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Rating Action:

Moody's rates Claire's second lien notes Caa3; Caa2 CFR affirmed

16 Feb 2011

New York, February 16, 2011 -- Moody's Investors Service today assigned a Caa3 rating to Claire's Stores, Inc. proposed $400 million senior secured second lien notes. The company's, Caa2 Corporate Family Rating, Caa1 bank credit facilities, Caa3 senior unsecured notes, Ca senior subordinated note , and SGL-3 Speculative Grade Liquidity rating were affirmed. The rating outlook is positive.

RATINGS RATIONALE

Proceeds from the proposed senior secured second lien notes will be used to repay in full the $194 million drawn under Claire's $200 million revolving credit facility expiring in May 2013 and to refinance $196 million of the company's $1.4 billion term loan B due in May 2014.

Claire's Caa2 CFR considers Moody's view that that despite the company's adequate liquidity and ability to self fund growth capital expenditures, unless earnings significantly improve it's leverage could hover at between 8 and 9 times during the next twelve to eighteen months . This could make it difficult for the company to refinance it remaining $1.2 billion term loan that matures in May 2014, or refinance on favorable terms. Additionally, any refinancing could result in higher annual interest costs and more restrictive financial covenants. Claire's low cost of debt capital is currently an important component of the company's ability to fully cover its interest expense and to generate modestly positive free cash flow. The company is not currently subjected to any restrictive financial covenants .

The ratings are supported by Claire's strong qualitative factors including its value positioned price points, international geographic presence, well known brand name, and high margins relative to specialty retail peers. Additionally, the proposed transaction -- assuming it closes as planned -- will eliminate all of Claire's outstanding debt maturities through 2013 and reduce the amount of debt maturing in 2014 to $1.2 billion. In addition, Claire's liquidity will be bolstered by having a fully available and undrawn revolving credit facility.

If the transaction is completed as planned, Moody's expects that Claire's bank facilities will be upgraded to B3 to reflect the reduced amount of senior secured first lien bank debt in the capital structure and the additional support provided by the new senior secured second lien notes. Additionally, Moody's expects that Claire's Speculative Grade Liquidity rating will also be raised, to SGL-2. This would reflect the full pay down of the company's revolving credit facility along Moody's expectation that the company would maintain significant availability under its revolver during the next 12 to 18 months. The successful completion of the transaction, however, would not change in Claire's CFR, PDR, senior unsecured and subordinated note ratings.

The proposed $400 million senior secured second lien notes will be initially offered by a wholly-owned escrow corporation subsidiary called Claire's Escrow Corporation that will merge into Claire's upon the delivery of Claire's year-end financial statements. The year-end financial statements are required so that Claire's can meet the debt incurrence covenant in its bank credit agreement, a condition that has to be met for the company to move ahead with the proposed transaction.

The positive outlook reflects Moody's view that Claire's sales and earnings will improve, which could lead to a higher rating over time. Claire's can self fund new store openings which will drive earnings growth as will its value price points which continue to resonate with consumers. The positive outlook also reflects Moody's view that Claire's current expense discipline will continue.

Claire's CFR could be upgraded if Claire's operating performance improves to levels such that a refinancing of its debt maturities is likely and the company could fully cover its interest expense even if interest expense were to increase. Quantitatively, EBITA to interest expense would need to remain meaningfully above 1.0 time. Claire's CFR could be downgraded should operating performance or liquidity deteriorate, interest coverage weaken, or if for any reason the overall probability of default were to increase.

Rating assigned and subject to review of final documentation:

$400 million senior secured second lien notes due 2019 at Caa3 (LGD 4, 63%)

Ratings affirmed:

Corporate Family Rating at Caa2

Probability of Default Rating at Caa2

Senior secured revolver expiring 2013 at Caa1 (LGD 3, 34%)

Senior secured term loan B due 2014 at Caa1 (LGD 3, 34%)

Senior unsecured notes due 2015 at Caa3 (LGD 4, 67%)

Senior subordinated notes due 2017 at Ca (LGD 6, 94%)

Speculative Grade Liquidity rating at SGL-3

The last rating action on Claire's Stores, Inc. was on December 16, 2010 when its Corporate Family Rating and Probability of Default Rating were upgraded to Caa2 from Caa3 with a positive outlook.

The principal methodologies used in this rating were Global Retail Industry published in December 2006, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA

published in June 2009.

Claire's Stores, Inc., headquartered in Hoffman Estates, IL is the leading specialty retailer of value-priced jewelry and fashion accessories for pre-teens, teenagers, and young adults. It operates 2,981 stores and franchises 395 stores in North America and Europe. Annual revenues are about $1.4 billion.

REGULATORY DISCLOSURES

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

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

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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.

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New York
Margaret Taylor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Keith Foley
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's rates Claire's second lien notes Caa3; Caa2 CFR affirmed
No Related Data.
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