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09 Jul 2003
MOODY'S RATES ORIENTAL TRADING'S NEW FACILITY Ba3, DOWNGRADES EXISTING RATINGS
Approximately $290 Million of Debt Rated
New York, July 09, 2003 -- Moody's Investors Service downgraded the existing ratings of Oriental
Trading Company, Inc. ("OTC"), and assigned
a rating of Ba3 to the company's new revolving credit and term loan
facilities. The rating outlook is stable.
The rating actions follow a decision by Oriental Trading to redeem a large
amount of holding company preferred stock with senior secured bank debt.
Prior ratings had incorporated the expectation that Oriental Trading would
use its free cash flow to reduce debt, and that debt at the operating
company would not increase. The proposed transaction significantly
increases the level of secured debt at the operating company, which
is the rated entity. The ratings continue to reflect the strength
and consistency of Oriental Trading's business, and its ability
to comfortably service the new debt levels.
The following ratings were affected by this action:
Senior implied rating to Ba3 from Ba2;
Senior secured credit facilities to Ba3 from Ba2;
Senior unsecured issuer rating to B1 from Ba3.
Ratings of Ba3 were assigned to OTC's new $40 million secured
revolving credit facility and $250 million secured amortizing term
loan.
Ratings of the existing bank debt will be withdrawn when the new facilities
are closed.
The ratings continue to recognize OTC's good cash flow generation,
which has been sufficient to service debt resulting from its leveraged
buyout in 2000 and to internally finance growth objectives and operating
needs; debt protection measures which are generally strong relative
to other companies in OTC's rating category; demonstrated low demand
volatility despite the discretionary nature of its products; the
benefits of diversification from a large and fragmented customer base;
and low inventory risk as a result of low product obsolescence and consistently
high gross margins.
The ratings also recognize OTC's ability to leverage certain operating
costs as it continues to grow existing business lines, tempered
by high growth in catalog costs and the need to finance additional infrastructure
within the medium term if the company meets growth expectations.
The ratings reflect the replacement of preferred obligations at the parent
level with secured debt at the operating company, albeit at a lower
effective interest cost; short term risks to profitability due to
high growth in catalog spending; exposure to external shocks,
such as increases in paper and postage costs and political risks affecting
vendors in Asian markets; and seasonality of operating income and
cash flow generation, which is concentrated in the fourth calendar
quarter. OTC's sales are closely tied to holidays and special
events, and leveraging of fixed costs causes profits to rise disproportionately
during the holiday quarter.
The rating outlook is stable. More efficient operations and higher
operating leverage due to sales growth increased the operating cash flow
available for debt reduction. Moody's expects OTC's
gross income to continue to grow more quickly than operating expenses,
which should continue to improve debt servicing capability. However,
the rating and outlook consider that OTC has demonstrated a pattern of
replacing or increasing debt levels through subsequent refinancing of
its debt agreements. The new term facility has a small annual amortization
requirement as well as a cash sweep mechanism for excess cash flow (as
defined). The new facilities also allow for an increase in debt
levels under certain conditions which have yet to be defined. A
negative rating or outlook action could follow a decline in fundamental
business performance or increase in debt levels, either of which
would result in deterioration in leverage measures. Ratings could
also respond negatively to a change in business strategy or a rise in
expenditures that do not produce commensurate returns. Ratings
could rise if OTC demonstrates a commitment to permanent reduction in
debt levels.
Following this transaction, OTC's projected debt to EBITDA
will increase to 2.5 times, and fixed cost coverage,
including catalog costs, is expected to be 1.5 times.
The ratings anticipate that sales and gross profits will continue to rise
more quickly than catalog and other operating expenses due to a certain
amount of price elasticity and continued opportunities to prospect for
new customers. Moody's notes that OTC may need to increase
distribution capacity if sales continue current growth trends, which
could require expenses to increase or could temporarily reduce operating
margins.
The new bank facilities consist of a $40 million five-year
revolving credit facility and a $250 million term loan with final
maturity of seven years from closing. The term loan will have quarterly
amortization payments totaling $13 million annually starting the
quarter after closing. Both facilities are fully secured by essentially
all of OTC's assets, and are guaranteed by OTC's parent
company (OTC Holdings) and all subsidiaries. OTC's total
assets are lower than the initial amount of secured debt.
Oriental Trading Company, 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 $482 million for the fiscal year
ended March 2003.
New York
Charles O'Shea
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Marie Menendez
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
No Related Data.
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