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Rating Action:

MOODY'S UPGRADES NEBRASKA BOOKS SR SEC BANK CREDIT FACILITY TO Ba3, CONFIRMS OTHER RATINGS. OUTLOOK IS CHANGED TO POSITIVE.

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 additional debt.

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 store growth.

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 and publishers.

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 million.

New York
Julia Turner
Managing Director
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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