MOODY'S ASSIGNS B3 RATING TO WH HOLDINGS (CAYMAN ISLANDS) LTD'S PROPOSED SR UNSECURED NOTES; UPGRADES HERBALIFE INTERNATIONAL INC'S EXISTING RATINGS AND SENIOR IMPLIED RATING; OUTLOOK REMAINS STABLE
Approximately US$525 Million of Debt Affected
New York, February 23, 2004 -- Moody's Investors Service assigned a B3 rating to the proposed $275
million senior unsecured notes to be jointly issued by WH Holdings (Cayman
Islands) Ltd. ("Holdings") and WH Capital Corporation
("Capital") as part of Holdings' intended recapitalization;
upgraded Herbalife International Inc.'s ("Herbalife")
existing ratings one notch; and left the outlook stable. The
proceeds of the $275 million senior unsecured notes will be used
to redeem approximately $220 million of preferred stock and $52
million of senior notes that had collectively represented the equity capital
provided by the private equity sponsors and management as part of the
July 2002 LBO.
The B3 rating assigned to Holdings' planned note issue reflects
the structural subordination of this issue to indebtedness at the operating
subsidiary level and the lack of upstream guarantees from any of the various
operating subsidiaries of Herbalife. The one notch upgrade to Herbalife's
existing ratings reflects the improved financial position of this direct
seller of weight management, nutritional supplements and personal
care items as evidenced by the increased level of operating earnings achieved
since the July 31, 2002 LBO. The recapitalization will bring
leverage back up to where it was at the time of the LBO, but Moody's
expects steady de-leveraging following the recapitalization.
Ratings actions for WH Holdings (Cayman Islands) Ltd. and WH Capital
Corporation were as follows:
$275 million senior unsecured notes due 2011, B3 assigned;
Senior Implied Rating - to Ba3 from B1;
Unsecured Issuer Rating - to B3 from B2;
Ratings actions for Herbalife International, Inc.
$25 million senior secured revolving credit facility due 2007 -
to Ba3 from B1,
$120 million senior secured term loan due 2008 - to Ba3
$165 million of senior subordinated notes due 2010 - to
B2 from B3
With the issuance of rated debt at Holdings and Capital, Moody's
has moved the enterprise's senior implied (B1) and issuer rating
(B2) to Holdings from Herbalife.
The ratings take into account that Holdings' proposed recapitalization
will repay the capital invested by shareholders in July 2002, leaving
little remaining shareholder capital at risk. Total enterprise
leverage will rise to levels comparable to those reached at the July 2002
LBO closing, moving from a Total Debt/EBITDA ratio of 2.0x
at 12/31/03 to a pro-forma Total Debt/EBITDA ratio of 3.1x
at 12/31/03 vs. the 3.2x ratio achieved at 7/31/02.
In addition, pro forma book equity becomes slightly negative and
intangibles constitute approximately 58% of total assets.
The ratings also are restrained by the substantial operating risks that
are associated with selling weight management, nutritional and other
ingested products through an independent, multi-level marketing
(MLM) distributor network of over one million people in 58 countries and
the high turnover rates characteristic of MLM companies. Meaningful
product concentration exists as Formula 1 comprises around 20%
of sales. Moody's notes that Herbalife is exposed to regulatory,
legal and publicity risks from both its products and its widespread business
model, which is subject to control concerns regarding inappropriate
marketing practices. Furthermore, the company faces intense
competition from MLM and non-MLM companies with regard to both
its products and ongoing recruiting needs.
Herbalife's ratings are supported by Herbalife's strong cash flow model,
which benefits from low working capital needs (company receives payment
via credit card prior to delivering product), outsourced production
from multiple suppliers, and modest research and development expenditures.
The demographic trends underlying demand for the company's products are
positive. An aging population, increasing obesity rates,
greater acceptance of herbal and dietary supplements, and growth
in worldwide health expenditures are favorable trends suggesting ongoing
fundamental demand for weight management and nutritional products.
In addition, long-term interest in working at home,
self-employment and supplemental family income has led to high
single digit growth rates for the direct marketing industry, and
provides a sustainable recruiting environment for MLM companies going
forward. Herbalife's franchise value and market position,
built over its twenty-four-year history in these markets,
provides a substantial platform to benefit from these continuing trends.
In addition, the new CEO that was hired in April 2003 has further
strengthened the existing management team with several additional hires
with expertise in the areas of legal, product development,
operations and marketing.
The stable rating outlook reflects Herbalife's improving operating
performance, as well as consideration of factors that could threaten
this trend going forward. Herbalife's profitability and cash flow
have shown meaningful improvement over the last several quarters,
due largely to sales growth in markets outside the U.S.
that has benefited from a weak U.S. dollar, which
also has kept product costs stable. Herbalife also has benefited
from several cost cutting initiatives and has shifted its strategy from
rapid international expansion, to focus on placing greater emphasis
on sustaining and increasing sales and improving profitability in existing
markets. Concerns regarding the sustainability of current operating
performance include the reduction of sales experienced last year in the
U.S., Japan (Herbalife's second largest market) and
Korea; relatively high U.S. unemployment levels;
a need to continue to invest in systems and training following its rapid
expansion period; and a number of legal, regulatory,
and publicity risks. Specific future sales declines or expense
increases could be associated with insurance premiums, product reformulation,
and anticipated new product launches, and class action lawsuits
and state regulatory investigations concerning Herbalife's distributors
and marketing system remain outstanding. The company recently settled
claims arising from its sale with the July 2002 LBO transaction.
Also, consistent with its multinational operations, Herbalife
is routinely subject to tax audits by various governmental authorities,
which if settled adversely could have a meaningful impact on future results.
Negative ratings actions could be taken if operating performance trends
falter, there are material adverse developments regarding lawsuits,
regulatory investigations or tax audits, and leverage begins to
increase. The ratings outlook could become positive if remaining
legal and regulatory matters are resolved favorably, new product
launches are successful, distributor churn is meaningfully reduced,
sales declines in major markets are turned around, and profitability
levels are sustained over time.
Projected pro forma credit statistics for 2004 compare favorably to the
rating category, with expected EBITA cash interest coverage of 3.3x
, debt leverage of 3.3x EBITA (2.4x EBITDA,
down from 3.1x pro-forma at 12/31/03), and retained
cash flow-to-debt of about 14%. Moody's notes
that the proposed senior unsecured note securities of Holdings are structurally
subordinated to the rated debt of Herbalife (the notes are not guaranteed
by Herbalife or any of its subsidiaries and payments to Holdings are subject
to a restricted payments basket under the senior credit facilities).
Nonetheless, Moody's notes that Herbalife is the sole source of
funds for the senior unsecured Holdings notes, and that dividends
to the parent company for cash interest payments on these notes are specifically
carved out of the restricted payments provision of the indenture governing
Herbalife's subordinated notes.
The Ba3 rating on the bank credit facilities reflects their senior position
in the capital structure, as well as the benefits and limitations
of support from guarantees and the collateral package. The credit
facilities continue to be guaranteed by certain direct and indirect subsidiaries,
except for foreign subsidiaries where guarantees would result in adverse
tax or other consequences. The facilities and guarantees continue
to be secured by a first-priority pledge of certain assets and
all capital stock of borrowers and guarantors, and by a 66%
stock pledge of non-guarantor foreign subsidiaries. Borrowings
are subject to the limitations of customary negative covenants,
and by financial covenants including maximum leverage ratio, minimum
fixed charge coverage ratio, and maximum capital expenditures.
Moody's notes that 72% of Herbalife's 2003 sales and 42%
of its assets were derived from and located, respectively in foreign
jurisdictions. In addition, Moody's believes that liquid
tangible assets are unlikely to sufficiently cover outstanding balances
under the facilities in a distress scenario.
The B2 rating assigned to Herbalife's senior subordinated notes
reflects their subordination to the senior secured indebtedness.
Additionally, the notes, which are guaranteed by the above
referenced guarantors and rank pari passu with existing and future senior
subordinated indebtedness of these guarantors, are effectively subordinated
to all debt of non-guarantor subsidiaries. These notes carry
customary limitations on the company's ability to incur additional indebtedness,
make restricted payments and investments, create liens on assets,
and merge or sell assets.
The B3 rating assigned to Holdings senior unsecured notes reflects their
position at the holding company without subsidiary guarantees.
Herbalife, with corporate headquarters in Los Angeles, California,
is a marketer of weight management products, nutritional supplements
and personal care items, sold through a global network of independent
distributors in 58 countries. Product sales for fiscal 2003 were
approximately $1.2 billion.
Corporate Finance Group
Moody's Investors Service
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service