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Rating Action:

MOODY'S RATES SEALY'S PROPOSED LBO FINANCING; SR SECURED CREDIT FACILITIES B2; SR SUB NOTES Caa1; SENIOR IMPLIED LOWERED TO B2

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 at B2;

$490 million senior subordinated notes due 2014, assigned at Caa1;

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 (B3).

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.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kevin L. Ziets, CFA
Asst Vice President - Analyst
Corporate Finance Group

No Related Data.
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