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08 Feb 1999
MOODY'S ASSIGNS B3 TO FORMICA CORPORATION'S PROPOSED SR. SUB.NOTES AND Ba3 TO THE BANK FACILITY
Moody's Investors Service assigned a B3 rating to Formica Corporation's proposed $215 million issuance of senior subordinated notes due 2009 and a Ba3 rating to its bank facility. The senior implied rating is B1 and the outlook is stable.
The ratings reflect Formica's high leverage and modest interest coverage, along with little tangible equity. It also reflects its weak financial performance over the three year period BTR Nylex ltd. (BTR) owned it between January 1995 and April 1998, its exposure to revenues generated in Asia, and the decorative surfacing products market being a mature cyclical industry.
These concerns are mitigated by Formica's 86-year history, its global market position and worldwide brand awareness, and the return of a management team that previously ran the business profitably from 1985 to 1994 prior to BTR's ownership, and which has already implemented a cost savings program intended to significantly reduce SG&A expenses. Also helping the ratings are the significant investment of CAPEX over the past three years, the global distribution network, and the diversification of sales revenues, which flow from both the new construction and the repair/remodel segments as well as from both the residential and commercial markets.
The B3 rating of the $215 million senior subordinated notes also reflects their effective subordination to borrowings under the $205 million secured credit facility. The Ba3 rating of the $205 million bank facility reflects, its secured position, the collateral package supporting the facility, and its guarantee's from all of Formica's existing and future subsidiaries.
Formica has entered into a senior secured credit agreement with DLJ Capital Funding as agent, for $205 million expiring May 2004, initially priced at Libor plus 2.25%. The facility is comprised of a $120 million revolver that includes four $5 million facilities that have as borrowers the UK, French, Canadian, and Spanish subsidiaries and an $85 million amortizing term loan that is broken out among the US, UK, and Canadian subsidiaries at $35 million, $40 million, and $10 million respectively.
The facility is secured by all existing and after-acquired personal property of the subsidiaries including a pledge of all of the stock and a first-priority perfected lien on these properties, a pledge by FM Holdings Corp., Formica's parent, of the stock of the Company and a pledge by Laminates Acquisition Co., FM Holding's parent, of the stock of FM Holdings, and a negative pledge on all assets of the company and its subsidiaries. Borrowings under the credit facility as of September 30, 1998 were $85.0 million.
Laminates Acquisition Company, the company's indirect parent, purchased Formica on May 1, 1998 for $405.4 million (10.5 times 1997 EBITDA / 6.3 times 1997 Proforma EBITDA) with cash and assumption of debt, from BTR Nylex ltd. ("BTR"), an Australian company and a subsidiary of BTR plc. In order to fund the acquisition, it used a Bridge note of $200 million together with bank debt and equity of $137 million. Proceeds from the senior subordinated note will be used to repay the bridge notes. Laminates Acquisition Company is owned on a fully diluted basis 42% by DLJ Merchant Banking Partners II, L.P., 21% by CVC Capital, 21% Citicorp Venture Capital, and 16% by management.
Financial results over the BTR period were poor, although sales continued to grow from $489 million in 1994 to $533 million in 1997, EBITDA fell from $71.4 million in 1994 to $38.6 million in 1997. Surprisingly the worst results came from the North American division while the U.S. economy was pushing ahead full steam. This is in contrast to what happened from 1990 through 1994 when the new management was operating the business during a recession and slow recovery. During this period, sales grew from $437 million in 1990 to $489 million in 1994 and EBITDA improved marginally from $66.1 million to $71.4 million respectively.
The poor financial results during BTR's ownership largely resulted from the continuous senior management changes that included four new CEO's during the period and higher spending levels as a result of some operational and strategic misdirections such as changing the direction of marketing from architects, designers and distributors to consumers.
Proforma EBITDA for the twelve months ending September 30, 1998 covers proforma interest 1.8 times. If you subtract out CAPEX their is minimal coverage. Proforma EBITDA includes a $13.5 non cash charge and $14 million of incremental annualized cost savings. Two scenarios will occur going forward that gives Moody's some comfort that interest will reach close to 2 times coverage over the next two years. The first is the amount of CAPEX going forward will not be as large as it has been over the past four years. Including 1998's CAPEX the average amount spent has been $42 million. This amount will return to levels of $15 - $20 million, similar to levels the management previous to BTR operated under. This investment of the past four years is expected to yield substantial manufacturing savings, improve competitiveness and increase capacity.
The second scenario sees a drop in SG&A. Formica's SG&A costs were significantly higher under BTR then they had historically been prior to BTR ownership. Under BTR it operated at close to the 30% range while previous management operated at close to the 20% range. Management has begun to implement a cost savings program intended to reduce net SG&A costs by approximately $30.0 million which is expected to be fully realized in 1999. These include reducing: excess advertising and sales promotion, other selling and administrative expenses ($18 million), flooring expenses ($6 million), operating costs ($4 million), consultant/legal/other expenses ($4 million), and staff reductions ($5 million). As of September 30, 1998, approximately $16.0 million of net cost savings had been realized. These costs reductions will be partially offset by incremental standalone costs of approximately $7.0 million.
Besides the improvement in EBITDA expected from the new but experienced management team putting the company back in the right direction, the ratings also incorporate the significant brand awareness and leadership Formica has in the high pressure laminates (HPL) market. It is the largest producer of HPL in Europe, the second largest producer in North America next to Wilsonart ( a subsidiary of Premark International), and one of the largest producers in Asia.
The company generates 41% of its sales outside of North America, however all of its operating income was generated from Europe and Asia in 1996 and 1997. Moody's believes their are risks to doing business abroad, including exchange rate fluctuations and limits on repatriation of funds. Moody's believes Asia contributions to total EBITDA could diminish due to the Asian crisis.
Formica's book equity after the high yield offering will be $132 million, a figure that becomes a negative $52.4 million after subtracting intangibles (primarily trademarks and patents) of $184 million. Total debt will be $334 million on sales and total assets of $551 million and $703 million, respectively. Leverage is high, with the ratio of total debt to capitalization equaling 71.7%, while pro forma debt-to-adjusted EBITDA is high at 5.3 times.
Formica's products are marketed under the Formica and Surell brand names through over 7,500 locations worldwide by a domestic and international independent distributor and dealer network as well as the company's own sales force. Sales are broken down by high pressure laminates - 92%, solid surfacing - 5%, and flooring 3% for year ended 1997. Sales by region are split North America 59%, Europe 27%, and Asia 14%.
The notes will be offered and sold in privately negotiated transactions without registration under the Securities Act of 1933, under circumstances reasonably designed to preclude a distribution in violation of the Act. The issuance has been designed to permit resale under SEC Rule 144A.
Formica Corporation, established in 1913 and headquartered in Cincinnati, Ohio is one of the largest producers of decorative high pressure laminates ("HPL") in the world and a leading brand name in the decorative surfacing products market. HPL products are used in applications where surface durability is important, for example, kitchen countertops, furniture, doors, and flooring.
No Related Data.
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