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17 Apr 1996
MOODY'S ASSIGNS Ba3 TO GTD SENIOR SEC REVOLVING CREDIT FACILITY AND B2 TO GTD SENIOR SUBORDINATED NOTES OF AVONDALE MILLS, INC.
New York, 04-17-96 -- Moody's Investors Service assigned a Ba3 rating to Avondale Mills, Inc.'s proposed U.S.$ 450 million, five-year, senior secured credit facility and a B2 rating to the company's U.S.$ 150 million issue of senior subordinated notes, due 2006. Both facilities carry the guarantee of the holding company, Avondale Incorporated, whose primary assets are the shares of the borrower. The proceeds of the borrowings will be used to finance the acquisition of the textile assets of Graniteville Company, as well as for general corporate purposes. This is the first time Moody's has rated the debt obligations of Avondale Mills. The rating outlook is positive.
The ratings reflect the risks of integrating Graniteville, a large, underperforming asset, during a cyclical downturn; as well as Avondale's high leverage, and concentration of sales to one client. However, they also incorporate Avondale's strong earnings history, currently understated earnings power, strong market share in key products, a supportive bank group, and an operationally experienced chairman who owns 33% of the stock. Furthermore, they reflect the impact of the Graniteville acquisition in terms of diversifying the company's revenues away from the volatile yarns business and reducing customer concentration.
The Ba3 bank loan rating reflects the value of the security package vis vis expected maximum permitted borrowings, taking into account mandatory commitment reductions and prepayment provisions upon the securitization of receivables and the issuance of subordinated debt or equity (in excess of the anticipated U.S.$ 40 million private placement of equity at the parent, Avondale Incorporated, prior to closing), as well as a cash sweep of 75% of free cash flow should the company raise less than U.S.$ 125 million from the anticipated subordinated debt placement or from equity.
The B2 rating of the notes reflects the structural subordination of the notes to the claims of secured lenders. Prior to 1999, the company has the option to redeem up to 35% of the notes with the proceeds of an equity offering. The notes will be privately placed under Rule 144A of the Securities Act of 1933 and the company intends to file a registration statement and exchange of notes with the SEC and achieve effectiveness within 150 days of closing.
On March 31,1996, Avondale entered into an asset purchase agreement with Graniteville Company and its parent, Triarc Companies, Inc., to acquire Graniteville's textile assets for a total price of U.S.$ 255 million in cash. Graniteville is engaged in the manufacture of cotton and cotton-blend finished fabrics, including utility wear, sportswear, denim, and specialty apparel fabrics for sale to the apparel and industrial sectors. The acquisition increases Avondale's leverage, with financing provided by the proceeds of the note issue, borrowings of around U.S.$ 145.8 million under the new bank facility, a new receivables securitization program estimated at U.S.$ 100 million, and a private placement of 2.2 million of class A common stock (16.7% of equity) for a purchase price of U.S.$ 40 million.
Graniteville's performance over the past few years has been lackluster, with consistently lower EBITDA margins than its peer group or Avondale ( 7% in 1995 versus Avondale's 13% margin and a peer average of 11%), despite having had the benefit of 196% capital expenditure to depreciation ratio. Moody's believes that the success of the combined companies will be dependent upon the degree of synergistic integration, cost savings, and improved utilization of Graniteville's assets.
Positive aspects of the acquisition include the potential to reduce sales volatility by diluting the earnings contribution of Avondale's yarns business (second largest domestic producer with 14% market share) from 55% to 28%, and incorporating more stable sales from utility wear (23% of pro forma sales), which currently enjoys 50% market share. Graniteville's contribution of piece-dyeing and finishing equipment will make Avondale the third largest denim producer globally (15% domestic market share)and broaden its product range, creating more cross-selling opportunities, particularly in the areas of branded and private label denims and specialty fashion fabrics. The different client bases will act to reduce sales concentration to V.F. Corporation from 26% to around 18% of total sales. Denims are expected to contribute 33% of sales; piece-dyed specialty fabrics 8% (12% market share), specialty fabrics 4%, and greige (unbleached and undyed) fabrics 4%.
While Avondale's leverage appears quite high from a balance sheet perspective, with debt to pro forma book capitalization at 87%, debt to sales ratios of 39% and 37% for pro forma 1995 and 1996, respectively, are somewhat in line with the company's peer group and are a better reflection of debt capacity. The company's high tangible asset turnover of around 1.8 times demonstrates comparable and in some cases somewhat higher efficiency rates than that of some peers with less leverage. Moody's therefore believes that if the company maintains its maximum capacity utilization with targeted production, cash flows will remain healthy. However, some downward pressure on revenues can be expected for 1996, particularly for the yarns segment. Despite this, fixed coverage ratios are expected to be well in excess of financial provision requirements in the short term.
Avondale Mills, Inc., with principal offices in Monroe, Georgia, is a wholly owned subsidiary of Avondale Incorporated. Upon the completion of the contemplated acquisition of the textile assets of Graniteville Company of Graniteville, South Carolina, Avondale Mills will be a leading manufacturer of cotton and cotton-blend yarns and finished fabrics, denims, and utility wear fabrics supplied to the apparel and industrial markets.
No Related Data.
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