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Rating Action:

MOODY'S ASSIGNS Ba3 TO HERBALIFE'S PROPOSED SR SEC CREDIT FACILITIES; SR IMPLIED AFFIRMED AT Ba3; SR SUB NOTES AND HOLDINGS' SR. NOTES PLACED ON REVIEW FOR POSSIBLE UPGRADE; OUTLOOK REVISED TO POSITIVE FROM STABLE

09 Nov 2004
MOODY'S ASSIGNS Ba3 TO HERBALIFE'S PROPOSED SR SEC CREDIT FACILITIES; SR IMPLIED AFFIRMED AT Ba3; SR SUB NOTES AND HOLDINGS' SR. NOTES PLACED ON REVIEW FOR POSSIBLE UPGRADE; OUTLOOK REVISED TO POSITIVE FROM STABLE

Approximately $385 Million of Rated Debt Facilities Affected.

New York, November 09, 2004 -- Moody's Investors Service has taken several actions regarding its ratings on Herbalife International, Inc. ("Herbalife") and its parent company, WH Holdings (Cayman Islands) Ltd. ("Holdings"): 1) assigned a Ba3 rating to Herbalife's proposed $225 million senior secured credit facilities and affirmed Herbalife's Ba3 ratings on its existing senior secured credit facilities; 2) affirmed Holdings' Ba3 senior implied rating and revised the rating outlook to positive from stable; and 3) placed Holdings' B3 senior unsecured ratings and Herbalife's B2 senior subordinated rating on review for possible upgrade.

The rating assignment, affirmation and outlook revision reflect the benefits of company's proposed recapitalization, which will significantly reduce debt and interest expense, and reposition the capital structure for future deleveraging through bank debt repayment. These actions also recognize Herbalife's steady operating performance and strong cash flow generation on a global basis through June 2004, but are tempered by continued declines in two of its largest markets and by the use of cash balances in the transaction that had supplemented the company's modest external liquidity sources.

Herbalife's senior subordinated notes and Holdings' senior notes were placed on review for possible upgrade based on the material reduction in higher priority and pari passu obligations under the contemplated recapitalization.

The following ratings of Herbalife International, Inc. were affected by this action:

$25 million senior secured five-year revolving credit facility, assigned at Ba3;

$200 million senior secured six-year term loan facility, assigned at Ba3;

$25 million senior secured revolving credit facility due 2007, affirmed at Ba3;

$120 million senior secured term loan due 2008, affirmed at Ba3;

$165 million 11 ¾% senior subordinated notes due 2010, B2 placed on review for possible upgrade.

The following ratings of WH Holdings (Cayman Islands) Ltd. were affected by this action:

Senior implied rating, affirmed at Ba3;

$275 million 9 ½% senior unsecured notes due 2011, B3 placed on review for possible upgrade;

Senior unsecured issuer rating, B3 placed on review for possible upgrade.

Proceeds from the proposed $200 million term loan along with $300 million from a planned initial public offering, and $120 million in balance sheet cash will be used to fund the retirement of Herbalife's existing senior secured credit facilities, a $200 million special shareholder dividend, a tender offer for Herbalife's 11 ¾% senior subordinated notes, and the redemption of 40% of Holdings 9 ½% senior notes. Upon successful completion of the proposed transactions, Moody's will withdraw the ratings on Herbalife's existing senior secured credit facilities, upgrade (to B1) and withdraw ratings on Herbalife's senior subordinated notes, and upgrade to B2 Holdings' senior unsecured ratings. The substantial dividend and transaction fees associated with the recapitalization minimize net debt reduction, and the use of cash balances removes a substantial liquidity source for the company, leaving a relatively modest $32 million cash balance and $25 million revolving credit facility.

Nonetheless, the ratings affirmation and outlook revision to positive reflect the benefits of the transaction, including a material reduction in funded debt levels and borrowing costs, and the repositioning of the capital structure towards more easily reduced bank debt. As a result of the transactions, June 2004 LTM debt-to-EBITDA is reduced to 2.2x from 3.0x and interest coverage improves to 5.6x from 3.5x. In the year-to-date period through June 2004, Herbalife has exceeded expectations with strong growth in sales and EBITDA, largely due to consultant gains in Latin America, Europe, and Asia/Pacific regions. However, the company continues to experience declining operating trends in its two largest markets, United States and Japan, which represent around half of its gross sales.

Despite the need for above average statistics to compensate for substantial business risks and weak assets, Herbalife's pro forma credit protection measures strongly position the ratings in their current category. As such, Moody's could consider a ratings upgrade within a year after the recapitalization if the company maintains current operating levels and leverage below 2.0x, and stabilizes its top two markets. In this last regard, Moody's notes that the company has credible plans to grow in niche market segments and to invest in tools and marketing programs to increase distributor recruiting and retention. Importantly, the outlook revision to positive is contingent on the successful execution of the proposed recapitalization, and otherwise will revert to stable. In addition, a stable outlook or other negative rating actions are possible if operating performance trends falter, if there are material adverse developments regarding lawsuits, regulatory investigations or tax audits, or if leverage increases to fund changing financial and strategic policies. Moody's notes that the company's strong growth has been aided by favorable currency rate moves and by promotional activity in Europe, which could result in more volatile earnings performance going forward.

Herbalife's ratings continue to be supported by its 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 ratings 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 59 countries and the high turnover rates characteristic of MLM companies. 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.

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 and parents, 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. Moody's notes that 72% of Herbalife's 2003 sales and 42% of its assets respectively were derived from and located 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. Borrowings are subject to the limitations of customary negative covenants, and by financial covenants including maximum leverage ratio, minimum interest expense ratio, and maximum capital expenditures. Mandatory prepayment provisions include a 50% excess cash flow sweep.

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 59 countries. Net sales for the twelve months ended June 2004 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
Kevin L. Ziets, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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