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19 Jul 2002
MOODY'S RATES ORIENTAL TRADING'S BANK FACILITIES AT Ba2
Approximately $180 Million of Debt Rated.
New York, July 19, 2002 -- Moody's Investors Service assigned debt ratings to Oriental Trading Company,
Inc. ("OTC"), the primary operating subsidiary of OTC Holdings,
Inc. The following ratings were assigned to OTC:
Ba2 senior implied rating;
Ba2 ratings on the guaranteed $180 million senior secured credit
facilities of Oriental Trading Co.;
Senior unsecured issuer rating of Ba3.
The outlook on all ratings is stable.
The ratings reflect OTC's demonstrated low volatility for product demand
despite the discretionary nature of its products; the benefits of
diversification from a large and fragmented customer base which has shown
consistent growth as the company seeks out new categories of customers;
low inventory risk, as a result of high gross margins, low
obsolescence risk, and low cost of introducing new products;
the ability to generate sufficient free cash flow from operations to internally
finance growth and operating needs as well as amortize debt since its
leveraged buyout; and a leading position in the U.S.
market for retail novelty products, which gives it the benefit of
good name recognition and low cost of growth. The ratings also
recognize OTC's ability to leverage certain operating costs as it continues
to grow existing business lines, offset in part by the need to increase
catalog costs in line with customer acquisitions and the need to increase
warehousing and distribution infrastructure in the medium term if growth
The ratings also reflect OTC's still-high leverage and modest levels
of debt reduction following its LBO in 2000. While OTC has generated
excess cash flow, it has until recently retained cash on its balance
sheet which has been used to finance seasonal working capital needs,
rather than to reduce long term debt balances. About half of the
debt reduction contemplated in this transaction is taking place by reducing
cash balances, which will likely require seasonal revolver borrowings
during the remainder of this year and could therefore raise average debt
balances. The ratings also consider recent and upcoming changes
to the management team; short term risks to profitability as a result
of anticipated changes in operational processes; exposure to exogenous
shocks, such as increases in paper and postage costs and political
risks affecting its vendors in Asian markets; and high seasonality
focused around the calendar 4th quarter.
The ratings recognize that OTC's parent, OTC Holdings, Inc.,
is building a liability as a result of accruing dividends on preferred
stock. While this is not a direct obligation of OTC, these
dividends will likely be repaid through the parent's only source of operations,
which is OTC, or through an IPO. At the time of the rating,
a restricted payment covenant under the credit agreement had not been
negotiated, but the company had stated its intention to pay these
dividends only at the time of an IPO.
The rating outlook is stable. Moody's believes that OTC will continue
to be able to generate excess cash flow from operations which could enable
it to repay debt more quickly than the modest minimum amortization.
The term loan includes a 75% excess cash flow sweep until the company
achieves certain leverage ratios. Future ratings could be higher
if OTC repays debt significantly ahead of schedule. Ratings could
remain at current levels or decline if the company uses cash for other
purposes which increase operating or financial risk, or returns
cash to shareholders prior to an IPO.
The rated facilities consist of a $30 million 5-year senior
secured revolving credit facility, and a $150 million 7-year
senior secured term loan. The term loan amortizes at the rate of
$6 million per year for the first five years and $60 million
for the remaining two years, plus 75% of excess cash flow
(defined as being after required debt amortization, working capital,
and capital expenditures) until the company achieves certain leverage
ratios. The facilities will be secured by a first lien on all of
OTC's assets, giving them first priority in the capital structure.
The Ba2 ratings on these facilities, equal to the Ba2 senior implied
rating, recognize the absence of subordinated financing or significant
levels of vendor financing supporting the bank debt.
As part of this refinancing, OTC will repay nearly $80 million
of 13.5% senior subordinated notes. The lower interest
rate on the bank debt will reduce OTC's interest burden, improving
coverage ratios and cash flow. Moody's expects EBITDA less capex
to debt service (including required amortization) will improve from 1.7
times in the year ended March 2002 to over 4 times this year as a result
of higher EBITDA generation and a 50% reduction in interest expense.
Adjusted EBITDAR to total fixed costs, including capex and catalog
expense, has varied between 1.2 and 1.5 times over
the past five years. Moody's expects this ratio will range toward
the higher end of this range following this transaction. OTC believes
it can increase the productivity of its distribution operation as a result
of changes being made to its picking process. Debt to EBITDA is
moderate at about three times, and could improve if the company
repays debt through excess cash flow or improves operating income.
Top line growth has also contributed to steady improvement in OTC's operating
margins, as the company has been able to lever fixed costs.
OTC has also benefited from conditions which have kept paper prices low
for the past five years. An upturn in paper or further increases
in postage costs could have an impact on OTC's operating margins.
Disruption in sourcing due to political issues or the potential upcoming
longshoremen's strike could have sharp short term impacts on financial
performance. The $30 million revolving credit facility provides
sufficient liquidity to meet seasonal peaks and normal operating needs,
but could be tight if operations are disrupted by shipping or sourcing
Oriental Trading Company, Inc., a subsidiary of OTC
Holdings, is a privately held company headquartered in Omaha,
Nebraska. The company sells novelties and home decor items
by catalog and Internet. Revenues were $418 million for
the fiscal year ended March 2002.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
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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