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Rating Action:

Moody's upgrades Head NV to B3 from Caa1 (Netherlands)

17 Feb 2011

Approximately EUR28 million worth of rated debt affected

Milan, February 17, 2011 -- Moody's Investors Service has today upgraded Head NV's corporate family rating (CFR) and probability-of-default rating (PDR) to B3 from Caa1. Concurrently, the rating agency has upgraded to Caa2 from Caa3 the senior unsecured rating on the EUR27.7 million remaining outstanding of the notes due in 2014, issued by HTM Sport GmbH (HTM). The outlook on the ratings is stable.

RATINGS RATIONALE

"Today's rating action reflects further strengthening in Head's financial and liquidity profiles following the company's effort to improve cash flow generation in recent years together with the debt exchange completed during 2009. These measures are expected to result in a financial leverage (measured as debt to EBITDA, adjusted for operating leases and pension liabilities) in line with a single-B rating going forward," says Paolo Leschiutta, a Moody's Vice President-Senior Analyst and lead analyst for Head. "Today's rating action also incorporates Moody's expectation that Head will be able to take advantage of the modest recovering trends in the sport equipment market, and in the pick-up in consumer spending (which however is likely to remain volatile), and increase its profitability. The B3 rating also assumes that the company will address its 2012 debt maturities in due course," adds Mr Leschiutta.

During 2009, Head exchanged part of its senior unsecured notes (EUR135 million outstanding at the time) with EUR43.7 million worth of new senior secured notes issued in August 2009 and ordinary shares of Head. As a result of this extraordinary measure, and the resulting debt reduction, together with Head's effort over the years in reducing its operating costs increasing the share of outsourced products, Moody's sees Head's lighter capital structure as more adequate to support the existing business profile of the group.

During the first nine months of 2010, Head reported satisfactory performance, especially in its Winter Sport division, the volumes of which increased by mid-single digits and Moody's expects this trend to have continued over Q4 2010. The company's total turnover during the nine months to September 2010 was EUR218 million, 5.7% up compared to the same period in 2009. These results reflect improving market conditions, moderately increasing volumes and better sales-mix. Head's total operating profit as at September 2010 (on a YTD basis) was ca. EUR6.9 million, compared with EUR2.1 million as of the same period in FY 2009. Moody's recognises that Head's operating profit was strengthened by: (i) a reduction in fixed costs (excluding R&D and marketing expenses); (ii) the relocation of production plants in low-cost countries; and (iii) increased outsourcing. Indeed, the rating agency expects to see additional evidence of these measures in Head's full-year 2010 accounts.

The stable outlook reflects Moody's view that the improvements made by Head to its credit profile currently adequately position the company in the B3 rating category. It also incorporates the rating agency's expectation that, as a result of restructuring measures taken by Head, the company will achieve improvements in its operating and financial profiles, despite the likelihood that these will be partially eroded by ongoing uncertainty in market conditions and expected raw-material price increases.

Moody's would consider downgrading the ratings if Head failed to show the expected progress in improving its profitability and cash generation, such that it were to exhibit: (i) an EBITA margin declining towards the low single digits; (ii) a retained cash flow (RCF)/net debt ratio trending towards the mid-teens; and (iii) a debt/EBITDA ratio remaining above 6x. A deterioration in market conditions in the markets served by the company could also trigger a downgrade.

Although unlikely at this stage, Moody's would consider upgrading the ratings if Head were to achieve further improvements in its top line and profitability, such that its EBITA margin were to increase towards 7% and further strengthen its financial profile, such that its debt/EBITDA ratio were to decrease towards 4x on a sustainable basis. Before giving any consideration to an upgrade, Moody's would need to be satisfied with the company's liquidity profile and refinancing risk.

The Caa2 senior unsecured rating on the remaining outstanding EUR27.7 million bond issued by HTM reflects its subordinated position in Head's capital structure relative to the EUR43.7 million worth of new senior notes issued by HTM in August 2009. These notes are secured on a pool of inventories, receivables and cash under certain specified conditions. The pool of assets offered as collateral must always remain greater than the amount of the new senior secured notes; Moody's acknowledges that the company has, to date, met this requirement.

Ratings upgraded today are:

.... Corporate Family Rating, Upgraded to B3 from Caa1

.... Probability of Default Rating, Upgraded to B3 from Caa1

.... Senior Unsecured Regular Bond, Upgraded to Caa2 from Caa3

Moody's most recent rating action on Head was implemented on 18 May 2010, when the rating agency changed the company's outlook to stable from negative. This rating action followed signs of stabilisation in the company's financial and liquidity profiles after the conclusion of the debt exchange, although market conditions and the company's profitability remained subject to a degree of volatility.

The principal methodology used in rating Head was Moody's "Global Consumer Durables Rating Methodology", published in October 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Incorporated in the Netherlands, Head is a leading global manufacturer and marketer of branded sporting goods serving the winter sports, racquet sports and diving equipment markets, with strong market positions and a good reputation for product innovation. The company reported revenues of EUR331 million on an LTM basis as at September 2010.

REGULATORY DISCLOSURES

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 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 maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

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.

Milan
Paolo Leschiutta
Vice President - Senior Analyst
Corporate Finance Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
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Moody's Italia S.r.l
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Telephone:+39-02-9148-1100

Moody's upgrades Head NV to B3 from Caa1 (Netherlands)
No Related Data.
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