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Rating Action:

Moody's downgrades SRAM's Speculative Grade Liquidity Assessment to SGL-3; affirms all ratings with negative outlook

15 Dec 2011

New York, December 15, 2011 -- Moody's Investors Service downgraded SRAM's speculative grade liquidity rating to an SGL--3 from an SGL-2 due to future covenant concerns. At the same time, the following ratings were affirmed: B1 CFR and PDR, Ba3 for the $605 million 1st lien senior term loan, Ba3 rating for the $50 million revolver and B3 rating for the $125 million 2nd lien term loan. The outlook remains negative.

"The downgrade of the speculative grade liquidity rating reflects our view that SRAM's leverage ratio will be below levels which would allow it to borrow from the revolver in the quarter ending March 31, 2013," said Kevin Cassidy, Senior Credit Officer at Moody's Investors Service. "This is despite the recent amendment to the revolving credit facility, which loosened covenants through December 31, 2012." Moody's believes there is sufficient cushion in 2012. Without a covenant amendment or initial public ofering, a potential covenant violation would result in SRAM being unable to access its revolver. "While we do not expect SRAM to rely on its revolver, not having this safety net would hurt its liquidity profile," added Cassidy.

Credit metrics are currently very weak for a B1 rating due to the additional debt incurred with the May 2011 recapitalization and non-recurring acquisition related accounting charges recorded in Q2 2011. However, Moody's believes that SRAM demonstrated sufficient operating resiliency, cost control and commitment to debt reduction that credit metrics should improve beginning in 2012 even if an IPO does not happen. For example, while adjusted debt/Ebitda is currently over 8x, Moody's thinks it will be around 5.5 times by the end of 2012 assuming an IPO does not happen, If an IPO were to occur in 2012, this ratio could be under 4x. "We expect debt/Ebitda to steadily come down over the next few quarters through a combination of higher earnings and debt repayment," noted Cassidy.

RATING RATIONALE

The B1 Corporate Family Rating reflects SRAM's modest scale with about $600 million of revenue, narrow product focus in bicycle component parts, and susceptibility to discretionary consumer spending. It also recognizes that while credit metrics are currently weak, they should steadily improve over the next year to more reasonable levels. The ratings are also constrained by the company's history of shareholder friendly activities such as dividends and share repurchases as well as by the potential for future acquisitions. SRAM's ratings benefit from its: 1) strong operating margins with EBITA to revenue in the high teens/low 20% range; 2) good market position within the bicycle component industry; 3) extensive product portfolio within the premium segment; and 4) brand recognition among bike enthusiasts and dealers. The ratings also benefit from the company's geographic diversification and stable industry dynamics.

The SGL 3 speculative grade liquidity rating reflects SRAM's adequate liquidity profile. SRAM's liquidity position is comprised of modest cash balances of around $15 million, good operating cash flow generation and full availability under its $50 million revolver for at least the next four quarters. The revolver expires in 2016. The maturity dates of the 1st and 2nd lien term loans (1st lien matures in June 2018 and 2nd lien matures in December 2018) enhances SRAM's liquidity position as does having a 50% excess cash flow sweep in the 1st lien term loan if certain leverage levels are not met. A minimum quarterly leverage and fixed charge covenant in the revolving credit facility is a constraint to liquidity. Mitigating this fact is that the financial covenants only have to be complied with if the company has outstanding revolver borrowings or letters of credit at the end of a quarter. The modest size of the cash balances and revolver are constraints to liquidity, but the principal liquidity restraint is the step down in the financial leverage covenant in the quarter ending March 2013. Moody's thinks the company could lose access to the revolver at this time because Moody's doesn't think it will be able to meet the required covenant absent another revision to the covenant levels.

The negative outlook reflects Moody's view that SRAM's credit metrics will exceed what is typical for a B1 issuer. For example, SRAM's debt/EBITDA ratio is currently over 8 times, while less than 6 times is closer to what is expected. The negative outlook reflects Moody's concern that SRAM may not be able to reduce leverage to below 6 times absent an IPO.

Ratings could be downgraded if credit metrics do not improve as Moody's expects by June 2012. For example, Moody's could downgrade the ratings if debt/EBITDA does not approach 6 times or if EBITA margins don't start reverting back to the high teens/low 20% range. Another aggressive debt funded shareholder return in the near to mid-term term would also spark a downgrade. The speculative grade liquidity rating would likely be downgraded further, and possibly the CFR as well, if the potential March 2013 covenant issue is not resolved by early Q3 2012.

The outlook could be stabilized if SRAM reduced financial leverage to around 6 times either by paying down debt with IPO proceeds or by paying down debt with free cash flow and improving earnings. That said, there is no upside rating pressure in the near term even if an IPO closes given the size and history of shareholder friendly moves. Because of SRAM's relatively small scale with revenue around $600 million and history of aggressive financial policies, SRAMs' sustained credit metrics need to be stronger than similarly rated consumer durables companies. For example, for an upgrade to be considered debt/EBITDA would need to approach 3 times and interest coverage needs to be moving toward 4 times.

The following rating was downgraded:

Speculative grade liquidity rating to SGL-3 from SGl-2;

The following ratings were affirmed/assessments revised:

Corporate Family Rating at B1;

Probability of Default Rating at B1;

$605 Million First Lien Term Loan at Ba3 (LGD 3, 36% from 35%);

$30 Million First Lien Revolver at Ba3 (LGD 3, 36% from 35%); and

$185 Million Second Lien Term Loan at B3 (LGD 5, 86% from 85%)

For additional information, please refer to our Credit Opinion of SRAM published on Moodys.com.

The principal methodology used in rating SRAM was the Global Consumer Durables rating methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Headquartered in Chicago, Illinois, SRAM Corporation is a global manufacturer and designer of premium bicycle components. Revenue for the twelve months ended September 30, 2011, approximated $600 million.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. 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.

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

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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.

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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.

Kevin Cassidy
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

Peter H. Abdill, CFA
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 downgrades SRAM's Speculative Grade Liquidity Assessment to SGL-3; affirms all ratings with negative outlook
No Related Data.
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