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13 May 2008
Moody's affirms NTK Holdings (Nortek) B3; rates new Sr notes B1
Approximately $1.8 billion of rated debt securities affected
New York, May 13, 2008 -- Moody's Investors Service has affirmed NTK Holdings and its subsidiary
Nortek's (together "Nortek") corporate family rating and rated
the company's new senior secured notes. The ratings affirmation
considers the company's proforma liquidity and cost reduction initiatives.
The ratings reflect the expectation that 2009 should be a better year
for remodeling and home starts than 2008. The ratings reflect the
company's high leverage and generally weak balance sheet.
The ratings outlook is negative.
The following ratings and LGD assessments have been affected:
Issuer: NTK Holdings, Inc.
Corporate Family Rating affirmed at B2,
$403 million Senior Unsecured Notes, affirmed at Caa2 (LGD6,
Issuer: Nortek, Inc.
$750 million Senior Secured Notes, due 2013, assigned
at B1 (LGD3, 32%),
$625 million Senior Subordinated Notes, affirmed at Caa1
(LGD5, 78%). Previously at (LGD4, 68%).
The following rating will be withdrawn upon the close of the transaction:
$691 million (currently $677 million outstanding) senior
secured term loan due 2011 rated Ba3 (LGD2, 19%),
$200 million senior credit facility due 2010 rated Ba3 (LGD2,
The assignment of the B1 to the company's planned senior secured
notes reflects their priority of claim in the company's capital
structure. The notes carry a first lien on the company's
property plant an equipment and the majority of the company's asset
with a few exceptions including accounts receivable, inventory,
cash and proceeds and products of certain assets that the company will
have a second lien on. The notes second lien on accounts receivable,
inventory, and cash is the primary reason why these notes are not
notched higher above the CFR. The overall notching is also affected
by Moody's estimate of the overall deficiency on total debt caused by
in part by the company's high levels of goodwill and intangibles.
Nortek's manufacturing facilities are known for their competitive
position in various markets including in the HVAC (heating and air conditioning)
and in the air exchange market. The company also has home entertainment
products that are known for producing reasonably high end components.
The B3 corporate family rating reflects the company's credit metrics and
the expectation that demand will remain weak into 2009 due to the weak
new home construction market and also weakness in the home remodeling
market. Homeowners' willingness to commit to large projects
is likely to deteriorate as long as home equity continues to decline along
with home prices. Nortek sells a full range of kitchen extraction
fans and also sells air quality systems for the home. The company's
music systems are relatively expensive. Demand is currently anticipated
to be weak into 2009 and cash flow generation is expected to be in line
with the low B rating category. However, the affirmation
of the B3 rating reflects improved liquidity as a result of the ABL.
The company is anticipated to have around $300 million available
under its ABL facility thereby providing a significant boost to Nortek
's liquidity. The company's liquidity is extremely important
given Moody's projection that the company may produce negative free
cash flow in 2008 and possibly in 2009.
The company's weak balance sheet results from a decision in 2005.
At the beginning 2005, NTK Holdings issued $250 million in
senior discount notes to pay a sizeable dividend (Moody's currently rates
the discount notes at Caa2). The company amended its financial
covenants in April 2006 in such a manner that it eliminated its acquisition
basket, and ability to pay certain dividends. Following the
amendment, in May 2006 NTK Holdings borrowed $205 million
under a senior unsecured loan facility to pay a cash dividend to shareholders
and to help fund deferred compensation payments to management (Moody's
does not rate the unsecured loan facility).
The negative ratings outlook reflects the belief that the company is still
undergoing significant revenue and margin pressure. The rating
may decline to the Caa ratings category if liquidity deteriorates,
or if new housing starts fall below current expectations and the repair
and remodeling market contracts by more than 15% over 2007's level.
Additionally, the company's cost cutting initiatives would
need to be successful enough so that the company's operating and
EBITDA margins do not contract meaningfully in 2008 or 2009 so that free
cash flow generation to debt does not fall below a negative 5%.
Nortek, Inc., headquartered in Providence, Rhode
Island, is a leading diversified manufacturer of innovative,
branded, residential and commercial ventilation, HVAC,
and home technology convenience and security products. Its products
include range hoods and other ventilation products, heating and
air conditioning systems, indoor air quality systems, and
home technology products. Revenues for the 2007 year were almost
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Glenn B. Eckert
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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