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Rating Action:

Moody's downgrades CROSSMARK's CFR to Caa1; outlook stable

25 Oct 2016

Approximately $575 million of rated debt affected

New York, October 25, 2016 -- Moody's Investors Service ("Moody's") downgraded CROSSMARK Holdings, Inc.'s ("CROSSMARK") Corporate Family Rating (CFR) to Caa1 from B3 and its Probability of Default Rating to Caa1-PD from B3-PD. In connection with this rating action, Moody's downgraded the ratings on the company's first lien senior secured bank facility (revolver and first lien term loan) to B3 from B2 and senior secured second lien term loan to Caa3 from Caa2. The rating outlook is stable.

The downgrade is the result of a continued negative trend in sales over the last 18 months, with revenues falling close to 4.5% in the first half of 2016 after sliding 7.5% in 2015 from a combination of industry headwinds and client losses. Deleveraging from planned cost savings over this period did not meet Moody's expectations, and near-term earnings deterioration and minimal debt reduction over the next 12 to 18 months will result in debt leverage sustained at high levels. In addition, Moody's projects that liquidity will be constrained over the next few quarters given the upcoming 2017 revolver maturity and the potential for covenant pressures to significantly restrict borrowing capacity under the facility.

The change in CROSSMARK's outlook to stable from negative reflects Moody's expectation for continued weakness in operating performance over next 12 to 18 months with mid-single digit EBITA margins (all metrics incorporate Moody's standard adjustments). Moody's believes the company will maintain sufficient internal liquidity to cover the majority of its basic cash needs over the next 12 months, due primarily to projected inflows from working capital liquidation.

The downgrades of the ratings on the revolving credit facility and the first and second lien term loans follow from the one-notch downgrade of CROSSMARK's CFR.

The following ratings were affected by these actions:

Corporate Family Rating downgraded to Caa1 from B3;

Probability of Default Rating downgraded to Caa1-PD from B3-PD;

$75 million Sr. Secured 1st lien Revolving Credit Facility due 2017 downgraded to B3 (LGD3) from B2 (LGD3);

$410.6 million (originally $425 million) Sr. Secured 1st lien Term Loan due 2019 downgraded to B3 (LGD3) from B2 (LGD3);

$90 million Sr. Secured 2nd lien Term Loan due 2020 downgraded to Caa3 (LGD6) from Caa2 (LGD5).

RATINGS RATIONALE

CROSSMARK's Caa1 CFR reflects the company's elevated debt/EBITDA of approximately 7.4x as of June 30, 2016 and the company's significant debt burden relative to its revenue base. Moody's expects that debt leverage will remain high over the next 12 to 18 months as anticipated cost savings may be unable to fully offset continued revenue declines. Industry headwinds, particularly, significant spending cuts by large consumer packaged goods (CPG) manufacturers and national retailers, are likely to persist and negatively affect demand for certain outsourced sales and marketing services. Coupled with business losses - including but not limited to contracts lost to competitors - the negative industry trend is likely to further pressure operating performance. Also considered in the rating is the uncertainty around both the time frame for realizing the full benefit of cost reduction measures, as well as the future success of recent business transformation initiatives. The Caa1 rating also incorporates a heightened risk of debt repurchases at distressed levels, which Moody's could view as equivalent to a default.

Moody's also remains concerned about CROSSMARK's high customer concentrations - its top 10 customers represent a significant percentage of total revenues - and competition from the two larger sales and marketing agencies (SMAs) that have historically held a dominant combined market share.

Moody's believes that CROSSMARK currently has a weak liquidity profile, and that free cash flow generation from the wind down of working capital will diminish substantially by the end of 2017. Moreover, the company's upcoming revolver maturity and Moody's expectations for covenant pressures in 2017 could significantly limit near-term financial flexibility. Financial policy risk associated with private equity ownership also is a key rating constraint.

Offsetting these risks is CROSSMARK's large scale within the SMA industry and its strong market position as one of only three dominant firms in the sector. The company also has good geographic diversification compared with smaller, regionally-concentrated competitors. The industry has substantial barriers to entry, as switching costs could be high and also because new entrants lack the ability to support national brand coverage for larger customers. In addition, cyclicality in the SMA industry is generally low due to the relative stability of demand for many consumer products being represented by these firms.

The ratings on the senior secured bank credit facilities reflect the overall probability of default for CROSSMARK, which Moody's rates Caa1-PD. The B3 ratings on the revolver and first lien term loan are one notch above the CFR, reflecting the first loss protection provided by second lien debt in the capital structure. The Caa3 rating on the second lien term loan, two notches below the CFR, reflects the facility's lien subordination to approximately $485 million of secured debt that has a first-priority claim on the company's most liquid assets.

The ratings could be upgraded if current business rationalization and transformation efforts, as well as investments in growth and improved operating efficiency, successfully deleverage the business such that debt/EBITDA can be sustained below 7.0x. In addition, free cash flow generation in conjunction with growth in EBITDA could result in an upgrade. At a minimum, positive rating actions would require the company to improve its liquidity profile, including addressing both the upcoming maturity of its revolving credit facility, as well as potential covenant pressures that could restrict borrowing capacity.

A downgrade could occur if the company experiences a delay in realizing cost savings from planned rationalization activities and investments in growth and efficiency initiatives. If adjusted debt/EBITDA does not improve or if adjusted EBITA/interest expense falls below 1.0x, negative rating actions may be taken. Additionally, deterioration in free cash flow generation or overall liquidity could also pressure the ratings.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CROSSMARK Holdings, Inc., headquartered in Plano, TX, is a sales and marketing services company in the consumer goods industry that provides service to manufacturers and retailers. The company operates three businesses: Sales Agency, Marketing Services, and International. Sales Agency includes the management of headquarter sales activities, category and space management, and retail services such as routine store coverage and project work. Marketing services include in-store product demonstrations and sampling, experiential marketing, and data collection. The company is private and is owned by affiliates of Warburg Pincus.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Manish Desai
Analyst
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

Alexandra S. Parker
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

No Related Data.
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