100 million senior secured revolving credit facility maturing 2002, at Ba2;
$350.5 million senior secured term loans maturing 2002 through 2006, at Ba2;
Issuer Rating, at B1.
The outlook revision reflects Sealy's diminished credit statistics and its exposure to a challenging economic environment that Moody's expects will persist for the near-to-intermediate term. An indication of these challenges is evident in Sealy's recent write-off of $26.3 million related to minority equity investments in affiliated companies (largely related to specialty sleep shops that sell Sealy's products on an exclusive or premier basis). Diminished consumer confidence is likely to force consumers to delay high-ticket purchases, or choose lower-priced (lower-margin) products. This in turn increases the likelihood of failure for struggling furniture retailers, department stores and sleep shops, while Sealy's stronger customers may require increased promotional support.
Sealy's write-off reflects the particularly difficult retail environment for sleep shops, which have represented the fastest growing form of distribution for the mattress manufacturers in recent years. Significant receivable write-offs or continuing erosion in margins could result in a ratings downgrade over the near-to-intermediate term. We note in this regard Sealy's increased year-over-year bad debt expense outlays and the slowed velocity of its receivable turnover levels. These statistics will be reviewed closely going forward given the increasingly challenging economic environment for the bedding industry which is likely to continue into the immediate future.
In April 2001, Sealy acquired a European bedding manufacturer, Sapsa Bedding, S.A., for approximately $31.5 million. Sapsa's lower margin operations, combined with increased promotional and bad debt expenses in Sealy's core business, have further contributed to diminished credit statistics year-over-year for the twelve-month period ending August 2001. On an consolidated EBITA (EBITDA) basis, operating margin fell to 10.4% from 12.8% (to 11.8% from 14.0%), leverage increased to 6.5x from 5.0x (to 5.7x from 4.6x), and interest coverage decreased to 1.8x from 2.3x (to 2.1x from 2.5x). The above noted margin performance pressure may likely remain in evidence for Sealy as it continues to grow non-US franchises and continues to pursue its strategy of expanding market share and sales volumes in today's highly competitive retail environment. Moody's interest coverage ratio includes proforma cash interest of $13.9 million on Sealy's $128 million discount senior subordinated notes, which become cash pay in December 2002. Retained cash flow-to-debt also decreased year-over-year for the twelve months ended August 2001 to 3.2% from 6.3%.
Sealy's $125 million senior subordinated note issuance earlier this year provided funding for the Sapsa acquisition and reduced the company's senior debt. Sealy's liquidity remains sufficient with full availability under its $100 million revolving credit facility. The company is in compliance with the covenants under its credit facilities and maintains sufficient cash flow to support its current debt service. This said, portions of its bank facilities are shortly up for renewal, with the terms and conditions potentially being impacted by a currently retrenching bank credit market. Amortization requirements under existing facilities increase and become meaningful in the next 2-4 fiscal years.
The ratings continue to reflect Sealy's high leverage, moderate interest coverage and modest retained cash flow relative to debt. The ratings also consider risks typical of the bedding industry, including a reliance on second half operating performance and a competitive landscape that can pressure margins or require cash outflows for product development, affiliate agreements and acquisitions.
Sealy's ratings are supported by its strong brand recognition, leading market share and reputation for quality and innovation. Sealy and two other major bedding manufacturers, Simmons and Serta, comprise approximately 50% of all wholesale sales. The company's ratings also benefit from the bedding industry's stability (over 70% of sales are for replacement), as well as the sector's unit growth potential due to an aging population with higher disposable income and more second homes, a growing general population, a high divorce rate, and an increasing number of bedrooms in homes. Sealy's geographical and customer diversity, including international operations, somewhat reduces its exposure to regional economic fluctuations or to the operational problems of individual retailers. No single customer accounts for more than 10% of Sealy's total sales. Additional rating support comes from Sealy's 16 international and domestic licensing agreements, which provide a steady source of high-margin income (offset to SG&A), while minimizing risk and investment in certain markets. Finally, Sealy's vertical integration (the company manufactures all of its innerspring parts and half of its foundation parts) limits its reliance on any one supplier.
Sealy Mattress Company is a wholly-owned subsidiary of Sealy Corporation, which in turn is majority-owned by Bain Capital. Headquartered in Trinity, North Carolina, Sealy Corporation is the world's largest bedding manufacturer. The company manufacturers and sells a complete line of mattress and box springs, including those sold under the Sealy, Sealy Posturepedic, Stearns & Foster and Bassett brand names. Sales for the twelve month period ended August 2001 were approximately $1.2 billion.
No Related Data.
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