New York, January 12, 2011 -- Moody's Investors Service assigned a Ba1 rating to Compass Diversified
Holding's $325 million senior secured revolving credit facility
and a B1 rating to the $200 million senior secured term loan (collectively
referred to as the $525 million senior secured credit facility).
At the same time, Moody's affirmed the Ba3 corporate family rating,
B1 probability of default rating and SGL 2 speculative grade liquidity
rating. The rating outlook remains stable. Ratings on the
existing term loan and revolver will be withdrawn upon closing of the
The proceeds are expected to be used to repay amounts outstanding under
the existing senior secured credit facility ($74 million term loan
and $30 million revolver) and to fund future acquisitions.
"Compass has historically financed its acquisitions through revolver
draw downs that were later repaid with operating cash flow,"
said Kevin Cassidy, Senior Credit Officer at Moody's Investors
Service. "We expect this practice to continue after the company
deploys the $95 million of proceeds from the offering,"
he added. Based on September 2010 information, proforma for
the refinancing and $70 million equity offering in November 2010,
the company would have no revolver borrowings, $200 million
of funded debt outstanding and almost $115 million of cash.
The Ba3 corporate family rating reflects the company's strong industry
diversification, low financial leverage and good interest coverage.
The rating also benefits from the company's size with revenue around $1.6
billion, strong geographic diversification throughout the US and
strong operating and financial controls over its subsidiaries.
In addition to distributing the majority of its operating cash flow to
shareholders, the rating is constrained by the uncertain economy,
the extreme earnings volatility in its staffing business and by fluctuating
operating margins in most of its other businesses.
The Ba1 rating for the revolver and the B1 term loan rating reflect both
the overall probability of default of the company, to which Moody's
assigns a PDR of B1, and a loss given default of LGD 2, 13%,
for the revolver and LGD 4, 56%, for the term loan.
The term loan contains a "last out" provision whereby any payments,
including in liquidation, are required to be applied to the revolver
before the term loan. The term loan and revolver are issued by
Compass Diversified Holdings and are not guaranteed by its operating subsidiaries,
but are secured on a first lien basis by Compass' assets, including
intercompany loans, which are secured on a first lien basis by each
subsidiary's assets. Because of the "last out" provision,
the revolver is ranked ahead of the term loan in our LGD notching template.
The stable outlook reflects Moody's expectation that despite the weak
job market and continuing uncertainty in discretionary consumer spending,
Compass will continue generating free cash flow in the fourth quarter
of 2010 as it did in the third quarter and that it will maintain financial
leverage between 2x and 3x and interest coverage around 4x. Our
expectation that the company will continue to distribute a substantial
portion of its free cash flow, but will not increase leverage to
fund a distribution is reflected in the outlook. Reducing leverage
after an acquisition with operating cash flow is critical to the outlook.
There is minimal near term upward rating momentum due to the continuing
weak economy and mounting raw material price pressure. A positive
outlook could be considered over the longer term if Compass continues
to demonstrate good execution of its business strategy, increases
its international diversification, does not become concentrated
in any one industry through additional acquisitions, and is able
to improve its operating performance beyond previous levels. In
addition to these factors, a significant increase in revenue and
moderation of shareholder payouts would be necessary for an upgrade.
Key credit metrics driving potential upward ratings pressure would be
improving operating margins to the low double digits (currently around
5%) and consistent generation of free cash flow with FCF/adjusted
debt of at least 20%.
While not likely, downward rating pressure could arise if the company
revises its business strategy and targets acquisitions that do not have
stable cash flow or if Compass increases its concentration in any one
industry. A large debt funded dividend or share repurchase would
also pressure the ratings. Key credit metrics driving potential
downward ratings pressure would be adjusted leverage approaching 4x for
a sustained period, and interest coverage below 3. Failure
to improve operating margins or a return to the consumption of cash could
also result in negative rating actions.
The following ratings were assigned:
$325 million revolving credit facility maturing in January 2016
at Ba1 (LGD 2, 13%);
$200 million term loan maturing in January 2017 at B1 (LGD 4,
The following ratings were affirmed:
Corporate Family Rating at Ba3;
Probability of Default Rating at B1;
Speculative grade liquidity rating at SGL 2
Moody's subscribers can find further details in the Compass Credit Opinion
published on Moodys.com
The last rating action was on September 25, 2009, where Moody's
downgraded the speculative grade liquidity rating to SGL 2 from SGL 1.
The principal methodology used in rating Compass was Moody's Special Comment,
"Analytical Considerations in Assessing Conglomerates" published in September
2007, the Global Consumer Durables rating methodology published
in October 2010 and Loss Given Default for Speculative-Grade Non-Financial
Companies in the U.S., Canada and EMEA published in
June 2009. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's website.
Compass' business strategy is to acquire and manage businesses that operate
in industries with long-term macroeconomic growth opportunities,
have positive and stable cash flows, face minimal threats of technological
or competitive obsolescence and have strong management teams largely in
place. The company holds majority ownership interests in eight
distinct unrelated operating subsidiaries: Advanced Circuits,
American Furniture Manufacturing, Anodyne Medical Devices,
Fox Factory, Halo Branded Solutions, Staffmark (formerly known
as CBS Personnel), Liberty Safe and ERGObaby. Its strategy
is to acquire and manage businesses that operate in industries with long
term macroeconomic growth opportunities and have positive and stable cash
flows. The company reported revenue of approximately $1.6
billion for the twelve months ended September 30, 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's 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.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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 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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates Compass Diversified Holding's revolver Ba1 and term loan B1; outlook remains stable
250 Greenwich Street
New York, NY 10007