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02 May 2002
MOODY'S DOWNGRADES SEALY'S DEBT RATINGS; OUTLOOK REVISED TO STABLE
Approximately $833 Million of Debt Affected.
New York, May 02, 2002 -- Moody's Investors Services downgraded the debt ratings of Sealy Mattress
Company, and revised the outlook to stable. The following
ratings are affected by this action:
Senior Implied, lowered from Ba3 to B1;
$100 million senior secured revolving credit facility due 12/15/2002,
lowered from Ba2 to B1;
$125 million senior secured Term Loan A due 12/15/2002 ($25
million currently outstanding), lowered from Ba2 to B1;
$330 million senior secured AXEL Term Loans due 2004-2006,
lowered from Ba2 to B1;
$250 million 9.875% senior subordinated notes due
2007, lowered from B2 to B3;
$128 million 10.875% senior subordinated discount
notes due 2007, lowered from B2 to B3;
Senior Unsecured Issuer Rating, lowered from B1 to B2.
The rating downgrades reflect Moody's concerns regarding Sealy's increased
sales, earnings, and balance sheet exposure to distressed
affiliate entities, as well as ongoing margin and cash flow pressure
associated with international expansion, increased retail/consumer
economic challenges, expenditures required to improve regional and
international operating efficiency, the substantial amortization
of Sealy's term loans over the next few years, and near-term
increases in cash interest payments (when interest on the discount notes
becomes cash payable in December 2002).
The rating downgrades follow an outlook change to negative from stable
in December 2001, which highlighted potential deterioration in affiliate
earnings and receivables quality. Following these concerns,
Sealy invested $12.5 million in an affiliate that required
renegotiated bank financing to support its business and reclassified $15
million of the receivables of another affiliate (in default under its
credit agreement) as an investment. Total receivables and loans
due from affiliates, which comprise around 15% of the Sealy's
annual sales, were around $56 million at the end of March
2002, and represented over 25% of total receivables.
Sealy's other receivables have also been extended, as a challenging
U.S. retail environment and Sealy's expanding international
operations have required an extension of trade terms. Total days
outstanding for receivables plus investments was over 60 days as of March
2002. These factors are also straining Sealy's margins, as
the first quarter EBITA margin decreased 60 basis points to 11.1%
from 11.7% in the prior year.
The ratings continue to reflect Sealy's high leverage, moderate
interest coverage and modest retained cash flow relative to debt.
The ratings also consider risks typical of the bedding industry,
including the deferrable nature of its products and the high degree of
competition that requires significant expenditures to support frequent
new product launches and market share. For the twelve-month
period ending March 2002, leverage was approximately 7.0x
on an EBITA basis (5.9x on an EBITDA basis), pro-forma
cash interest coverage was around 1.5x on an EBITA basis (1.8x
on an EBITDA basis), and pro-forma retained cash flow was
around 2% of total debt. Furthermore, acquisitions,
investments and working capital increases forced the company to increase
borrowings by around $55 million year-over-year.
Support for the ratings is maintained by Sealy's strong brand recognition
and market share, by the high quality of its products, and
by the fundamental long term stability of the bedding industry.
Sealy and two other major bedding manufacturers, Simmons and Serta,
comprise over half of all wholesale sales. While consumers can
defer mattress purchases in the short term, replacement bedding
accounts for about two-thirds of industry sales; the average
replacement cycle has been relatively steady at just under 8 years.
Additional volume can come from an aging population with increased disposable
income and more second homes, greater awareness of quality and brand
by mattress consumers, and a growing general population.
Additional rating support comes from Sealy's national presence and partial
vertical integration, which somewhat reduce the risks of potential
business disruption in any one area, while allowing the company
to rapidly meet the needs of its customers.
The stable ratings outlook reflects Moody's confidence in the fundamental
strength of the bedding industry, which it expects will rebound
from 2001's unit and sales decline, its first down year since 1982.
The rebound may be dampened by price-focused consumers, who
will keep pressure on margins, and volatility in international markets
such as South America. Sealy's operational restructuring and manufacturing
consolidation in 2001 will help support profitability in this environment,
but the issues described above regarding troubled affiliates and liquidity
will continue to pressurize the rating. Moody's expects that Sealy
will be able to renew its revolving credit facility prior to its December
2002 expiration, and will be able meet its term loan principal payments
in the near-term. Factors which will influence Moody's future
rating actions on Sealy will include its ability to address near and longer-term
liquidity concerns, its degree of exposure to affiliate retailers,
its success in streamlining its operations, its propensity to engage
in acquisitions, and its ability to sustain or improve profitability
The B1 ratings on Sealy's bank credit facilities continue to reflect their
senior position in the capital structure and the benefits of their collateral
package. The downgrade from Ba2 considers Moody's heightened concerns
regarding a lack of tangible asset support, given the weakened quality
of a portion of those assets and the earnings they generate. In
this regard, Moody's observes that despite approximately 10%
sales growth, amounts due from customers have increased by nearly
35% fiscal year on year. The B3 rating on Sealy's subordinated
notes reflects subordination to a substantial amount of senior secured
Sealy Mattress Company is a wholly owned subsidiary of Sealy Corporation,
which in turn is majority-owned by Bain Capital. Bain and
its affiliates own and/or have material equity interests in Mattress Discounters
(Caa3, senior implied) and other mattress retailers that comprise
approximately 15% of Sealy's sales. Headquartered in Trinity,
North Carolina, Sealy Corporation is the world's largest bedding
manufacturer. The company manufactures and sells a complete line
of mattresses and box springs, including those sold under the Sealy,
Sealy Posturepedic, Stearns & Foster and Bassett brand names.
Sales for the twelve-month period ending March 2002 were approximately
Corporate Finance Group
Moody's Investors Service
Russell S. Gorman
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 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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