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Rating Action:

MOODY'S ASSIGNS FIRST TIME RATINGS TO TSA STORES, INC. (CORPORATE FAMILY AT B2)

31 Mar 2006
MOODY'S ASSIGNS FIRST TIME RATINGS TO TSA STORES, INC. (CORPORATE FAMILY AT B2)

Approximately $225 million in Rated Debt Affected

New York, March 31, 2006 -- Moody's Investors Service assigned a B2 corporate family rating to TSA Stores, Inc. ("TSA") and a B1 rating to the $225 million senior secured term loan B . This is the first time that Moody's has rated the debt of TSA Stores, Inc., a wholly-owned direct subsidiary of The Sports Authority, Inc. The rating outlook is stable.

First-time ratings assigned:

Corporate family at B2, and

$225 million senior secured term loan B maturing April 2013 at B1.

The outlook is stable.

The ratings take into account The Sports Authority, Inc.'s agreement to be taken private in a leveraged buyout by affiliates of Leonard Green & Partners ("Leonard Green") in a transaction valued at approximately $1.34 billion. The financing structure for the transaction will consist at the TSA level of draws totaling $320 million under an unrated senior secured $750 million asset-based revolving bank credit facility, $225 million in the B1 rated senior secured term loan B, $350 million in unrated senior subordinated notes, and $438 million in equity contributed by Leonard Green, representing roughly 33% of the total transaction. The transaction value represents a multiple of roughly 7.2 times reported EBITDA for the fiscal year ended January 28, 2006. Using Moody's standard analytic adjustments funded leverage would be 6.5x, with a fully-drawn revolver increasing this to 7.32x. Ratings are restrained by the limited levels of free cash flow that are expected to be generated over the next two years.

The Sports Authority is the result of the combination of the legacy The Sports Authority and Gart Sports, along with the Sportmart banner. It currently operates a total of 398 stores in 45 states (no stores in the Dakota's, Vermont, West Virginia, or Kentucky), and is the number two retailer in terms of sales of sporting goods in the U.S. behind Dicks Sporting Goods, carrying a broad assortment of brands including Nike, The North Face, Under Armour, and Columbia Sportswear.

The stable outlook reflects The Sports Authority's solid position in the retail sporting goods segment, as well as Moody's expectation that the business will continue to run smoothly during the expected transitions that need to occur, i.e., continued systems and distribution integrations, as well as the re-badging of the Gart and Sportmart stores to The Sports Authority banner.

The B1 rating of the $225 million senior secured term loan B recognizes its senior position in the capital structure with the unrated $750 million asset based revolver, balanced by its inferior collateral position in the form of a second lien on accounts receivable and inventory, but a first lien on all other assets including the trademark. While hard asset collateral coverage is somewhat marginal, likely resulting in an enterprise-value based recovery, there is a substantial amount of junior capital ($350 million sub debt plus $438 million equity) beneath this level of debt. At present revolver levels, a multiple of 3.1x would be required to fully repay both the unrated revolver and the term loan B. Assuming a fully-drawn revolver, an enterprise value multiple of 5.2x would be required for full repayment given no change in the current EBITDA level, which seems reasonable given the current strength of the brand and franchise. The term loan B is guaranteed by all current and future direct and indirect subsidiaries, as well as by its parent, The Sports Authority, Inc. The contractual term loan amortization is nominal at 1% per year, with a bullet at maturity; however, there is a 75% excess cash flow sweep with step downs.

Prospectively, upward rating pressure would occur once The Sports Authority begins generating free cash flow in excess of 5% of debt, and Debt/EBITDA reduces below 5x (calculated using Moody's standard analytic adjustments) on a sustainable basis. Conversely, if free cash flow to debt remains negative for an extended period, or if debt/EBITDA does not reduce to below 6.5x (calculated using Moody's standard analytic adjustments) by fiscal year end January 2007, downward rating pressure would be generated.

The Sports Authority, Inc., headquartered in Englewood, CO, is a leading retailer of sporting goods in the United States, with 398 stores in 45 states.

New York
Charles O'Shea
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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