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Rating Action:

MOODY'S RATES AMSCAN'S REVISED ACQUISITION FINANCING; FIRST LIEN SR SEC UPGRADED TO B1; SECOND LIEN SR SEC ASSIGNED AT B3; EXISTING RATINGS (B1 CFR) REMAIN ON REVIEW FOR POSSIBLE DOWNGRADE

19 Dec 2005
MOODY'S RATES AMSCAN'S REVISED ACQUISITION FINANCING; FIRST LIEN SR SEC UPGRADED TO B1; SECOND LIEN SR SEC ASSIGNED AT B3; EXISTING RATINGS (B1 CFR) REMAIN ON REVIEW FOR POSSIBLE DOWNGRADE

Approximately $650 Million of Rated Debt Facilities Affected.

New York, December 19, 2005 -- Moody's Investors Service upgraded the proposed first lien senior secured credit facilities being raised by Amscan Holdings, Inc. ("Amscan") to finance its acquisition of Party City Corporation ("Party City"). The ratings upgrade reflects a $95 million reduction in first lien term loan borrowings since the initial transaction rating in November, due to an incremental $30 million equity contribution and the addition of a $65 million second lien senior secured term loan. Moody's assigned a B3 rating to the second lien facility. Amscan's current bank facilities, corporate family rating, and senior subordinated notes remain on review for possible downgrade pending the close of the acquisition. At that time, Moody's expects to downgrade Amscan's corporate family rating to B2, to lower its senior subordinated notes rating to Caa1, and to withdraw existing senior secured ratings. The ratings outlook is anticipated to be stable.

The prospective rating downgrade reflects the weakened financial profile expected to result from the high-priced and majority debt-financed acquisition, which heightens risks associated with the timely realization of synergies, the retention of non-Party City customers, and the stabilization of Party City sales and profits. These risks are moderated, in part by the sensible combination of the leading vendor and specialty retailer in the relatively stable party supply market and by the company's well-considered synergy, customer retention, and operational strategies.

The following ratings were affected:

$65 million second lien senior secured eight-year term loan facility, assigned at B3;

$85 million senior secured six-year revolving credit facility, upgraded to B1 from B2;

$325 million (formerly $420 million) senior secured seven-year term loan facility, upgraded to B1 from B2;

The following ratings remain on review for possible downgrade:

Corporate family rating (formerly senior implied rating), B1;

$50 million senior secured revolving credit facility due 2010, B1;

$205 million senior secured term loan B facility due 2012, B1;

$175 million 8.75% senior subordinated notes due 2014, B3.

The upgrade of Amscan's proposed first lien credit facilities reflects the meaningfully improved enterprise value coverage due to reduced facility size. Further, Moody's recognizes their predominant position in the pro forma capital structure, as supported by operating subsidiary guarantees and by asset and capital stock pledges by Amscan and its subsidiaries. The B3 rating on the second-lien facilities reflects their effectively subordinated position in the capital structure, due to their second-priority security interests behind the still large first-lien debt class and their customary, but limited rights and remedies under terms of the proposed inter-creditor agreement.

In September 2005, Amscan entered into an agreement to purchase Party City for approximately $362 million. The transaction is expected to close by year-end. Although the acquisition price represents a substantial multiple of Party City's trailing twelve-month EBITDA, the impact on Amscan's financial leverage is moderated by an approximate $162 million equity investment by Berkshire Partners, Weston Presidio, and management. Further, Moody's recognizes the strategic benefits that may result from the business combination, including the potential for incremental sales of Amscan product into Party City's owned and franchised stores.

Nonetheless, the transaction will leave Amscan with a vulnerable financial profile. The company's high leverage and limited near-term debt repayment prospects heighten the execution risks surrounding the acquisition, including the following: 1) realizing sales and cost related synergies in the expected magnitude and timeframe; 2) maintaining stabilized sales and profit trends at Party City under new ownership and management, and with retention of key personnel; 3) managing important non-Party City retail relationships in order to minimize any potential customer/sales losses; and 4) maintaining distinct operating controls between the retail and wholesale businesses to eliminate potential conflicts.

While management has sensible strategies to address these concerns, the company will be challenged to return to its historical credit metrics in the near-term even under flawless execution, and could face unforeseen challenges or adverse market developments. In this last regard, Moody's notes Party City's historical volatility in terms of store growth, comparable store sales, and profitability; the potential for higher energy costs to limit discretionary spending or customer traffic; Amscan's exposure to higher raw material or distribution costs; the risk of incremental category participation by mass retailers, direct sellers, and other specialty chains; and the potential for heightened competition.

Notwithstanding these concerns, the prospective rating levels and stable outlook also reflect the expectation that Amscan will realize substantial synergies through the business combination and begin to meaningfully reduce leverage by fiscal 2007. Moody's view is supported by the substantial product overlap of Amscan's existing product portfolio with Party City's non-Amscan SKU. Further, Moody's notes Amscan's stable historical operating performance, and the generally moderate risks in party supply categories related to cyclicality, seasonality, or fads. The company's product breadth, balloon license portfolio, design capabilities, and cost efficiency have made it a valuable partner for its superstore customers, many of which may be reluctant to switch vendors (particularly smaller independent chains). Lastly, the ratings are supported by Party City's clear leadership and recognition in the party superstore channel; by the recent comparable sales gains as the company has improved its merchandising, layouts, and promotional offerings; and by the convenience, selection, and value offered by the superstores relative to mass retailers and other competitors.

Upward rating pressure is unlikely over the coming year due to the time needed to successfully execute sales and cost synergy plans, but could develop over the longer-term if planned profit and cash flow gains are achieved such that the company maintains debt-to-EBITDA below 6.0x, EBIT-to-interest over 1.5x, and free cash flow in mid-single digits as a percentage of debt (all ratios including Moody's standard adjustments). Similarly, while Amscan has a moderate cushion at existing rating levels for near-term execution or operational challenges, sustained profit erosion or negative cash flow would likely pressure the ratings. In particular, ratings could be downgraded if leverage exceeds 7.25x or if Amscan's liquidity becomes constrained in any way.

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. Party City Corporation, with headquarters in Rockaway, New Jersey, currently operates more than 500 company-owned and franchised party goods stores in the United States and Puerto Rico. For the twelve-month period ended September 2005, the combined companies had pro forma revenues of around $875 million and pro forma EBITDA of approximately $100 million, excluding the synergies expected to be generated by the acquisition.

New York
William L. Hess
Senior Vice President
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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