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25 Oct 2006
Correction to text, October 23, 2006 release: Moody's rates Sally Holdings: B2 CFR with stable outlook
Approximately $2.18 Billion of Debt Securities Affected
New York, October 25, 2006 -- In penultimate paragraph, last sentence delete "and by Sally
Holdings' immediate parent" Revised release follows.
Moody's Investors Service assigned first time ratings, including
a corporate family rating of B2 and a speculative grade liquidity rating
of SGL-2, to Sally Holdings, LLC ("Sally Holdings").
The rating outlook is stable. The ratings are conditional upon
review of final documentation.
Corporate family rating at B2
Probability-of-default rating at B2
$400 million senior secured guaranteed bank revolving credit facility
at Ba2 (LGD 1, 7% LGD rate)
$1.07 billion senior secured guaranteed term loans at B2
(LGD 4, 50% LGD rate)
$430 million senior unsecured guaranteed notes at B2 (LGD 4,
55% LGD rate)
$280 million unsecured senior subordinated guaranteed notes at
Caa1 (LGD 6, 93% LGD rate)
Speculative Grade Liquidity Rating of SGL-2
Sally Holdings, LLC will own the beauty retail operations ("Sally")
and the beauty distribution businesses (Beauty Systems Group or "BSG")
currently owned by Alberto-Culver Company (Baa1, on review
for possible downgrade). Alberto-Culver is separating its
consumer products business from its Sally/BSG operations, into two
publicly-traded companies. Alberto-Culver shareholders
will receive from New Sally Holdings, Inc. ("New Sally")
one share of each New Alberto-Culver and New Sally stock and a
special cash dividend of $25 share (about $2.35 billion).
New Sally will fund the special dividend with debt and with $575
million of equity invested by Clayton, Dubilier & Rice Fund
VII, L.P. ("CD&R"). At the
conclusion of the transaction, New Sally will be owned approximately
52.5% by Alberto-Culver shareholders and 47.5%
by CD&R, on a fully-diluted basis. New Sally,
through intermediate holding companies including Sally Holdings,
will own Sally and BSG.
The B2 corporate family rating of Sally Holdings reflects post-transaction
credit metrics that will be weak, especially very high leverage
and low cash flow coverage. Scale, in terms of revenues,
is commensurate with Ba rated companies. The ratings are further
constrained by sales concentrations in hair care products, vendor
concentrations, and wide-ranging competition. Offsetting
these high yield attributes are the company's investment grade characteristics
-- including extensive geographic diversification, leading
positions in defined subsectors of retail, low seasonality and cyclicality,
and generally robust comparable store sales increases. The ratings
clearly benefit from the leading position of both Sally and BSG in their
respective market segments and the quality and depth of their merchandise
The speculative grade liquidity rating of SGL-2 reflects Sally
Holding's comfortable liquidity profile and incorporates Moody's
expectation that over the next four quarters Sally Holdings will fund
its ordinary working capital, capital expenditures and mandatory
debt amortization with cash generated from operations; however,
the cushion of excess free cash flow will not be large in comparison to
Sally Holdings' scale. The SGL rating also incorporates Moody's
belief that the company will have access to its new $400 million
asset-based revolving credit facility and that the facility's
single covenant will not be tested. Given that all assets will
be pledged to lenders, there is no alternative liquidity other than
the sale of a business, which would impair enterprise value.
The stable outlook reflects Moody's expectation that the company
will continue to grow comparable store revenues, improve operating
margins and generate positive free cash flow which will be applied heavily
to debt reduction. Given the magnitude of Sally Holdings'
post-transaction leverage, an upgrade is unlikely in the
intermediate term. Over the longer term, an upgrade would
require continuing solid operating performance coupled with debt reduction
such that debt to EBITDA falls below 6.0 times and free cash flow
to debt is above 5% on a sustainable basis. Conversely,
negative rating pressure would develop if operating performance were to
be weaker than expected or if overall comparable store sales were to become
negative. Quantitatively, ratings would be lowered if normalized
annual reported EBITDA is not a minimum of $260 million,
or if free cash flow to debt becomes negative.
New Sally (to be re-named "Sally Beauty Holdings, Inc."
upon completion of the transactions), through intermediate holding
company Sally Investment Holdings, LLC, will own Sally Holdings.
Sally Holdings will own the operating subsidiaries and Sally Capital Inc.
Sally Holdings will be a borrower under a $400 million senior secured
Asset Backed revolving credit facility and $1.07 billion
in senior secured Term Loans, and a co-issuer, with
Sally Capital, of $430 million senior unsecured notes and
$280 million unsecured senior subordinated notes.
The $400 million senior secured revolving credit facility will
benefit from borrowing base governance and expected full collateral coverage
in a hypothetical default scenario. The revolving credit facility
is secured by a first-priority lien on accounts receivable,
inventory and other assets (together "ABL Collateral"),
and a second priority lien on all other tangible and intangible assets
of the company. The $1.07 billion senior secured
term loans (to be comprised of term loan A and term loan B) will be secured
by a first priority lien on all tangible and intangible assets other than
ABL Collateral, including property, plant, and equipment
and capital stock of subsidiaries, as well as a second priority
lien on the ABL Collateral. Moody's believes that there will
be relatively little collateral coverage on the term loans during a hypothetical
default scenario. Sally Holdings will be a borrower under the ABL
and the Term Loans; if there are additional borrowers, all
will be jointly and severally liable. Both the revolving credit
facility and the term loans will have guarantees from the direct parent
of each borrower, and from each direct and indirect domestic subsidiary
of Sally Holdings (other than any subsidiary that is a borrower or a foreign
subsidiary holding company).
The $430 million senior unsecured notes and the $280 million
unsecured senior subordinated notes reflect their unsecured status.
Sally Holdings and co-Issuer Sally Capital will be jointly and
severally liable. These issues will be guaranteed by Sally Holdings'
direct and indirect operating subsidiaries.
New Sally Holdings, Inc., headquartered in Denton,
Texas, will be a leading national retailer and distributor of beauty
supplies with operations under its Sally Beauty Supply and Beauty Systems
Group businesses. For the fiscal year ended September 30,
2005, New Sally's revenues exceeded $2.2 billion.
Corporate Finance Group
Moody's Investors Service
Elaine E. Francolino
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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