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15 Apr 2004
MOODY'S CONFIRMS AMSCAN'S RATINGS; ASSIGNS B1 TO PROPOSED $250 SR SECURED AND B3 TO $175M SR SUB FACILITIES
Approximately $425 Million of Rated Debt Facilities Affected.
New York, April 15, 2004 -- Moody's Investors Service assigned a B1 rating to Amscan Holdings,
Inc.'s ("Amscan") proposed $250 million
senior secured credit facilities and a B3 rating to its proposed $175
million senior subordinated notes. In addition, Moody's
confirmed Amscan's B1 senior implied rating. The ratings
confirmation concludes the review for possible downgrade that was initiated
on April 2, 2004 following the announcement that Amscan had signed
a definitive acquisition agreement with affiliates of Berkshire Partners
and Weston Presidio.
The material increase in leverage associated with this transaction,
as well as the company's ongoing exposure to concentration and volatility
in the party superstore channel, leaves the ratings weakly positioned
in their rating categories. Nonetheless, the rating action
also recognizes the modest impact on free cash flow associated with the
transaction (which is expected to facilitate ongoing debt reduction),
the relatively steady operating track record of the retained management
team, and the company's strong market positions. The
rating outlook is stable.
The following ratings were affected by this action:
Senior implied rating, confirmed at B1;
$50 million new senior secured revolving credit facility due 2010,
assigned at B1;
$200 million senior secured term loan B facility due 2012,
assigned at B1;
$175 million senior subordinated notes due 2014, assigned
Senior unsecured issuer rating, lowered to Caa1 from B2.
Proceeds from the term loan and notes along with cash of $7.0
million, $140 million of contributed equity, and $17.6
million of assumed mortgages and other debt will fund the acquisition
of Amscan, the refinancing of existing debt, and related transaction
fees. Following the transaction, Berkshire Partners will
own approximately 65%, Weston Presidio 32%,
and management approximately 3%. After the proposed transaction
closes, the B1 ratings on the existing bank credit facilities and
the B3 ratings on the existing senior subordinated notes will be withdrawn.
The downgrade of the senior unsecured issuer rating reflects the formal
application of Moody's definition of this rating and does not represent
a severe deterioration in Amscan's credit quality. The senior
unsecured issuer rating of Caa1 provides a rating indication for a holding
company obligation without collateral support or guarantees from operating
subsidiaries, and therefore, reflects the structural subordination
relative to Amscan's rated debt that has such guarantees.
Amscan's position in the ratings category and its upward rating
potential are considerably constrained by the increased debt amounts being
issued to finance a fully-priced acquisition at around 7.7x
adjusted EBITDA. As a result, debt-to-EBITDA
will increase from 4.1x to 5.7x (based on adjusted FY03
EBITDA of $72 million). The debt increase, including
a sizable variable interest rate component, constrains the company's
financial flexibility and leaves little room for unexpected operational
issues. This is particularly concerning given the competitive nature
of the party goods industry, sales concentration issues, and
exposure to raw materials' price volatility. Amscan competes against
smaller specialty manufacturers and divisions of larger companies,
some of which have greater financial resources and sizable licensing portfolios.
In addition, while management remains committed to diversifying
its customer mix, its sales remain concentrated with the party superstores.
Despite the stabilized financial condition and operations of the party
superstore channel in recent years, the channel remains exposed
to geographic and category expansion by mass retailers (where Amscan has
a weaker market position). Further, sales concentration and
slower growth within the channel could lead retailers to focus on inventory
management and margin enhancement initiatives that could in turn pressure
Amscan's sales and profitability (including the inability to pass
through raw material price increases).
Notwithstanding these concerns, Moody's confirmation of the
existing ratings and stable ratings outlook reflect the expectation that
Amscan will maintain its leading market share in the party superstore
channel and its position as the largest manufacturer of metallic balloons,
and will leverage its investments in recent years to focus on profitability,
asset efficiency, cash flow and debt reduction. Amscan's
vast product breadth; steady operating track record through difficult
economic environments; selective outsourcing flexibility; strong
design capabilities and balloon license portfolio; and the service
level that it offers to its customers, all supported by efficient
distribution and manufacturing operations, underpin this expectation.
Further, Moody's anticipates the disciplined execution of
continued cost savings and growth initiatives, which could diversify
the company's customer mix and support profit gains.
The stable outlook reflects the expectation that Amscan will achieve operating
results that will allow it to deleverage to under 5x debt to EBITDA and
achieve EBITDA less capex interest coverage of close to 3x over approximately
the next 18 months. Negative rating actions could result from the
failure to progress toward these financial goals during fiscal 2004 and
2005, as potentially impacted by changing strategic priorities,
unexpected costs associated with growth and facility consolidation efforts,
or unfavorable trends in competitive activities, consumer spending,
or customer relationships. Moody's would view the achievement
of these financial targets as more comfortably positioning the ratings
in the current category and therefore sees limited upside rating potential
at this point. That said, Moody's would consider positive
rating actions over this period if Amscan executes opportunistic capital
transactions or achieves meaningful and sustainable increases in earnings
and cash flows (as supported by customer diversification and operational
efficiency initiatives) that results in more rapid deleveraging than is
The B1 ratings on Amscan's senior secured credit facilities reflects
their priority in the capital structure as supported by domestic subsidiary
guarantees and collateral pledges comprising substantially all of the
assets of the borrower and guarantors, including 100% of
the capital stock of the domestic subsidiaries and 65% of the capital
stock of wholly-owned foreign subsidiaries. Despite these
benefits, the ratings on the facilities are at the same level as
the senior implied rating due to limited tangible asset coverage and the
significant portion of the debt structure that is comprised by the senior
secured asset class. The final credit agreement is anticipated
to contain a 75% excess cash flow sweep and financial covenants
governing minimum interest coverage, maximum capital expenditures,
and maximum total leverage.
The B3 rating on Amscan's proposed senior subordinated notes reflects
their contractual and effective subordination to a material amount of
senior secured indebtedness. The notes will be guaranteed by existing
and future domestic subsidiaries of Amscan. Provisions in the indenture
are expected to restrict additional indebtedness, dividends,
investments, affiliate transactions, liens, asset sales,
and mergers and acquisitions.
Amscan Holdings, Inc., with executive offices in Elmsford,
New York, is a leading manufacturer of party goods and the largest
manufacturer of metallic balloons. The company sells its products
through party superstores, party goods retailers and other retail
distribution channels. Sales for the fiscal year ended December
2003 were approximately $403 million.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Kevin L. Ziets, CFA
Asst Vice President - Analyst
Corporate Finance Group
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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