MOODY'S ASSIGNS B2 TO SR SEC NOTES OF KAYSER-ROTH CORPORATION
New York, 05-30-95 -- Moody's Investors Service assigned a B2 rating to Kayser-Roth Corporation's $100 million senior secured notes. The rating reflects the limited growth potential for the sheer hosiery market; the company's heavy customer concentration and reliance on its No nonsense brand; strong competition in its markets; its foreign ownership structure; and its historical low levels of return on assets. However, the rating also reflects the company's position as the second largest US manufacturer and marketer of legwear products; its strong distribution network and its wide brand name recognition. The rating outlook is stable.
These securities will be sold in a privately negotiated transaction with registration rights under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issuance has been designed to permit resale under Rule 144A.
The securities, which rank parri passu with the company's $40 million bank credit facility, are secured by second lien on the company's accounts receivable and inventories and a first lien on certain other assets. Proceeds from the transaction will be used to repay borrowings under the company's working capital facility and to refinance inter-company loans stemming from the 1994 acquisition of the company by an indirect wholly-owned subsidiary of Mexico-based Grupo Synkro. Any remaining inter-company loans will be converted into additional paid-in-capital, strengthening the company's capital structure. Pro forma, tangible net worth is $35.9 million. Moody's expects leverage defined as total average debt over EBITDA to be in excess of 5 times for fiscal 1995. Although there is little judicial precedent or basis for substantive consolidation or for Kayser-Roth to become part of bankruptcy proceedings commenced against Grupo Synkro, Moody's remains concerned about the potential impact on the company from a filing against its parent company. Grupo Synkro is currently in negotiations with its lenders to restructure certain credit agreements following the negative impact on its financial performance of the devaluation of the Mexican peso and the weakening of Mexico's economy.
After growing strongly in the 1980s, when more women joined the workforce, sales of sheer hosiery products started to decline in 1993 as more companies implemented casual days. Kayser-Roth is particularly vulnerable to this new trend as sheer hosiery accounted for 53.3% of its sales during the eleven month period ended December 31, 1994. Although introductions of casual days has slowed, Moody's expects sales of sheer hosiery products to remain vulnerable to further decline. The acquisition of the Hue license last year has provided the company with an inroad into the alternative legwear market in order to reduce its dependence on sheer hosiery. Although a strong cash flow contributor, Moody's believes sales of the company's Burlington brand of men's socks have not significantly participated in the casual wear trend.
Kayser-Roth depends heavily on its core label, No nonsense, which made up 51% of last year's sales. Although the company enjoys a broad customer base with its products being sold through 120,000 doors, Moody's is concerned about the company's heavy reliance on both Wal-Mart and Sam's Club which accounted for 21% of 1994 sales. Given the importance of the food, drug and mass merchandisers channels for the No nonsense label, Moody's sees only little room for improvement in the company's customer concentration. The company's higher-end Hue and Calvin Klein labels are being distributed through department and specialty stores. Its men's socks are being distributed through virtually all distribution channels.
Profitability, as measured by EBITDA margins and return on assets have historically been very low. Moody's expects profitability to rise however, as the new owners reposition and restructure the company, a process begun last year. The initiatives, which include divesting non-strategic assets and operations as well as reducing costs, should produce annual savings of $10 million by the end of 1995, according to Moody's. For fiscal 1995, Moody's expects EBITDA margins to be in excess of 8% and interest coverage, defined as EBITDA minus capital expenditures over interest expense to exceed 1.4 times. Following a recent action by Sara Lee, its major competitor, Kayser-Roth recently raised prices in an attempt to recover price increases for raw materials. Although together all these actions should improve Kayser-Roth's financial performance, Moody's remains concerned about the company's long term ability to maintain stronger earnings if competitive pressures increase, given the company's higher leverage and limited financial resources.
The No Nonsense label, which enjoys over 90% name recognition, is owned by Kayser-Roth. The Calvin Klein and Hue product lines are being manufactured and marketed under license agreements.
Kayser-Roth Corporation, was acquired in January 1994 by Legwear Holdings Corporation, a indirect wholly-owned subsidiary of Mexico's Grupo Synkro. The company is the second largest US manufacturer of legwear products under such names as No Nonsense, Burlington, Calvin Klein and Hue. Kayser-Roth is based in Greensboro, NC.
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