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Rating Action:

MOODY'S AFFIRMS WARNACO'S EXISTING RATINGS, OUTLOOK REVISED TO STABLE

21 Dec 2005
MOODY'S AFFIRMS WARNACO'S EXISTING RATINGS, OUTLOOK REVISED TO STABLE

Approximately $210 million of Rated Debt Affected

New York, December 21, 2005 -- Moody's Investors Service affirmed the ratings for Warnaco Inc. and its parent, The Warnaco Group Inc., including the corporate family rating of Ba3 and the senior unsecured debt rating of B1, following the announcement that the company will purchase certain businesses from Fingen SpA. The ratings outlook was changed to stable from positive.

Warnaco announced plans to acquire certain businesses from Fingen SpA, headquartered in Florence, Italy for $286 million. Warnaco will acquire the licensing rights to distribute Calvin Klein jeans, accessories and other apparel in European and Asian markets. The licenses have a 40-year term, similar to the maturity of the existing Western Hemisphere jeans license. Warnaco will also acquire the design and production of the Calvin Klein Collection apparel and accessory license which will continue to be operated by Fingen for two years. Warnaco will become responsible for the Collection apparel license for a five year period beginning in 2008.

The acquisition, which represents approximately 14% of the combined entity's projected 2005 revenues, will offer Warnaco worldwide control of the Calvin Klein jeans business and the opportunity for additional international sales of its Calvin Klein underwear and swimwear businesses, in addition to its various intimate apparel labels and the recently acquired Ocean Pacific brand. Moody's expects that the transaction will be financed by a balanced mix of cash on hand and secured debt.

Warnaco has the flexibility within its existing ratings to finance the proposed acquisition without adversely affecting its corporate family rating or its unsecured debt rating. Independent of the acquisition, Warnaco has made steady progress in improving its profitability since emerging from bankruptcy in 2003, with reported gross margins increasing from 31.6% in fiscal 2003 to 33.5% in the LTM 10/1/05 period. Reported FCF (after working capital) to debt was 33.2% and EBIT/interest was 6.2x in the LTM period -- both higher than the median for the Ba3 rating category.

The acquisition is expected to improve Warnaco's overall profitability because apparel and accessories tend to sell at higher prices in Europe and Asia versus the United States and the transaction will increase Warnaco's non-US sales from just under 30% to almost 40%. Additional negotiating leverage with suppliers could also bolster profits beyond 2006. Free cash flow may be adversely impacted in 2006 by the longer working capital cycle in international markets and the new launches of additional products. The ratings are supported by the expectation that Warnaco will continue to post gains in profitability over the next two to three years, will successfully integrate Fingen into Warnaco's existing European operations, and that free cash flow to debt will quickly return to preacquisition levels.

The stable outlook reflects the increased leverage over the medium term, the expectation that Warnaco will successfully integrate Fingen, the added complexity of the international business, and the likelihood that, over the long term, improvements in profitability will slow.

A ratings upgrade or change in outlook to positive could occur if Warnaco is able to grow sales at a faster than its industry peers, continues to improve its operating margin to a level above 9%, maintains FCF/debt at a level exceeding 35% or EBIT/interest above 6.0x. However, negative ratings pressure could occur if the integration of Fingen proves more challenging than expected, if reported FCF/debt declines materially or if debt/EBITDA rises above 2.5x for a sustained period.

The following ratings are affirmed:

Corporate family rating, Ba3;

$210 million senior unsecured debt, B1.

The outlook is stable.

Warnaco Inc. and its parent, The Warnaco Group, Inc., are headquartered in New York, NY. The company is one of the world's leading designers, manufacturers and marketers of intimate apparel, sportswear, and swimwear worldwide under brands that it owns ( including Warner's, Olga, Lejaby, Speedo, Ocean Pacific) or licenses (primarily Calvin Klein, Chaps). The company reported revenues of approximately $1.5 billion for the twelve month period ending 10/1/05.

New York
Brian Oak
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Marie Menendez
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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