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Rating Action:

Moody's assigns B2 CFR to Sweetwater

22 Jul 2021

New York, July 22, 2021 -- Moody's Investors Service (Moody's) assigned first-time ratings to Sweetwater Borrower, LLC (Sweetwater, initially Symphony Finance Sub, LLC), including a B2 corporate family rating (CFR), B2-PD probability of default rating (PDR) and B2 ratings on the senior secured first lien revolving credit facility and term loan. The outlook is stable.

Proceeds from the proposed $638.5 million term loan, $15 million of borrowings on the proposed $100 million revolver, equity from Providence Equity Partners and rollover equity from the company's founder will be used to finance the investment by Providence Equity Partners and pay for transaction fees and expenses.

"Sweetwater has gained share in the musical retail sector by capitalizing on growing e-commerce penetration and differentiating itself with a high level of service and a personalized selling model," said Moody's analyst Raya Sokolyanska. "While leverage is high pro-forma for the investment, we expect the company's good execution capabilities to continue driving solid long-term earnings performance." The rating assignment also incorporates governance considerations, including risks associated with private equity control.

Moody's assigned the following ratings to Sweetwater Borrower, LLC:

.... Corporate family rating, assigned B2

.... Probability of default rating, assigned B2-PD

.... GTD senior secured 1st lien revolving credit facility, assigned B2 (LGD4)

.... GTD senior secured 1st lien term loan, assigned B2 (LGD4)

.... Outlook, assigned stable

RATINGS RATIONALE

Sweetwater's B2 CFR is constrained by its high leverage with an estimated 6.1x Moody's-adjusted debt/EBITDA (as of March 31, 2021) pro-forma for the transaction and the financial strategy risks associated with its private equity ownership. The company has grown above trend during the pandemic, with revenues up over 50% for the LTM period ended March 31, 2021 compared to 2019, driven by resilient demand in the category and a step change in e-commerce penetration. In addition, management adjusted EBITDA more than doubled in that period, reflecting top line growth and margin benefits primarily from modest fixed cost leverage and more efficient marketing. While Moody's expects that the company will maintain the revenue gains and the majority of margin improvement, there is risk that earnings could weaken over the next 12-18 months from very high current levels. Moody's expects debt/EBITDA of 6.0-6.3x and EBITA/interest expense of 2.5x-2.7x over the next 12-18 months, reflecting stable to modestly lower earnings. In addition, the rating reflects the company's narrow focus on the discretionary musical instruments category and risks associated with private equity ownership. As a retailer, Sweetwater also needs to make ongoing investments in social and environmental factors, including responsible sourcing, product and supply sustainability, privacy and data protection.

At the same time, the rating is supported by Sweetwater's strong track record of revenue growth averaging roughly 20% over the past 10 years, driven by increasing e-commerce penetration in the musical products sector and the company's good execution capabilities. Sweetwater's personalized customer interaction model led by extensively trained musician sales engineers differentiates it from competitors and drives high retention rates and lifetime customer value. The predominance of minimum advertised price policies in the musical product space also supports the company's ability to compete effectively based on service. Additionally, Sweetwater's investments in online content and service over the years have driven brand awareness and favorable customer acquisition costs. Sweetwater's credit profile also benefits from its position as the second largest musical instrument retailer in the US after Guitar Center. As an online only retailer, the company also has a highly variable cost model, limiting downside earnings risk. The rating also benefits from Sweetwater's good liquidity over the next 12-18 months, including Moody's expectations for positive free cash flow, good revolver availability, a springing covenant only capital structure and a lack of near term debt maturities.

The stable outlook reflects Moody's expectations for good liquidity and stable to slightly lower earnings over the next 12-18 months.

As proposed, the new first lien credit facilities are expected to provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following:

• Incremental debt capacity up to the greater of closing data EBITDA and LTM Consolidated EBITDA plus unused capacity reallocated from the general debt basket, plus unlimited amounts subject to the Closing Date First Lien Net Leverage Ratio of 5.8x. Amounts up to 100% of closing date EBITDA as well as term loan A loans may be incurred with an earlier maturity date than the initial term loans.

• The credit agreement permits the transfer of assets to unrestricted subsidiaries, up to 75% of Consolidated EBITDA, subject to "blocker" provisions, which prohibit any investment by any loan party in the form of a contribution of material Intellectual Property to any unrestricted subsidiary (other than any bona fide operational joint venture established for legitimate business purposes).

• Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, subject to protective provisions, which only permit guarantee releases if such disposition is a good faith disposition to a bona fide unaffiliated third party for fair market value

• The credit agreement provides some limitations on up-tiering transactions, including 1) the requirement for the consent of each Lender directly and adversely affected thereby (but not the Required Lenders) with respect to any modification to the pro rata sharing of payment or waterfall provisions except as otherwise provided in the Credit Documentation and 2) the requirement of 100% of the Lenders consent with respect to any reduction of any voting percentage set forth in the definition of Required Lenders.

The above are proposed terms and the final terms of the credit agreement may be materially different.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be downgraded if earnings or liquidity decline, or the company undertakes aggressive financial strategy actions. Quantitatively, the ratings could be downgraded if debt/EBITDA is maintained above 6.25x and EBITA/interest expense below 1.75x.

The ratings could be upgraded if the company maintains steady growth and good liquidity. Quantitatively, the ratings could be upgraded if debt/EBITDA is maintained below 5.0x and EBITA/interest expense above 2.5x.

Headquartered in Ft Wayne, Indiana, Sweetwater Borrower, LLC (Sweetwater) is the largest online music products retailer in the US. The company will be controlled by funds affiliated with Providence Equity Partners LLC following the planned 2021 investment. Revenues for the LTM period ended March 31, 2021 were approximately $1.3 billion.

The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. 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 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 its website www.moodys.com.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

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.

Raya Sokolyanska
Vice President - Senior 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

Margaret Taylor
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
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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