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09 Aug 2002
MOODY'S UPGRADES NEBRASKA BOOKS SR SEC BANK CREDIT FACILITY TO Ba3, CONFIRMS OTHER RATINGS. OUTLOOK IS CHANGED TO POSITIVE.
Approximately $220 Million of Debt Securities Affected.
New York, August 09, 2002 -- Moody's Investors Service confirms B3 ratings on the senior subordinate
notes, due in 2008, of Nebraska Book Company, Inc.,
and the Caa1 rating on the senior discount debentures of its parent company,
NBC Acquisition Corp, due in 2009. Moody's also upgrades
the Nebraska Books Senior Secured Syndicated Credit Facility consisting
of a $50 million revolver, $11.1 million term
loan A, and a $23.8 million term loan B. The
rating outlook is changed from stable to positive.
The ratings reflect Nebraska's high leverage; modest operating cash
flow generation after capital expenditures; high seasonal working
capital needs; and the increased cash interest burden beginning in
2003. Moody's also recognizes the lack of significant organic growth
opportunities due to market saturation of college bookstores and a limited
supply of used books; and the risks faced by the company as it diversifies
beyond its core business.
The ratings are supported by Nebraska's stable operating profitability;
the low volatility in distribution of used text books; short inventory
cycles and excess demand for used textbooks that mitigate obsolescence
risk; the company's conservative expansion strategy; the tenure,
expertise, and track record of senior management; and the company's
continued success of steadily increasing franchise value without incurring
The upgrade in the ratings for the senior secured credit facilities is
motivated by the decreased amount of senior debt relative to tangible
assets and overall enterprise value, and to other debt in the capital
structure, as well as more rapid amortization of the term loan.
Collateral coverage is improved based on increased enterprise value and
stronger tangible asset coverage which increased to a range of 1.5x
to 2.0x depending on seasonal usage under the revolver, versus
a range of 1.1x to 1.4x at the time of the initial rating.
The positive outlook incorporates the expectation of modest sales growth
as Nebraska remains moderately acquisitive and maintains its focus on
increased sourcing of used books. Moody's expects Nebraska to continue
to fund potential opportunistic expansion through internally generated
cash flow. The positive outlook also includes expectations that
the company will be able to maintain profit margins at historical levels,
and will continue to reduce debt with excess cash flow. The ratings
are likely to rise if Nebraska meets with further success in deriving
profits from diversification of its business lines, especially distance
learning, while also maintaining a conservative expansion strategy.
The ratings could stabilize or fall if significant senior debt is added
to the capital structure for working capital or acquisition needs;
if the competitive landscape changes significantly and Nebraska's ability
to compete is limited by its high debt levels; or if future cash
flow is severly strained by diversifying into new products or services.
Nebraska Book's business exhibits low volatility and low business risk,
which enables it to sustain higher financial risk relative to other specialty
retailers in its rating category. Nebraska has preformed well operationally,
exhibiting consistent sales growth as well as consistent EBITDA margins
hovering around 14%. The company has been able to reduce
debt relative to earnings, with adjusted debt relative to EBITDAR
declining from 7.3X at the time of the initial rating to 4.5x
in 2002. Interest coverage has increased from 1.4 X in 1999
to 1.8X in 2002. The company has increased their ROA,
after adjusting for the treatment of goodwill amortization, from
14% in 1999 to 19% in 2002 by more efficient management
of assets particularly in its retail bookstore segment. The company
has been able to support its sales growth (11.5% CAGR) and
store growth, from 56 in 1998 to 108 in 2002, through internally
generated cash flow and enterprise value has grown consistently.
Liquidity availability under the revolver during peak borrowings may be
somewhat tight, and until this year, cash balances have been
low. Operating cash flow could become strained when the senior
discount debentures begin paying cash interest in 2003. The still-high
debt levels may also limit Nebraska's flexibility to raise capital in
order to finance new products and services development or to support accelerated
The retail segment of Nebraska's operations has grown more rapidly than
its wholesale operations. The retail and wholesale segments represented
60% and 35% of revenues in the year ending March 31,
2002, respectively. Growth in retail college bookstores is
driven by student enrollment, which is expected to increase as the
children of the baby boomers enter college. Bookstores also cater
to a somewhat captive audience based on location, product offers,
one stop shopping for course materials, and financial aid based
payment arrangements. However, the owners and managers of
college bookstores compete in a mature industry with high barriers to
entry from greenfield operations and additional growth has come for acquiring
market share. Although the company employs a conservative growth
strategy based on selectively adding new stores through acquisitions,
it faces the risk of cannibalizing sales from its wholesale segment.
To mitigate this risk, the company is selectively acquiring bookstores
on desirable campuses which it defines as a campus where the company does
not currently buy or sell used books and does not have a strong relationship
with the current bookstore's management. The strong demand for
used textbooks has historically outstripped supply by a significant margin,
leading to low volatility in this segment. The company's growth
prospects are limited by acquiring an adequate supply of used books.
To improve its supply of used books, the company has developed promotional
programs with students and bookstores. However, the success
of these programs may erode margins by somewhat raising costs.
The used textbook business is subject to obsolescence risk primarily resulting
from publishers' revision schedules. This risk is partially mitigated
by short inventory cycles, the overhang of demand, and Nebraska's
relationships and ability to gather intelligence from college books stores
At both the retail and wholesale level, Nebraska faces risk from
two major competitors who have a greater presence in the retail segment.
If the intensity of competition for acquisitions increases, Nebraska
could be at a disadvantage due to its high debt levels.
The company continues to expand horizontally into areas that leverage
its existing expertise and infrastructure, such as distance learning.
As Nebraska expands further into complementary services, it will
face diversification risk. Moody's has recognized the company's
success in using complementary services to support sourcing and sales
of used books and increasing customer retention by offering turnkey management
systems, but also recognizes the risks of diversification and lack
of sufficient returns for some ventures. The risk related to diversification
is also partially mitigated by leveraging existing expertise and infrastructure
in products such as distance learning.
The senior secured credit facility consists of a $50 million revolving
credit facility, and two amortizing loans totalling $34.9
million. The availability under the revolver is controlled by a
borrowing base of eligible account receivables and eligible inventory.
The revolving credit facility and the term loan facilities are secured
by substantially all the tangible and intangible assets of the company
and are guaranteed by the parent and by any future subsidiaries.
Moody's believes that the senior lenders are adequately secured by the
tangible asset coverage in the inventory and receivables of the company
as well as the enterprise value of the company. In 2002,
Nebraska Books prepaid $10 million of the term loans ahead of the
amortization schedule. The senior secured credit facility represents
16% of the company's outstanding debt (29% if fully drawn)
as of March 2002, compared to 31% of the company's total
debt (41% if fully drawn) when the debt was first issued.
Headquartered in Lincoln, Nebraska, Nebraska Books,
a wholly owned subsidiary of NBC Acquisition Corp., is one
of the largest wholesale distributors of used college textbooks.
The company also operates approximately 108 bookstores in or adjacent
to college campuses. For the year ending March 31, 2002,
annual revenues were $339 million and net earning were $11
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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