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Rating Action:

Moody's rates new first lien debt B1 for Advantage Sales & Marketing

Global Credit Research - 20 Apr 2017

Approximately $2.95 billion of rated debt affected

New York, April 20, 2017 -- Moody's Investors Service affirmed its B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating for Advantage Sales & Marketing, Inc. ("ASM"), and concurrently assigned B1 ratings to the company's proposed $200 million revolver and $225 million incremental term loan, both senior secured (first lien) and due 2021. The B1 and Caa1 ratings for the company's existing senior secured first and second lien term loans, respectively, were also affirmed. The ratings outlook is stable.

Proceeds from the proposed new term loan are expected to be used to finance ten acquisitions in 2017 (three of which have already closed) for $97 million excluding fees, and to term out $55 million of existing revolver borrowings and cover related fees and expenses. The balance of approximately $68 million will be held in cash on the balance sheet.

According to Moody's analyst David Berge, "The debt-funded acquisitive nature of ASM is consistent with historical practice and remains within the bounds of our current B2 CFR, particularly in consideration of our expectation that the company will delever through earnings growth and some debt repayment as it continues to evidence stable profitability rates and generate in excess of $100 million in annual free cash flow."

The following ratings have been assigned for Advantage Sales & Marketing, Inc.:

$200 million senior secured first lien revolving credit facility due 2021 at B1 (LGD3);

$225 million senior secured first lien term loan due 2021 at B1 (LGD3)

The following ratings have been affirmed for Advantage Sales & Marketing, Inc.:

Corporate Family Rating at B2;

Probability of Default Rating at B2-PD

$1.95 billion senior secured first lien term loan due 2021 at B1 (LGD3)

$60 million senior secured first lien delayed draw term loan due 2021 at B1 (LGD3);

$760 million senior secured second lien term loan due 2022 at Caa1 (LGD5);

The following rating remains unchanged and will be withdrawn upon the closing of the transaction:

Issuer: Advantage Sales & Marketing, Inc.

$200 million senior secured first lien revolving credit facility due 2019 at B1 (LGD3)

RATINGS RATIONALE

ASM's B2 CFR reflects the company's elevated leverage (6.8 times debt-to-EBITDA on a Moody's-adjusted basis, excluding upcoming acquisitions, at the end of December 2016), which remains high relative to similarly-rated business services companies. The ratings also consider ASM's revenue concentration among the company's top five customers, particularly in light of the potential for large consumer packaged goods (CPG) manufacturers and retailers to curtail spending in this industry. Also factored into the ratings is ASM's growth strategy using debt-financed acquisitions (such as those involved in the current set of transactions) and related integration risks, its willingness to raise debt for identified acquisitions before executing purchase agreements, and event risk related to financial policies under its private equity ownership. While earnings growth is anticipated, the company's strategy of growth through acquisition will likely limit the use of free cash flow for any meaningful future debt reductions.

ASM benefits from its position as one of the two largest sales and marketing agencies (SMA) in the US, its base of large national accounts, and broad service offering. The company has high customer retention rates due to its market position, which continues to increase from both organic growth and acquisitions, the potential switching costs for its clients as ASM becomes more deeply integrated in clients' business processes, and the conflict of interest for SMAs representing competing clients or brands. Moody's expects ASM will continue to benefit from new client and business wins, partially offsetting the potential for pull-backs in spending by certain large CPG manufacturers, while maintaining double-digit EBITA margins due to the highly variable cost structure and continued realization of acquisition synergies. Moody's recognizes the company's good liquidity, supported by solid cash flow generation through the cycle due to the relative inelasticity of demand for the products it represents, as well as for outsourced sales and marketing services.

Moody's expects ASM to maintain a good liquidity profile over the next 12 months, with expectations of more than $100 million of annual free cash flow augmenting good cash balances (excluding committed acquisition spending) and access to an undrawn $200 million committed revolving credit facility that does not expire until 2021. The term loans have no financial maintenance covenants, and the revolver has a springing covenant requiring first lien net leverage to be maintained below 8.25 times (almost double estimated proforma levels, as defined) if availability falls below 30% of the total commitment. Moody's expects the company to maintain sufficient headroom even if required to satisfy the financial covenant.

The stable ratings outlook reflects Moody's expectation that ASM will maintain or enhance its strong market position, which will allow the company to grow revenue and earnings and thereby reduce leverage to less than 6.5 times with some accompanying mandatory term loan amortization over the next 12 to 18 months, absent additional debt financed acquisitions or dividends.

Given ASM's highly leveraged capital structure, a rating upgrade in the near term is unlikely. Ratings could be upgraded if the company uses excess cash to prepay debt obligations such that debt-to-EBITDA is sustained below 6.0 times. An upgrade would also require a demonstrated commitment to more conservative financial policies with regard to dividends and acquisitions.

ASM's ratings could be downgraded if debt-to-EBITDA is sustained above 7.5 times, or if EBITA-to-interest falls below 1.75 times. A deterioration in ASM's liquidity profile, weaker-than-expected improvement in operating margins, or a material contraction in revenue could also pressure the ratings. Significant leveraging transactions to finance acquisitions or distributions to the owners could also result in negative rating actions.

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.

Advantage Sales & Marketing Inc. is a national sales and marketing agency (SMA) in the US, providing outsourced sales, marketing and merchandising services to manufacturers, suppliers and producers of consumer packaged goods. In July 2014, affiliates of Leonard Green & Partners, L.P. and funds advised by CVC Capital Partners purchased a majority ownership stake in the company. For the year ended December 31, 2016, management reported unaudited revenues of approximately $2.08 billion.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

David Berge
Senior Vice President
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

Russell Solomon
Associate Managing Director
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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