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Rating Action:

Moody's assigns (P) Caa1 rating to Dometic PIK Notes (Frostbite 1 AB); stable outlook

11 Apr 2011

London, 11 April 2011 -- Moody's Investors Service has today assigned a B1 corporate family rating (CFR) and a B2 probability-of-default rating (PDR) to Frostbite 2 AB, the parent company of the Dometic bank borrowing group. Moody's has also assigned a (P) Caa1 rating to the proposed EUR200 million PIK Notes due 2019 to be issued by Frostbite 1 AB, the parent of Frostbite 2 AB. The outlook on the ratings is stable.

A fund advised by EQT will use the proceeds from the PIK Notes, together with about SEK5,700 million senior bank debt and SEK4,600 million shareholder funding, to purchase Dometic for about SEK 12billion. The Enterprise Value of the transaction is about 9.2x on Moody's adjusted EBITDA.

RATINGS RATIONALE

Moody's considers the purpose of the PIK Notes to be essentially equity substitution. The (P) Caa1 rating on the Notes -- three notches below the CFR - reflects the ringfencing of this instrument from the Dometic bank borrowing group. The level of notching incorporates Moody's expectation that, following a default of the Dometic group, recoveries on the PIK Notes could be zero.

"Dometic's B1 CFR reflects the high leverage of the bank borrowing group (excluding the PIK Notes) under the new capital structure, and its exposure to cyclicality in its OEM divisions, says Tanya Savkin, Moody's Assistant Vice President and lead analyst for Dometic. "However, the assigned rating also incorporates Dometic's leading position in a niche industry, its strong brand and wide range of its product portfolio combined with attractive market dynamics."

Dometic holds leading positions in its key geographies across a majority of its products with approximately 75% of 2010 revenues generated from product segments in which Dometic is the market leader or co-leader. OEM channel contributed approximately 62% of its 2010 revenue, with the rest represented by less cyclical and more profitable aftermarket channel.

Pro-forma gross leverage post closing will be about 5.1x for the bank borrowing group (about 6.4x including the PIK Notes). Despite Dometic's high leverage in a relatively cyclical industry, the stable outlook reflects Moody's expectation that the company will achieve a significant deleveraging over the medium term through growth across all of its businesses and in particular in its aftermarket division, contributing to an eventual reduction in cyclicality.

In Moody's view, Dometic's liquidity profile is reasonable, supported by the undrawn SEK600 million revolving credit facility, undrawn SEK300 million CAPEX facility and solid cash flow generation. Dometic's B2 PDR reflects the fact that the debt within the restricted group is solely pari-passu bank debt. Maintenance financial covenants under the senior bank facilities will be established with a minimum headroom of approximately 25%. Dometic's exposure to currency transaction risks will be partially mitigated by its ability to draw on its bank facilities in currencies that reflect the group's various exposures.

The PIK Notes mature in 2019, beyond the maturity of Dometic's bank restricted group borrowings. They are structurally subordinated to all indebtedness of Dometic's bank restricted group, and are not guaranteed by, and do not have any creditor claim on, the bank restricted group. In Moody's view, a default on the Notes should not impact Dometic's bank restricted group. Frostbite 1 may, at its sole option, pay interest on the Notes in cash or in kind. Dometic's bank covenants permit distributions to Frostbite 1 if leverage (excluding the Notes) falls below 2.25x; and Frostbite 1 can distribute payments to shareholders if consolidated leverage (including the Notes) falls below 3.75x.

Moody's understands that consolidated financial statements will only be produced at the bank borrowing group level, by Frostbite 2 AB (so excluding the PIK Notes). Ratings guidance therefore excludes the impact of the PIK Notes. Positive pressure on the ratings could evolve if Dometic's total leverage falls to 4.0x, FCF to debt ratio approaches 7% and EBITA to Interest expense ratio reaches 3.0x. Conversely, negative pressure could develop if, inter alia, the group fails to reduce total leverage during 2011.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the term loan. A definitive rating may differ from a provisional rating.

The principal methodology used in this rating was Global Manufacturing methodology published in December 2010 and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Headquartered in Sweden, Dometic is a leading manufacturer of leisure products for the caravan, motor home, automotive, truck, hotel and marine markets in almost 100 countries. The company operates 21 production facilities in 8 countries and sells its products under Dometic, Waeco, Marine Air Systems, Condaria, Cruisair and Sealand brands. Europe and the U.S. are the company's key geographies, accounting for 87% of revenue for the year ended December 31, 2010. The company's largest segment is recreational vehicles (RVs), accounting for 57% of 2010 revenue. The company reported SEK7,958 million of sales and SEK1,345 million of Adjusted EBITDA in 2010 and employed 6,441 people.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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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.

London
Tanya Savkin
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Chetan Modi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns (P) Caa1 rating to Dometic PIK Notes (Frostbite 1 AB); stable outlook
No Related Data.
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