Approximately $1.1 billion of debt affected
New York, April 12, 2011 -- Moody's Investors Service assigned a B1 to Nortek, Inc.'s
(Nortek") proposed $350 million senior secured term loan
due 2017 and a Caa1 to the proposed $500 million senior unsecured
notes due 2021, and affirmed its B3 Corporate Family Rating and
B3 Probability of Default Rating. Proceeds from the term loan and
notes issuance will be used to redeem the company's existing secured
notes due 2013 and to pay redemption premiums and other related fees and
expenses. In a related rating action, Moody's upgraded
the company's existing senior unsecured notes due 2018 to Caa1 from
Caa2. The outlook is stable.
The following ratings/assessments were affected by this action:
Corporate Family Rating affirmed at B3;
Probability of Default Rating affirmed at B3;
Proposed senior secured term loan due 2017 assigned B1 (LGD2,25%);
Proposed senior unsecured notes due 2021 assigned Caa1 (LGD5, 73%);
$250 million senior unsecured notes due 2018 upgraded to Caa1 (LGD5,
73%) from Caa2 (LGD5, 88%).
The company's speculative grade liquidity rating remains SGL-3.
Nortek's B3 Corporate Family Rating remains constrained by its levered
capital structure. Despite the likelihood of some margin expansion
and new business, Nortek's debt leverage is high. The
proposed debt issuance increases the company's debt-to-EBITDA
to 7.5 times from 6.9 times on a pro forma basis through
December 31, 2010, which excludes full-year operating
results of Ergotron, acquired in December 2010. However,
EBITA-to-interest expense improves to about 1.5 times
from 1.2 times for the same time period (all ratios adjusted per
Moody's methodology), providing some offset to the company's
leveraged capital structure. The rating also considers the company's
exposure to cyclical end markets including residential new construction
and residential repair and remodeling, as well as the commercial
construction industry. It is exposed to volatile raw material costs
for commodities such as steel, copper, and aluminum,
which are negatively impacting the company's HVAC businesses.
The company's history of shareholder distributions contributing to creditor
losses in the past remains a recurring risk consideration, despite
Nortek's portfolio of well-established brand names, and solid
market positions across a broad array of building products support its
credit profile. Additionally, Nortek's cost reduction actions
are providing some counter balance to weak end markets and higher raw
material costs. Its EBITA margin was 6.9% for 2010
(Moody's adjusted) and the company's size based on revenues is robust
relative to the rating. Revolver availability supports the rating
Proceeds from the term loan and notes issuance will be used to redeem
all of the company's $753.3 million 11.0%
senior secured notes due 2013, and to pay redemption premiums and
other related fees and expenses. The proposed debt offerings will
improve interest coverage ratios slightly due to the proposed debt having
lower interest rates than the Notes due 2013, despite a higher combined
principal balance. The lower interest expense, approaching
$20 million annually, will also improve free cash flow.
Lastly, the transaction improves Nortek's debt maturity profile,
reducing the amount of maturing debt that needs to be addressed in 2013.
The B1 rating assigned to the proposed $350 million senior secured
term loan due 2017, two notches above the corporate family rating,
incorporates its first priority interest in substantially all of the company's
non-current domestic assets, second priority interest in
the revolving credit facility's collateral, and the support provided
by upstream guarantees from Nortek's material domestic subsidiaries.
The Caa1 rating assigned to the proposed $500 million senior unsecured
notes due 2021, one notch below the corporate family rating,
incorporates their position as junior debt in Nortek's capital structure.
The upgrade of Nortek's $250 million 10.0%
senior unsecured notes due 2018 to Caa1, one notch below the corporate
family rating, from Caa2 results from the reduced amount of senior
debt in Nortek's capital structure. Nortek's partial
recapitalization reduces its secured committed credit facilities by approximately
$403.3 million. This reduction in secured debt increases
the recovery values for the unsecured debt in a recovery scenario,
warranting the lift in the rating assigned to the company's Notes
due 2018. These senior unsecured notes will be pari passu with
the company's proposed senior unsecured notes due 2021.
The stable outlook reflects Moody's expectations that Nortek's operating
margins will improve modestly, resulting in credit metrics that
are more supportive of the rating. Revolver availability also gives
the company some financial flexibility to contend with ongoing uncertainties
in the residential new construction and repair and remodeling sectors.
Although Moody's anticipates improving operating margins, Nortek
must demonstrate its ability to generate meaningful levels of free cash
flow. Over the intermediate term an improved liquidity profile
and operating performance that results in debt-to-EBITDA
sustained below 5.0 times and EBITA-to-interest expense
comfortably above 2.0 times (all ratios adjusted per Moody's methodology)
could result in a positive rating action.
Factors which might pressure the ratings include erosion in the company's
financial performance, more debt financed acquisitions, any
dividends to shareholders or a deteriorating liquidity profile.
Debt-to-EBITDA sustained above 6.0 times or EBITA-to-interest
expense remaining below 1.0 times (all ratios adjusted per Moody's
methodology) for an extended period of time would likely result in rating
The principal methodologies used in this rating were Global Manufacturing
Industry published in December 2010. Other methodologies used include
Loss Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Nortek, Inc., headquartered in Providence, Rhode
Island, is a diversified manufacturer of branded, residential
and commercial building products. Its products include residential
ventilation products, technology products, and air conditioning
and heating products for residential and commercial applications.
Ares Management LLC ("Ares"), through its respective funds,
is Nortek's largest shareholder. Revenues for 2010 totaled
approximately $1.9 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns B1 rating to Nortek's proposed sr. sec. term loan; Caa1 rating to proposed sr. unsec. notes
250 Greenwich Street
New York, NY 10007