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Rating Action:

MOODY'S ASSIGNS B1 TO AMSCAN'S PROPOSED CREDIT FACILITIES; OUTLOOK REVISED TO STABLE FROM NEGATIVE

12 Dec 2002
MOODY'S ASSIGNS B1 TO AMSCAN'S PROPOSED CREDIT FACILITIES; OUTLOOK REVISED TO STABLE FROM NEGATIVE

Approximately $310 Million of Debt Affected.

New York, December 12, 2002 -- Moody's Investor's Service assigned a B1 rating to the proposed $200 million senior secured credit facilities of Amscan Holdings, Inc. Moody's also confirmed Amscan's existing debt ratings and revised the outlook on all ratings to stable from negative. The confirmation and outlook change reflect sustained improvements in revenue and profitability levels driven by new distribution initiatives, value-enhancing acquisitions, and cost control efforts, as well as by the stabilization of the party superstore channel.

The following specific ratings were affected by this action:

Senior Implied Rating, confirmed at B1;

$30 million senior secured revolving credit facility due 2007, assigned at B1;

$170 million senior secured term loan facility due 2007, assigned at B1;

$110 million 9 7/8% senior subordinated notes due 2007, confirmed at B3;

Senior Unsecured Issuer Rating, confirmed at B2.

Borrowings under the proposed term loan facility will be used to repay Amscan's current term loan and revolver, and to cover transaction fees. Moody's will withdraw the B1 rating on Amscan's existing credit facilities following the completion of the refinancing.

The ratings confirmation and outlook stabilization are based on Amscan's ability to generate increased profitability levels through organic sales growth, acquisitions and cost containment, and thereby improve enterprise value relative to debt. Furthermore, Moody's believes that planned sales strategies, existing market conditions and prior capital investments will allow Amscan to sustain its current operating improvements. The company's non-acquisition sales growth, currently running in the mid-to-high single digit range, is the result of management's initiatives to target independent retailers with a dedicated salesforce, as well as the improved financial condition of the party superstore channel. Party superstore chains are beginning to grow and generally have an improved credit profile, following recent consolidation that resulted from an overly aggressive expansion in the mid-to-late 90's. Additional revenue growth has been achieved through the acquisition of M&D Balloons from American Greetings earlier in 2002, which solidified the company's leading position in metallic balloons and provided a complimentary portfolio of character licenses. Amscan's growth has been achieved without an analogous increase in overhead expense, resulting in meaningful margin improvement and profitability levels. Combined with the partial equity financing of the M&D acquisition, Amscan's improved performance has resulted in reduced leverage on a relative basis.

Amscan's ratings continue to reflect its high leverage, moderate fixed charge coverage, and weak free cash flow relative to debt. The company's ratings are also restrained by its participation in a highly competitive market segment with significant sales concentrations and largely non-branded products. Amscan competes against smaller specialty manufacturers and divisions of larger companies, some of which have greater financial resources and sizable licensing portfolios. In addition, the company sells its products primarily to party superstores (Party City and its franchisees represent 28% of sales). Consequently, Amscan must compete based on price and breadth of product, which in turn pressurizes margins and increases capital investment and working capital needs. Furthermore, the company faces the risk of store saturation within the party superstore channel, category expansion by other mass or specialty retailers, and format or merchandising changes by its existing customers. Additional working capital pressures and business risks are present due to the moderately seasonal nature of the company's business, with sales somewhat concentrated in the last few months of the year, and its sensitivity to fluctuations in raw materials prices. In this last regard, Moody's notes that Amscan has historically been able to pass along raw materials price increases to its customers, but also recognizes that such a transference may occur with a lag.

Amscan's ratings are supported by the company's broad product array, proven design and innovation capabilities, and long-standing customer relationships within the party superstore channel. Further benefit to the ratings comes from the company's leading market position and strong license portfolio in metallic balloons, the somewhat recession-resistant nature of the party goods industry due to low price points, the experienced senior management team (with meaningful ownership stakes), and the demonstrated support of equity sponsor, Goldman Sachs Capital Partners ("GS Capital"). Through a preferred stock investment, GS Capital recently provided $6 million of additional financing, in support of capital outlays of over $30 million in 2000 and 2001 for a new distribution center. The new facility should allow the company to consolidate other locations, thereby generating operating efficiencies and cost savings.

The stable outlook reflects Moody's expectation that Amscan will sustain its current profitability levels due to continued growth of its specialty salesforce, improved financial and operating strength of the party superstore channel, and cost savings opportunities from facility consolidation and acquisition integration. Importantly, Moody's recognizes that Amscan's current cash requirements for interest, taxes, capital expenditures and working capital constrain the company's ability to repay debt at levels that would warrant higher rating levels. Additionally, Moody's notes that expansion into independent channels may increase pressures on margins and working capital, and that integration activities may result in unexpected expenses, delaying or diminishing the realization of synergies ($4-5 million according to management's estimates).

Positive rating actions would be considered if Amscan is able to reduce its debt levels, either through improved working capital management and free cash flow generation, or through a deleveraging equity transaction. Alternatively, the inability to sustain current profitability, liquidity and debt positions due to competitive/margin pressures, material changes in superstore relationships and performance, or failed integration initiatives could result in negative rating actions.

Moody's forecast for fiscal 2003 projects low-to-mid single digit sales growth, and modestly improved EBITDA. From these levels, Amscan will need to service $24 million in interest, $11 million in taxes, and $14 million in capital expenditures, resulting in retained cash flow of approximately $20 million (or 7% of funded debt). Additionally, Moody's anticipates that working capital increases will reduce free cash flow to around $10 million (or under 4% of funded debt).

The B1 rating on the senior secured credit facilities reflects their senior position in the capital structure, as well as the benefits and limitations of the security and guarantee package. The facilities will be guaranteed by domestic subsidiaries and will be secured by most of the assets of the borrower and guarantors, by all domestic subsidiary stock and by 65% of foreign subsidiary stock. The facilities' ratings also incorporate the exclusion of the new distribution facility from the collateral package, the majority position of bank debt in the overall capital structure, and the fact that full recovery from the liquidation of the tangible assets securing the credit facilities would be challenging in a distressed scenario. Liquidity is adequate given the size and nature of Amscan's business, with a $30 million revolver (expected to be undrawn at close), a modest amortization schedule, and achievable financial covenants over the intermediate term. The ratings anticipate terms and conditions on the facilities as articulated to Moody's in various communications and correspondence with management and its advisors throughout the rating process, including restrictions on additional indebtedness, capital expenditures, permitted payments, and permitted investments. The ratings are subject to a review of final documentation.

Amscan Holdings, Inc., with executive offices in Elmsford, New York, is a leading manufacturer of party goods and the largest manufacturer of metallic balloons. The company sells its products through party superstores (around 46% of sales), party goods retailers and other retail distribution channels. Amscan is principally owned by affiliates of Goldman Sachs Capital Partners and management following a recapitalization in 1997. Sales for the twelve months ended September 2002 were approximately $380 million.

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Russell S. Gorman
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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