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Rating Action:

MOODY'S ASSIGNS B3 TO SENIOR SUBORDINATED NOTES OF AMSCAN HOLDINGS, INC., AND A B1 TO ITS SENIOR SECURED BANK CREDIT FACILITY

01 Dec 1997
MOODY'S ASSIGNS B3 TO SENIOR SUBORDINATED NOTES OF AMSCAN HOLDINGS, INC., AND A B1 TO ITS SENIOR SECURED BANK CREDIT FACILITY New York, 12-01-97 -- Moody's Investor Service has assigned a B3 to Amscan Holding, Inc.'s (Amscan) $110 million senior subordinated notes, due 2007, and a B1 to its $167 million secured bank facility, consisting of a $117 million secured term loan, maturing in 2004, and a $50 million secured revolving credit facility, maturing in 2002 and undrawn at closing. This is the first time that Moody's has rated Amscan, a leading US designer, manufacturer and distributor of decorative party goods. The outlook is stable.

The transaction completes the recapitalization of Amscan, in which GS Capital Partners II, L.P. and affiliated investment funds (GSCP) will take control of the company with an 82.5% ownership of common stock. The previous majority owner, the Estate of John A. Svenningsen (whose family founded the company in 1947), will retain a 10% ownership interest, and senior management will own the remaining 7.5%.

The ratings reflect a weak capital structure evidenced by substantial debt and negative book equity. It also takes into consideration modest historical earnings, continued price pressure from customers and competition, material customer concentrations, low entry barriers for companies with larger financial resources and an aggressive growth strategy going forward.

However, the rating recognizes the company's long term presence in the industry, its leading market position, broad product assortment, unique design capacity, strong customer relationships, extensive distribution network, underlying industry growth prospects and an improving cost structure.

The rating of the senior subordinated notes reflects their contractual subordination to existing and future senior debt including the secured credit facilities. The debt incurrance test under the indenture requires the fixed charge coverage ratio to be at least two times. The B1 rating of the credit facilities reflects the thin asset coverage based on the collateral package. The notes and the credit facilities are secured by upstreamed guarantees from the company's domestic subsidiaries; guarantees are senior for the credit facilities, and senior subordinated for the notes.

The US decorative party goods industry has experienced steady growth in the past several years, driven by increased consumer spending, the emergence of party superstores and growth in the number of party events. The products of the industry include disposable tableware (cups, plates, cutlery, decorated napkins, plastic tablecovers), accessories (balloons, banners, flags and confetti) and novelties (candles, party hats, noise makers). Amscan offers a broad selection of items within each category for occasions like seasonal holidays, special events and themed celebrations. The industry generated around $3.5 billion in retail sales in 1996.

Competition is considered highly fragmented and price intensive. While the company is considered a leading player, Amscan faces competition from both small niche manufacturers and larger manufacturers, like Hallmark Corporation and Creative Expressions Group. The challenge for Amscan is to maintain low cost products, innovative designs and a broad assortment, while price competition intensifies along with the growth and dominance of party superstores and other established retailers and supermarkets.

Pro forma LTM September 30, 1997, the company had revenues of $207 million compared to $193 million for 1996, and $167 million for 1995. The company has experienced compound annual growth of approximately 20% since 1991, primarily derived internally. The growth reflects that of the industry and Amscan's relationships with the party superstores. While the company services over 5,000 retail accounts, the customer concentration is material; the top 10 customers account for 37% of 1996 sales, the largest single customer 15% and number two 7%. The concentration to the party superstore channel (44% of 1996 sales) may provide some strengths with the growth prospects of this retail segment. However, the company becomes increasingly dependant on the continued growth and financial performance of this relatively new and aggressively growing segment. The company's international sales represented 12% in 1996.

There is to some extent seasonality in the sales pattern. Due to the relatively higher number of holidays in the fourth quarter, the highest proportion of sales takes place in the third quarter, with fourth quarter sales typically being influenced by retailers selling through inventories built up in the previous quarter. As a result of historical growth, and the combination in sales of holidays events with everyday and themed events, the company has been able to mitigate exposure to seasonality. The company's gross margin increased to 35.7% in 1996 (35.1% in 1995 and 34.3% in 1994) due to direct cost savings related to enhanced manufacturing processes and lower raw material prices. The main raw materials are paper products and ink, which both have been exposed to price fluctuations; as raw material costs fluctuates, paper alone typically accounts for 35-40% of direct product costs. While the company has the benefit of lower raw material prices, the risk exists that it will not be able to fully pass-through future price increases.

On the operations side, the company has made changes over the years to its manufacturing process, and is believed to have sufficient capacity going forward. In the past five years, the company has invested $47 million in manufacturing capacity and efficiencies as well as distribution capabilities, and currently the company uses some excess capacity to manufacture for others. In-house production has been concentrated on core products, such as tableware, with most decorations and novelties being outsourced. The changes have resulted in an improved cost structure evidenced by the higher gross margins. A large proportion of outsourced production is located in Asia with the largest suppliers having exclusive supplier relationships.

The designs of the company, reside with a 70-person in-house design staff. Typically, the company replaces one-third of its designed product ensembles annually. Innovation and design is believed to be an important factor to the company, as growing consumer spending may further attract large brand names to the party goods industry. Recently, Hallmark has taken the direction of licensed production of party goods with brand name designs or designs of popular cartoon characters.

The company's pro forma LTM September 1997 EBITDA was $42 million, or 20.2% of sales compared to $37 million and 19.3% respectively in 1996. The company continues to make net investment in capital goods with capital expenditures slightly higher than depreciation. Pro forma interest coverage, measured as EBITDA-minus-Capex-to-interest-expenses, was 1.5 times, providing thin coverage. However, Moody's believes that improvements in operations from previous investments have yet to be fully materialized, which would improve margins over the next couple of years.

Following the recapitalization, the company will have substantial debt and high financial leverage. On a pro forma basis as of September 30, 1997, total debt is $238 million, and while GSCP has made a substantial equity contribution of $61.9 million, the company will have negative book equity of $95 million, as a result of recapitalization accounting rules. Pro forma debt-to-EBITDA is 5.7 times.

Management and GSCP expect the company to continue its domestic growth internally and through the acquisition of complementary product lines. The company further sees possibilities in penetrating international markets, which are considered less developed relative to the US market.

Amscan Holdings, Inc., headquartered in Elmsford, New York, is a leading US manufacturer of party goods. The company's product lines comprises approximately 14,000 SKU's and 250 ensembles consisting of 30-150 items. The comprehensive assortment, covering table wares, accessories and novelties, is offered through three catalogues, representing everyday events, seasonal party events and special holiday events. The company has four production plants, in New York, Rhode Island, Kentucky and Mexico, and six warehouses in the US, Canada, United Kingdom and Australia.


No Related Data.
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