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Rating Action:

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

23 Feb 2004
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;

Outlook: Stable

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 from B1,

$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.

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

New York
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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