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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
New Ratings Assigned:
B2 for the proposed $20 million senior secured revolver,
B2 for the proposed $130 million senior secured term loan B,
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
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
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.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Charles X. Tan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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