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Rating Action:

MOODY'S RATES AXIA'S SENIOR SECURED CREDIT FACILITIES B2; OUTLOOK STABLE

26 May 2004
MOODY'S RATES AXIA'S SENIOR SECURED CREDIT FACILITIES B2; OUTLOOK STABLE

Approximately US $150 Million of Bank Credit Facilities Rated

New York, May 26, 2004 -- Moody's Investors Service has assigned the following new ratings to Axia Incorporated ("Axia"), a manufacturer and distributor of proprietary engineered products. The rating outlook is stable. The ratings are subject to review of the final documentation of the financing transactions.

New Ratings Assigned:

B2 for the proposed $20 million senior secured revolver, due 2009,

B2 for the proposed $130 million senior secured term loan B, due 2011,

B2 senior implied rating, and

B3 senior unsecured issuer rating,

Moody's does not rate the company's new 12.5% $65 million subordinated debt due 2012, nor the $20 million PIK holding company notes due 2012. Proceeds from the term loan and new notes will be used to refinance $134 million of existing debt, to make a capital distribution of $75 million to existing shareholders and to pay fees and expenses of $6 million. Axia has been involved in several LBO transactions since 1984, the latest by the Cortec Group Fund III, L.P., a private equity investor, and affiliates, which purchased the company for $220 million in 2000.

The ratings reflect Axia's modest cash flow generation relative to its high starting debt level, considerable customer concentration in its dishwasher rack business, its small revenue base that makes it vulnerable to potential adverse operating and financial conditions as well as to competitive threats. On the other hand, the ratings recognize the company's strong position in several niche markets, attractive growth opportunities, and management's experience in operating in a highly leveraged environment.

The stable outlook reflects the significant challenges the company faces with a highly leveraged capital structure, balanced by its good market position and a track record of good profitability. Factors that could have negative rating implications include a change in the competitive structure in its taping and finishing tool business, larger than expected capital spending related to its specialty wire business, and a potential deterioration in its credit protection metrics. Factors that could have positive rating implications include a substantial improvement in financial performance and meaningful debt reductions.

Axia is composed of three segments with each targeting a niche market. Ames, a leader in the rental and sales of automatic taping and finishing tools (ATF) used in joining drywall joints, is the company's largest and most profitable segment. The ATF tools are a much more efficient alternative to hand finishing dry walls. Although this segment was only 41% of 2003 revenues, it accounted for over 60% of 2003 EBITDA. Ames holds a leading position in both the sales and rental of ATF tools. The relative high cost to own (approximately $4,000 for a full set of ATF tools), compared to rental (about $13 a day) makes the rental channel highly attractive to end users. Ames is the only established player in the ATF tools rental market with a distribution network and maintenance capabilities to run a nationwide rental operation. ATF tools have made significant penetration on the west coast (about 95%), but nationwide ATF tools only have approximately 35% penetration which represents a sizable opportunity for the company. However, the high margins on ATF tools may attract larger competitors such as the construction equipment rental companies although this is likely to be a medium-term threat at the earliest.

The specialty wire product segment consists of two businesses: Nestaway is a leading manufacturer of dishwasher racks and S&S is a manufacturer of underwires for the intimate apparel industry. Approximately 28% of dishwasher racks are currently outsourced to third parties with Nestaway being the largest third party supplier. Maytag and GE are Nestaway's largest customers, and were 14% and 6% of Axia's total revenues in 2003, respectively. Axia's revenues would be heavily impacted should one of Nestaway major customers decide to take its rack production in-house like two OEMs did in 1994 and 1996. Furthermore, should a large customer move its production facilities to overseas, Axia may have to spend significant capital to relocate its facilities to maintain the relationship.

Axia's smallest segment is Fischbein, a manufacturer of industrial bag closing and material handling equipment. In 2003, Fishchbein contributed 22% of Axia's revenues but only 13% of its EBITDA.

Pro forma for the transaction, Axia's total debt of $215 million (including $20 million PIK holding company notes) will be approximately 5.5 times estimated EBITDA of $39.4 million for the LTM ending May 2004. The company's free cash flow (cash from operations minus capex) ranged between $5 million and $17 million in the past three years, with free cash flow in 2001 and 2002 hurt by several large capital projects at Nestaway. Management believes that capital spending will return to more normal levels at about $5 million a year over the next few years. With a heavier debt burden, Moody's estimates that free cash flow in the near to medium-term will range between 5%-6% of pro forma debt. However, should Nestaway require significant capital investment, cash flow would be weakened.

Moody's expects Axia to have adequate liquidity over the next twelve months. In addition to expected modest but positive free cash flow generation, external liquidity is provided by the $20 million revolver, which will be undrawn at closing. Moody's also expects the company to meet covenants requirements over the next 12 months. Alternate liquidity options, however, are limited as all of company assets are encumbered.

The B2 rating on the $150 million senior secured credit facility, at the same level as the senior implied rating, reflects the benefit of the collateral package as well as support from the sizable amount of subordinated debt. The credit facilities will be guaranteed, on a senior secured basis, by the parent company as well as by all current and future domestic subsidiaries.

Headquartered in Houston, Texas, Axia Incorporated is a manufacturer and distributor of proprietary engineered products.

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Jersey City
Charles X. Tan
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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