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Rating Action:

Moody's assigns Harbor Freights proposed $1 billion term loan at B1

Global Credit Research - 25 Apr 2012

Approximately $1 Billion of Debt Securities Affected

New York, April 25, 2012 -- Moody's Investors Service today assigned Harbor Freight Tools USA, Inc.'s ("HFT") proposed $1 billion term loan at B1. In addition, the Corporate Family Rating and Probability of Default Rating of Ba3 were affirmed. The rating outlook is stable.

Proceeds from the new senior secured term loan along with borrowings under its proposed $400 million unrated revolving credit facility and excess cash on the balance sheet will be used to refinance approximately $641 million of existing debt and the balance will be used to fund a dividend to HFT's shareholders.

The following rating is assigned subject to receipt of final documentation:

Proposed $1 billion term loan due 2019 at B1 (LGD 4, 62%)

The following ratings are affirmed:

Corporate Family Rating at Ba3

Probability of Default Rating at Ba3

The following ratings are affirmed to be withdrawn upon their repayment:

$25 million revolving credit facility at Ba3 (LGD 4, 50%)

$750 million term loan facility at Ba3 (LGD 4, 50%)

The affirmation of the Ba3 Corporate Family Rating acknowledges that while HFT leverage will increase due to the incremental debt being used to finance a dividend, debt to EBITDA will only rise temporarily and will remain below 4.5 times. Pro forma for the transaction HFT debt to EBITDA will be around 4.3 times at July 31, 2012.

HFT's Ba3 Corporate Family Rating reflects its long term track record of paying sizable debt financed dividends to its shareholders. This has resulted in HFT having about a ten year history of periodically increasing its debt levels and then subsequently deleveraging from debt repayments and earnings growth.

The rating also acknowledges HFT's small size relative to the larger home improvement retailers as well as its narrow product niche. The rating is supported by HFT's unique niche in providing value priced tools and equipment which has resulted in strong positive same store sales growth. In addition, HFT's direct sourcing strategy drives high EBIT margins. Value priced retailers, such as HFT, are well positioned in the current economic environment and will maintain share gains realized during the most recent recession.

The stable outlook considers HFT's history of debt financed dividends which Moody's believes will prevent leverage from improving over the long term despite future earnings growth. The stable outlook also acknowledges an expectation that new store expansion will be measured and consistent with historical levels.

In view of the company's track record of debt financed dividends, Moody's believes an upgrade in the near term is unlikely. Longer term, an upgrade would require greater comfort that HFT financial policy will remain balanced and prudent. At the same time, the company would need to maintain moderate financial leverage with debt to EBITDA sustained below 4.0 times.

Ratings could be downgraded should operating performance falter or should HFT undertake further debt financed dividends that resulted in a sustained increase in leverage. Quantitively, ratings could be downgraded if we expected the company to sustain debt to EBITDA above 4.5 times.

The principal methodology used in rating Harbor Freight Tools USA was the Global Retail Industry Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Privately-held, Harbor Freight Tools USA, Inc., headquartered in Calabasas, California, sells value priced tools and equipment through 384 stores in 45 states as well as through the internet and catalogues. Revenues are about $2.0 billion.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

Margaret Taylor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Harbor Freights proposed $1 billion term loan at B1
No Related Data.

 

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