New York, April 07, 2021 -- Moody's Investors Service, ("Moody's") assigned
ratings to DEI Sales, Inc. (dba Sound United), including
a B2 Corporate Family Rating (CFR) and a B2-PD Probability of Default
Rating. Concurrently, Moody's assigned a B2 rating to the
company's proposed $380 million senior secured first lien term
loan due 2028. The outlook is stable.
Net proceeds from the proposed $380 million first lien term loan,
after paying fees and expenses, are expected to be used to refinanced
approximately $322.3 million of existing debt, and
to pay a $52 million dividend distribution to shareholders.
Concurrent with the transaction, the company will also enter into
a new $75 million asset based lending (ABL) revolving facility
due 2026 (unrated) that is anticipated to be undrawn at close.
All ratings are subject to Moody's final review of the documentation.
Assignments:
..Issuer: DEI Sales, Inc.
.... Probability of Default Rating,
Assigned B2-PD
.... Corporate Family Rating, Assigned
B2
....Senior Secured 1st Lien Term Loan,
Assigned B2 ( LGD4)
Outlook Actions:
..Issuer: DEI Sales, Inc.
....Outlook, Stable
RATINGS RATIONALE
Sound United's B2 CFR broadly reflects its high financial leverage
with debt/EBITDA expected at around 3.9x for fiscal year end March
31, 2021 (ratios are Moody's adjusted, otherwise stated),
pro forma for the proposed transaction and the recent Bowers & Wilkins
(B&W) acquisition. Sound United's core products are discretionary
with exposure to cyclical consumer spending and changes in consumer preferences
and technology trends. In particular, component audio speakers
and AV receivers, the company's largest revenue contributors,
are mature segments of the home audio market and are exposed to the increased
penetration of sound bars, wireless speakers, and all-in-one
devices. Also, the consumer electronics industry is highly
competitive featuring larger players with greater financial resources,
and the company has supplier and customer concentration. Governance
factors consider the company's aggressive financial policies under
private equity ownership, including high financial leverage,
growth through acquisitions strategy, and debt funded shareholder
distributions.
Sound United's credit profile also reflects its solid foothold in
its core audio products with well-known brands in key product categories
that garner some support from a core end customer base including sound
bars, wireless speakers, and all-in-one devices.
The acquisition of B&W further enhanced the company's product
portfolio, adding a well-recognized brand in the premium
audio category with better growth prospects than audio speakers and AV
receivers. Demand for the company's products has been very
high over the past few quarters, benefiting from the increase in
consumer spending on home entertainment. The legacy Sound United
segment reported year-over-year revenue and adjusted EBITDA
(management calculation) growth of 22% and 40% respectively,
for the third quarter ending December 31, 2020. Moody's
expects continued good consumer demand at least thought the first half
of calendar 2021, that combined with the company's historically
high backorder levels should support stable revenue and EBITDA in fiscal
2021. In addition, the company expects to achieve about $24
million of synergies in the next 12 months. Sound United has good
geographic diversification with almost 50% of sales outside the
US, primarily in Europe and Japan. the company's very
good liquidity is supported by its relatively healthy cash balance of
$80 million, Moody's expectations for free cash flow
in the $45-$50 million range over the next 12 months,
and its access to an undrawn $75 million ABL revolver due 2026,
and lack of meaningful near-term debt maturities.
The B2 rating assigned to the company's proposed $380 million
first lien term loan consistent with the CFR reflects the term loans'
preponderance within the company's capital structure.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Moody's
analysis has considered the effect on the performance of Sound United
from the current weak global economic activity and a gradual recovery
for the coming months. Although an economic recovery is underway,
it is tenuous, and its continuation will be closely tied to containment
of the virus. As a result, the degree of uncertainty around
our forecasts is unusually high. Moody's regards the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety. The weak economic conditions
experienced because of the coronavirus pandemic is a unique downturn with
mixed effects on Sound United's business. Country lockdowns
and social distancing measures in efforts to curve the spread of the pandemic
negatively impacted the company's sales and supply chain due to
retail stores and manufacturing facilities closures, as well as
equipment installers inability to access customers' homes.
However, home audio equipment demand subsequently increased to very
high levels as consumers spending shifted to home improvement, and
entertainment activities such as movie theaters closed or restricted access
in 2020. Moody's expects these activities to be more broadly
open in 2021 but still below pre-coronavirus levels and for consumer
demand to continue to be elevated at least through the first half of 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation for continued good
consumer demand at least through the first half of calendar 2021 combined
with Sound United's historically high backorder levels should support
debt/EBITDA leverage remaining at around 3.9x over the next 12-18
months. The stable outlook also reflects Moody's expectations
the company will maintain good liquidity over the next 12-18 months.
Ratings could be upgraded if the company demonstrates consistent organic
revenue and earnings growth, with debt/EBITDA sustained below 3.5x,
and free cash flow/debt percentage in the high single digits. A
ratings upgrade would also require maintenance of at least good liquidity
and financial policies that support credit metrics at the above levels.
Ratings could be downgraded if the company's revenue or profit margin
deteriorates, or if debt/EBITDA is sustained above 4.5x.
Ratings could also be downgraded if the company completes a large debt-financed
acquisition or shareholder distribution that materially increases financial
leverage, or if liquidity deteriorates for any reason including
negative free cash flow or increased reliance on the revolving facility.
The proposed first lien credit agreement contains provisions for incremental
debt capacity up to the greater of $130.0 million and 100%
of consolidated pro forma EBITDA for the most recent test period,
plus reallocated amounts under the general debt basket, plus additional
amounts subject to a pro forma first lien senior secured net leverage
requirement not to exceed 3.0x (if pari passu secured).
Up to $65 million of the incremental term loans may be incurred
with an earlier maturity date than the initial term loans. Subsidiaries
must provide guarantees whether or not wholly-owned, eliminating
the risk that guarantees will be released because they cease to be wholly-owned.
There are no express "blocker" provisions which prohibit the
transfer of specified assets to unrestricted subsidiaries; such transfers
are permitted subject to carve-out capacity and other conditions.
There are no express protective provisions prohibiting an up-tiering
transaction. The above are proposed terms and the final terms of
the credit agreement can be materially different.
The principal methodology used in these ratings was Consumer Durables
Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Vista, California, DEI Sales, Inc.
through its subsidiary Sound United, LLC (Sound United) is a designer
and manufacturer of home audio equipment under brands Denon, Polk
Audio, Marantz, Definitive Technology, HEOS, Classe,
Boston Acoustics, and Bowers & Wilkins. Pro forma for
the B&W Acquisition annual revenue are approximately $800 million.
The company has been majority-owned by affiliates of Charlesbank
Capital Partners, LLC since 2011, with FS KKR Capital Corp
holding a minority stake since 2020.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
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For any affected securities or rated entities receiving direct credit
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and whose ratings may change as a result of this credit rating action,
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Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued [with/with no] amendment resulting from that
disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Oliver Alcantara
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 1 212 553 0376
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