MOODY'S ASSIGNS B2 RATING TO WARNACO INC.'S PROPOSED $210 MILLION GTD SR. UNSECURED NOTES. ASSIGNS STABLE OUTLOOK.
Moody's Investors Service assigned a B2 rating to Warnaco Inc.’s (“Warnaco”) proposed $210 million issue of guaranteed senior unsecured notes due 2013. The proceeds from the sale of the notes will be used to repay $200.9 million of the existing second lien notes due 2008, plus approximately $2 million of accrued interest, which securities were distributed to the pre-petition secured lenders at the time of the company’s emergence from Chapter 11 on February 4, 2003, and to pay transaction fees. The ratings are contingent upon the receipt of final documentation in form and substance acceptable to Moody's.
The following ratings were assigned:
Warnaco Inc.: -
Senior Unsecured Notes Rating – B2
The Warnaco Group, Inc.: -
Senior Implied Rating – B1
Senior Unsecured Issuer Rating – B3
The rating outlook is stable.
The ratings are constrained by the company’s initial weak cash generation and the anticipated need for a potential repositioning of certain brands and reduction in owned manufacturing facilities in favor of a higher outsourcing mix. Further, the ratings are constrained by the price deflation at retail, as well as the uncertain impact of unpredictable consumer demand and a pending SEC investigation.
The ratings reflect the scale and the breadth of the company’s portfolio of brands which cover a variety of market segments, pricing points and distribution channels; significant market share in swimwear and intimate apparel; reduced exposure to operating outlet stores; as well as improved operating margins and reduced leverage upon emergence from bankruptcy.
The stable rating outlook is based on the company’s historical ability to maintain high revenue levels despite bankruptcy and the limited risk to earnings from the brands challenged by merchandizing or design issues (which Moody’s estimates at less than 30% of revenues). A significant deterioration of core customers’ profitability, manufacturing inefficiencies or any negative resolution of the pending SEC investigation could negatively affect the ratings. However, continued improvements in working capital, increased revenue opportunities from brand extensions and profitable licensing agreements could support an improvement of the rating outlook if leverage remains stable and industry dynamics strengthen.
The B2 rating on the guaranteed senior unsecured notes reflects the benefit of the joint and several guarantee of the note by the holding company, The Warnaco Group, Inc., and its domestic subsidiaries. The rating also incorporates the effective subordination of the notes to Warnaco’s $275 million guaranteed senior secured credit facility (unrated by Moody’s), which is currently undrawn, as well as the liabilities of the non-guarantor subsidiaries.
Warnaco emerged from bankruptcy on February 4, 2003 with a cleaner balance sheet and a reduced cost structure. While in bankruptcy, the company exited from non-core or underperforming assets. In addition, approximately $2.2 billion of the pre-petition debt was forgiven, giving Warnaco much greater financial flexibility. Post-bankruptcy Warnaco is expected to focus on cost and financial control as well as on revenue growth from both fine-tuning of existing businesses, brand extensions and licensing. The company will benefit from the growing strength of its swimwear segment, which covers the depth and breadth of the market with its athletic, moderate and designer brands and licenses.
Tighter cost control, financial management and operational reporting initiatives of the new management team resulted in improved profitability for the restructured company. Pro forma trailing twelve months ending April 5, 2003 gross profit margin increased 230bps, to 33.4%, from a trailing twelve months pro forma period ending January 4, 2003. However, increased fixed costs, resulting from higher management incentive payments and additional management staff, resulted in an EBITDA margin increase of only 190bps, to 9.9% pro forma for the same period. At the same time, the company’s pro forma last twelve months revenues grew approximately 2.2%, to $1.53 billion, primarily due to increased swimwear sales, which represent approximately 24% of total revenues.
Pro forma lease adjusted leverage for the issuance of the new notes is modest, at approximately 2.4 times, as measured by adjusted total debt-to-EBITDAR. Pro forma interest coverage, as measured by EBIT-to-interest expense, is moderate at over 4 times for the last twelve months period ending April 5, 2003.
Going forward, Moody’s expects Warnaco to sustain and improve its revenue base of approximately $1.5 billion per annum. However, Moody’s believes that in the near term, the company may be challenged to maintain operating profitability at the current margins, given the potential for increased marketing and advertisement expenses as well as its higher administrative expenses associated with management incentive payments. Excluding $32.5 million of pre-petition related payments in the first quarter, Moody’s estimates that Warnaco will generate free cash flow (defined as cash from operations less capex) in 2003 of only 2% of revenues and possibly up to 5% of revenues in 2004.
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 (approximately 39% of fiscal 2002 revenues), sportswear (35%), swimwear (20%), and retail (6%). The company owns a portfolio of brands such as Olga, Warner’s Lejaby, Calvin Klein Underwear, Calvin Klein Jeans, ABS by Allen Schwartz, Speedo, Catalina, and others. In June of 2001 the company filed for bankruptcy protection under the Chapter 11 of the bankruptcy code, and emerged from the bankruptcy on February 4, 2003.
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