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26 Jul 2004
MOODY'S AFFIRMS SEALY'S RATINGS UPON ISSUANCE OF HOLDCO PIK-FOR LIFE NOTE; OUTLOOK CHANGED TO POSITIVE
Approximately $1.2 Billion of Rated Debt Affected.
New York, July 26, 2004 -- Moody's Investors Service affirmed Sealy Mattress Company's
(Sealy) senior implied rating of B2 and senior unsecured issuer rating
of B3. Moody's also affirmed the B2 rating of the company's
senior secured credit facilities, the B3 rating of its senior unsecured
term loan, and the Caa1 rating of its senior subordinated notes.
Sealy Mattress Company is the major operating company of Sealy Corporation,
the parent holding company. The ratings outlook was changed from
stable to positive.
The change in outlook reflects Sealy's strong recent operating performance,
successful major new product launches, resolution of past working
capital problems and the current industry forecast of continued strong
demand growth. These positive factors are tempered by the recent
announcement that certain institutional investors will be investing $112.5
million at the holding company (Sealy Corporation) level in the form of
$37.5 million of common equity and $75 million of
a PIK-for-Life Note, increasing overall enterprise
leverage and allowing a partial cash out of existing equity investors.
The PIK Note will not be rated by Moody's. The following
ratings were affected by this action:
Senior implied rating, affirmed at B2;
$125 million senior secured revolving credit facility due 2010,
affirmed at B2;
$560 million senior secured term loan B due 2012, affirmed
$100 million senior unsecured term loan due 2013, affirmed
$390 million senior subordinated notes due 2014, affirmed
Senior unsecured issuer rating, affirmed at B3.
In April 2004, Sealy was acquired by Kohlberg, Kravis and
Roberts (KKR) in partnership with management and existing investors (Bain
Capital LLC and affiliates) for $1.46 billion, a multiple
of 8.9x LTM adjusted EBITDA as of February 2004. Certain
institutional investors are making an equity investment at the holding
company level consisting of $37.5 million of common equity
at the original investors' cost and a $75 million PIK-for-Life
Note. The $112.5 million in gross proceeds will be
returned to investors by a combination of cash distributions as well as
share repurchases. As a result of the issuance, KKR will
retain 82.9% and certain of Sealy Corporation shareholders
(including affiliates of Bain Capital) will retain 7.6%,
respectively, of the outstanding common stock of Sealy Corporation.
Although neither debt nor equity at the operating company will change
as a result of the transaction, there will be more leverage,
albeit not material, on a total enterprise basis. Sealy anticipates
receiving a current tax deduction for the PIK Note which could enhance
Sealy's free cash flow by approximately $3 million per annum.
The PIK Note will mature in 2015; carry a 10% PIK coupon;
have no voting rights or board representation; have no put rights
for the holders; allow for a call at 101% in the event of
an IPO prior to the third anniversary of issuance; and have no cross-default
or cross-acceleration with the operating company.
The positive outlook reflects strong industry growth dynamics and Sealy's
improving operating and competitive position which should result in sufficient
cash flow generation for the company to delever to more comfortable levels
on a fairly rapid basis. Sealy's one-sided product
launches in both its Sealy Posturepedic and Stearns & Foster lines
appear to have been successful although Moody's notes that operating
gains could moderate into the back half of the year as the company anniversaries
the initial launch of its one-sided Posturepedic mattress.
Working capital management and manufacturing cost efficiencies appear
to be being achieved according to plan. An upgrade in ratings would
require sustained operating momentum, continuing working capital
discipline and delevering below 5.5x debt/EBITDA. Delevering
could result from continued gains in operating performance and cash flow
and/or a delevering event, such as an IPO. Weakened credit
metrics due to longer term competitive or operating issues or changing
strategic priorities could result in unfavorable rating actions.
Sealy's ratings are restrained by the company's high leverage
as a result of its recent acquisition by KKR and other investors.
Including the PIK Note as debt, the company's leverage (debt/
adjusted EBITDA) on a pro forma basis would be 6.0x at the end
of the 2Q fiscal 04. Excluding the PIK Note as debt, the
comparable leverage ratio would be 5.6x. In addition,
40% of the company's debt is floating rate (through 2007)
which could leave it somewhat exposed to interest rate increases which
could constrain already modest cash flow levels relative to debt.
The company's high leverage will limit the company's ability
to respond to negative business developments such as economic or competitive
threats, costs related to the continuing shift of its products to
a one-sided mattress and other investments that may be required
to optimize the company's manufacturing and distribution operations.
Sealy's high debt levels could also constrain its ability to enter
new product categories or distribution channels that may offer higher
growth and profit opportunities.
Despite these risks, the company's ratings are supported by
management's achievements in repositioning the business to focus
on new product development, greater operating efficiency and tighter
financial controls. Sealy's strong operating momentum in
the first and second quarters of fiscal 2004 are a direct result of these
strategies with the successful launch of new one-sided products
in the Sealy Posturepedic and Stearns & Foster line and demonstrated
greater working capital discipline.
Ratings are further supported by Sealy's strong brand recognition
and leading market share, and by the attractive long term growth
prospects of the mattress industry. Sealy is the leader in the
US and Canadian markets and is the dominant player in the high-growth,
high-profit luxury product market segment with its Stearns &
Foster brand. Although mattress sales are deferrable in uncertain
economic times, more stable replacement bedding accounts for nearly
80% of sales according to industry sources. Additional rating
support results from Sealy's national presence, somewhat variable
cost structure, and partial vertical integration which reduces the
risk of potential business disruption while allowing the company to rapidly
fulfill customer orders.
The B2 rating on Sealy's senior secured credit facilities reflects
their priority in the capital structure as supported by domestic subsidiary
guarantees and collateral pledges comprising substantially all of the
assets of the borrower and guarantors (including capital stock) and 65%
of the capital stock of foreign subsidiaries. Despite these benefits,
the ratings on the facilities are at the level of the senior implied rating
due to limited tangible asset coverage and the significant portion of
the debt structure comprised by the senior secured asset class.
The B3 rating on the senior unsecured loan facility reflects its effective
subordination to a material amount of senior secured debt, but also
recognizes its senior position in the capital structure (pari passu with
all senior indebtedness and contractually senior to the subordinated notes)
and the benefits of domestic subsidiary guarantees. The Caa1 rating
on the company's senior subordinated notes reflects their contractual
and effective subordination to a material amount of senior secured and
unsecured indebtedness. The subsidiaries guaranteeing the bank
credit facility and Sealy Corporation guarantee the notes on a senior
Sealy Mattress Company, a wholly-owned subsidiary of Sealy
Corporation, is headquartered in Trinity, North Carolina.
The company is the world's largest bedding manufacturer which sells
mattresses and box springs under the Sealy, Sealy Posturepedic,
Stearns & Foster and Bassett brand names. Net sales for the
LTM ended May 2004 totaled $1.3 billion.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Margery B. Fischbein
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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