MOODY'S ASSIGNS Ba2 TO SENIOR SEC REVOLVING CREDIT FACILITY OF HARTMARX CORPORATION. CONFIRMS B3 RATING ON SR. SUB DEBT
New York, 06-30-95 -- Moody's Investors Service confirmed its B3 rating on Hartmarx Corporation's $100 million senior subordinated debentures and assigned a Ba2 rating to the company's $175 million secured bank credit facility. The company's senior implied rating is B1. This is the first time Moody's has rated the bank credit facility of Hartmarx Corporation.
The rating reflects the weak market for apparel in general and the changing dynamics of the men's tailored clothing business; declining margins due to competition and to the phasing out of the company's higher margin retail operations, the company's limited ability to pass on higher raw material costs; its heavy reliance on a single vendor; and continued losses in its women's apparel group. However, the rating also takes into consideration the completion of the company's restructuring and refinancing program, the breadth of its product offerings, its strong brand name recognition, its position as the lowest-cost US manufacturer of men's tailored clothing, and improved debt protection measurements. The rating outlook is stable.
The $175 million senior secured credit facility matures on March 23, 1997 and has a $25 million sub-limit for letters of credit. The Ba2 bank rating is supported by the restrictive provisions set forth in the borrowing test, Moody's said. All borrowings and issuance of letters of credit are subject to a borrowing base test. The facility is subject to an annual cleandown provision. Pricing under the facility ranges from LIBOR + 150 bps to 250 bps, based on certain financial performance measurements. Lenders have a first priority security interest in substantially all of the assets of the company and its subsidiaries. As the borrower principally acts as a holding company, all loans to its operating subsidiaries are guaranteed by all the respective subsidiaries on a secured basis.
Sales of the company's core men's apparel group improved marginally as a successful introduction of the Tommy Hilfiger line of tailored clothing and slacks, along with some improvements in other brands, more than offset the decline in sales to the company's former retail affiliate, HSSI. Moody's expects continued weakness in sales of men's tailored clothing as the industry adjusts to the more casual apparel styles in workplace and to new retail formats, such as Today's Man and Men's Wherehouse, which offer consumers a more value-priced product. However, Hartmarx should be able to take advantage of the casual trend through its Novapperel subsidiary, Moody's said. This new subsidiary recently signed license agreements with Perry Ellis and Daniel Hechter,.
Gross margins declined from 32.91 to 31.5% of sales for the year ended November 30, 1994. Moody's expects this trend to continue in 1995, as competition from lower-priced imported apparel intensifies and the company phases out its higher-margin retail operations. Hartmarx recently reached an agreement to sell its Kuppenheimer retail division to an investor group, effectively completing its strategic initiative to focus on its wholesale business.
Strong competition continues to limit Hartmarx's ability to pass on in full higher raw material costs such as cotton, Moody's said. The company also remains heavily dependent on Burlington Industries, Inc., its largest fabric supplier.
With the pending closing of the sale of Kuppenheimer, Hartmarx has substantially completed the comprehensive operational and financial restructuring of its operations that it began in 1992. As part of the restructuring, Hartmarx has sold off its retail operations, which were unprofitable, allowing it to focus it on its core manufacturing operations. The company also eliminated non-strategic manufacturing operations and excess production capacity, making it the lowest-cost US-based manufacturer of tailored clothing. The company's financial structure improved through the private placement of $30 million of its common stock, a new $175 million secured revolving credit facility and the issuance of $100 million subordinated notes.
Hartmarx enjoys strong brand name recognition, with such names as Hart Schaffner & Marx, Hickey-Freeman and Kuppenheimer and offers its retail accounts a wide breadth of products at various price points, allowing it to appeal to a broad-based customer base, Moody's said.
For 1995, Moody's only expects modest improvements in the company's debt protection measurements as it replaces lost sales from its Kuppenheimer division with new wholesale business. For the year ended November 30, 1994, interest coverage defined as EBITDA over interest expense was 2.2 times, up from 1.9 times the previous year. Total debt over EBITDA was 4.2 times, down from 5.4 times. The sale of its retail operations will also improve the company's lease-adjusted leverage as its total lease payments tied to store leases will decline by $36.8 million, Moody's said.
Hartmarx Corporation is the largest US manufacturer and marketer of men's tailored clothing, sportscoats and slacks, under such names as Hart Schaffner & Marx, Hickey-Freeman, Kuppenheimer, Perry Ellis, Tommy Hilfiger and others. The company is based in Chicago, IL.
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