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Rating Action:

MOODY'S CONFIRMS B3 RATING ON AMSCAN HOLDINGS, INC.'S SR SUB NOTES AND B1 RATING ON ITS SECURED CREDIT FACILITY; ASSIGNS B1 RATING TO ITS SUPPLMENTAL TERM LOAN

20 Aug 1998
MOODY'S CONFIRMS B3 RATING ON AMSCAN HOLDINGS, INC.'S SR SUB NOTES AND B1 RATING ON ITS SECURED CREDIT FACILITY; ASSIGNS B1 RATING TO ITS SUPPLMENTAL TERM LOAN New York, 08-20-98 -- Moody's Investors Service confirmed its B3 rating on Amscan Holdings, Inc.'s (Amscan) $110 million of 9 7/8% senior subordinated notes, due 2007, and the B1 rating on its $167 million secured credit facility, consisting of a $50 million revolving credit and $117 million term loan, the latter maturing in 2004. Moody's also assigned a B1 rating to its proposed $40 million supplemental term loan facility. The outlook remains stable. Amscan's senior implied rating is B1.
The confirmations, as well as the new rating assignment, are in response to the recent announcement that Amscan will acquire, largely with debt, the stock of Anagram International, Inc. (Anagram) for $91 million. The purchase price, which includes the repayment of $16 million of Anagram debt, as well as transaction costs, is relatively high at approximately 15 times Anagram's LTM EBITA of $6 million (10 times EBITDA). Anagram, with LTM sales of nearly $66 million, is a privately-held manufacturer of metallic balloons. Its products are primarily sold through distributors to grocery stores, as well as floral, card and gift shops.
Amscan designs, manufactures and distributes decorative party goods largely through the party superstores. Its products primarily include plastic and paper tableware, novelties, balloons and gift wrap.
The ratings reflect Amscan's weak capital structure, which includes substantial debt and negative book equity, the latter due to recapitalization accounting. The ratings also reflect the potential for ongoing margin pressure due to intense competition in the decorative party goods industry, as well as the company's significant exposure to party superstores, which have gained significant market share and buying power over the past several years.
However, the ratings also reflect the fact that the incremental cash flow generated by Anagram is sufficient to cover the effects of the acquisition debt without causing a material deterioration in credit fundamentals. The ratings further reflect Amscan's broad, albeit highly discretionary, product offerings, which include 15,000 SKU's, and its diversified customer base, both of which will be enhanced as a result of the proposed acquisition. The ratings also consider the potential for cost synergies, as well as the good prospects for continued growth of the $3.5 billion US decorative party goods industry.
In order to finance the $91 million acquisition price, Amscan will use $15 million of existing cash on-hand and will borrow approximately $24 million under its revolving credit facility, which is currently unused. Additionally, a $40 million supplemental term loan will be provided by its existing bank group. The balance of the purchase price will be represented by Anagram roll-over equity.
Pro forma for the acquisition, Amscan's debt remains substantial at $301 million, compared to negative book equity of $80 million. Prior to the acquisition, total debt was $237 million. Based on pro forma adjusted EBITA of $39 million ($49 million EBITDA) for the LTM ended June 30, 1998, cash flow leverage is high at nearly 7.7 times (6.1 times EBITDA) and interest coverage is thin at 1.4 times (1.8 times EBITDA). Interest coverage as measured by EBITDA minus CAPEX-to-interest expense is 1.4 times. Despite the additional debt incurred to finance the proposed acquisition, the cash flow generated by Anagram, as well as $1 - 2 million of annual cost savings which may be realized from revenue and cost synergies, results in relatively unchanged pro forma debt service coverage ratios when compared to Amscan's LTM ratios on a stand-alone basis. However, downward pressure on the ratings could be applied if additional debt is incurred to finance future acquisitions, or if there is any erosion in the company's debt service coverage ratios, especially as a result of margin compression.
Pro forma adjusted operating income was $35 million for the LTM ended June 30, 1998, which results in a healthy operating margin of nearly 13%. Although, Anagram's historical gross margins have been substantially higher than Amscan's, its SG&A expenses have also been notably higher.
Amscan's pro forma balance sheet is weakened by $56 million of goodwill, resulting primarily from the proposed acquisition. Intangibles account for nearly 25% of total assets. However, its EBITA return on assets is in excess of 15%, which appears capable of supporting the significant level of intangibles.
At nearly 122 days, Amscan's inventory is substantial, but improving. However, this inventory partially reflects seasonality of sales, which are highest in the third quarter, as well as the company's high number of SKU's.
Though pro forma retained cash for the LTM is only $10 million, or 3% of total debt, the company will have $26 million of unused availability under its revolving credit facility, which should provided added liquidity. Management's objective is to pay-down the revolving credit over the next two years. In addition, term loan amortization over the next few years is relatively modest. Management has estimated that capital expenditures will be in the $12 - 14 million range during the period 1999 - 2002. Pro forma CAPEX for the LTM was approximately $11 million.
Beyond the nearly 45% concentration of Amscan's revenues to party superstores, the balance of revenues are to a more fragmented base of independent card and party retailers, mass merchandisers and other distributors. Though it has a relatively diverse customer base, one customer accounted for nearly 19% of its sales in fiscal 1997. Following the acquisition of Anagram, its customer base should become more diversified. In addition, the combined company should benefit from Amscan's strong presence in party superstores and Anagram's well-established presence in independent grocers and gift shops.
The US decorative party goods industry has experienced steady growth over the past several years, largely due to increased consumer spending, the emergence of the party superstores and increases in the number of party events. Though competition is highly fragmented and price intensive, Amscan's vertical integration has historically provided substantial cost benefits and has provided for relatively healthy profit margins. These profit margins may be enhanced as a result of various cost synergies, including the consolidation of distribution facilities, and lower manufacturing and marketing expenses as a result of economies of scale. However, the impact of such cost benefits on Amscan's profit margins may be reduced slightly by Anagram's continued use of distributors.
Since 1990, the party superstores have been growing rapidly by providing consumers with a one-stop source for all of their party needs. Currently, these superstores account for nearly 10% of total industry sales, and they could double their market penetration over the next several years. As industry sales continue to shift to these superstores, pricing pressure is likely to remain strong. In addition, the purchasing power of the party superstores could make it difficult for Amscan to fully pass-through any future raw material price increases, especially increases in the price of paper.
Headquartered in Elmsford, New York, Amscan Holdings, Inc. is a manufacturer of party goods, including table wares, accessories and novelties. Its pro forma sales for the LTM ended June 30, 1998, were $277 million.


No Related Data.
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