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24 Mar 2004
MOODY'S RATES SEALY'S PROPOSED LBO FINANCING; SR SECURED CREDIT FACILITIES B2; SR SUB NOTES Caa1; SENIOR IMPLIED LOWERED TO B2
Approximately $1.2 Billion of Rated Debt Affected.
New York, March 24, 2004 -- Moody's Investors Service assigned a B2 rating to Sealy Mattress
Company's ("Sealy") proposed $685 million senior
secured credit facilities and a Caa1 rating to its proposed $490
million senior subordinated notes. In addition, Moody's
downgraded Sealy's senior implied and senior unsecured issuer ratings
to B2 and B3, respectively. The rating action reflects the
company's raised risk profile, given a significant increase
in leverage to support the $1.5 billion buyout by affiliates
of Kohlberg, Kravis, and Roberts ("KKR"),
which is occurring at the same Sealy is completing a major product and
operational transformation. The rating outlook is stable.
The following ratings were affected by this action:
Senior implied rating, downgraded to B2 from B1;
$125 million senior secured revolving credit facility due 2010,
assigned at B2;
$560 million senior secured term loan B due 2012, assigned
$490 million senior subordinated notes due 2014, assigned
Senior unsecured issuer rating, downgraded to B3 from B2.
Proceeds from the term loan and notes, along with balance sheet
cash ($65 million), seasonal revolver borrowings ($15
million), the sale of a note receivable ($14 million),
and new equity contribution from KKR ($485 million), will
fund the acquisition of Sealy and the refinancing of its existing debt
(plus related transaction fees). Following the transaction,
KKR is expected to own approximately 92% of the company,
with equity rollovers from management and affiliates of Bain Capital representing
the remaining 8%. If the transactions are completed as proposed,
Moody's will withdraw its ratings on Sealy's existing senior
secured credit facilities (B1) and its existing senior subordinated notes
The ratings downgrade reflects the sizable increase in Sealy's financial
leverage associated the proposed transactions. Based on LTM February
2004 adjusted EBITDA of $164 million, Sealy's leverage
will increase from 4.5x to 6.5x. In addition,
the proposed capital structure's large term loan component leaves
Sealy exposed to future interest rate increases that could constrain already
modest cash flow levels relative to debt. Specifically, the
higher debt burden will limit the company's ability to respond to unexpected
negative business developments, including economic and competitive
threats or costs related to the ongoing transformation of its products
to a one-sided mattress. The company's limited financial
flexibility is a significant risk factor, given market share and
operating efficiency gains in recent years for Sealy's closest competitor,
Simmons Company, and the required investments that Sealy may need
to make in order to optimize its manufacturing and distribution operations.
Further, Moody's is concerned that Sealy's large debt
levels could constrain its ability to enter new product categories or
distribution channels that may offer higher growth and profit opportunities.
Despite these risks, Moody's recognizes the benefits that
flow from the transaction, which include an improved liquidity profile
by removing approaching debt maturities under the company's credit
facilities, the significant equity contribution by KKR, the
retention of the existing management team, and the continuing involvement
of Bain Capital. In addition, the ratings are supported by
management's achievements in repositioning the business to focus
on product development, operating efficiency and financial controls.
Sealy's strong operating momentum with the launch of its new one-sided
product, as well as its demonstrated working capital discipline
in recent periods, are a direct result of these strategies.
Ongoing support for the ratings is maintained by Sealy's strong brand
recognition and leading market shares, and by the fundamental long-term
stability of the bedding industry. Sealy and two other major bedding
manufacturers, Simmons (B2, stable) and Serta (National Bedding
Company - B1, stable), comprise nearly two-thirds
of all wholesale sales. Sealy holds the leading position in U.S.
and Canadian markets overall, and in the high-growth,
high-profit luxury product market segments with its Stearns &
Foster brand. While consumers can defer mattress purchases in the
short term, replacement bedding accounts for about two-thirds
of industry sales. Additional volume can come from an aging population
with increased disposable income and more second homes, greater
awareness of quality and brand by mattress consumers, and a growing
general population. Additional rating support comes from Sealy's
national presence, somewhat variable cost structure, and partial
vertical integration, which reduces the risks of potential business
disruption, while allowing the company to rapidly meet the needs
of its customers.
The stable ratings outlook reflects Moody's expectation that Sealy
will maintain its recent operating gains in coming periods with the support
of its Stearns & Foster one-sided product launch, but
that substantial debt reduction could be impeded by rollout costs and
other efficiency initiatives. Further, Moody's notes
that operating gains could moderate into the back half of the year as
the company anniversaries the initial launch of its Posturepedic one-sided
mattress. Nonetheless, the strong run-rate performance
suggested by first quarter sales and profit increases positions the ratings
well in the current rating categories. As such, continued
operating momentum and concurrent working capital discipline that allows
for rapid deleveraging (below 5.5x) could result in positive rating
actions in the coming periods. While current rating levels allow
cushion for significant one-time costs associated with the company's
product transformation and business efficiency plans, weakened credit
metrics due to longer-term competitive or operating issues or changing
strategic priorities could result in unfavorable rating actions.
The B2 rating on Sealy's senior secured credit facilities reflects their
priority in the capital structure as supported by domestic subsidiary
guarantees and collateral pledges comprising substantially all of the
assets of the borrower and guarantors (including capital stock) and 65%
of the capital stock of foreign subsidiaries. Despite these benefits,
the ratings on the facilities are at the level of the senior implied rating
due to limited tangible asset coverage and the significant portion of
the debt structure comprised by the senior secured asset class.
The final credit agreement is anticipated to contain customary limitations,
a 50% excess cash flow sweep (subject to financial performance
measures), and financial covenants governing maximum leverage,
minimum interest coverage, and maximum capital expenditures.
The Caa1 rating on Sealy's proposed senior subordinated notes reflects
their contractual and effective subordination to a material amount of
senior secured and unsecured indebtedness. The subsidiaries guaranteeing
the bank credit facility and Sealy's parent, Sealy Corporation,
will guarantee the notes on a senior subordinated basis. Provisions
in the indenture are expected to restrict additional indebtedness,
dividends, investments, liens, asset sales, affiliate
transactions, and mergers and acquisitions.
Sealy Mattress Company is a wholly owned subsidiary of Sealy Corporation
(with corporate headquarters in Trinity, North Carolina) and the
world's largest bedding manufacturer. The company manufactures
and sells a complete line of mattresses and box springs, including
those sold under the Sealy, Sealy Posturepedic, Stearns &
Foster and Bassett brand names. The company's leading U.S.
market share is estimated at around 21%. Sales for the twelve-month
period ended February 2004 were approximately $1.2 billion.
Corporate Finance Group
Moody's Investors Service
Kevin L. Ziets, CFA
Asst Vice President - Analyst
Corporate Finance Group
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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