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Moody's Affirms Unsecured Ratings of Energizer Holdings (ENR) Following Review for Downgrade

September 30, 2014 3:16 PM EDT

Moody's Investors Service confirmed Energizer Holdings' (NYSE: ENR) Baa3 senior unsecured note ratings, concluding the review for downgrade initiated on April 30, 2014 following Energizer's announced plan to split-up its household products and personal care businesses. The confirmation reflects Moody's expectation that Energizer will reduce debt-to-EBITDA to the 3x range within 12-18 months following the spin-off, and that the company's remaining personal care businesses will generate stable revenue and meaningfully positive free cash flow. The negative rating outlook reflects that because Energizer has not finalized certain aspects of the spin-off -- including the stand-alone cost structures, distribution arrangements, and capital structures -- there is uncertainty regarding the company's ability to reduce and sustain debt-to-EBITDA leverage in a 3x range.

Moody's took the following rating actions on Energizer Holdings, Inc.:

Confirmations:

Senior Unsecured Regular Bond/Debentures, at Baa3

Senior Unsecured Shelf, at (P)Baa3

Outlook is Negative

RATINGS RATIONALE

Energizer has good market positions in its personal care businesses, and Moody's believes that stable category demand and the company's growth and cost reduction initiatives will continue to drive strong free cash flow following the spin-off. Moody's anticipates that Energizer will retain all of its existing debt following the spin-off and utilize a combination of existing cash, projected free cash flow and cash distributions from the spun-off entity to fund a partial debt pay down. Moody's expects that the resulting modest leverage position, in combination with the mix of stable personal care businesses, can sustain an investment-grade rating notwithstanding the diminished scale, business diversity and cash flow resulting from the credit negative spin-off of the household products business.

Energizer's Baa3 senior unsecured rating reflects that following the spin-off the company will continue to maintain a good market position in a portfolio of relatively stable consumer products, strong free cash flow, and product and geographic diversification. Revenue pressure exists from competition with more diversified and better capitalized multi-national companies, and the ongoing need for promotions to hold share, but category demand remains consistent through economic cycles. Debt-to-EBITDA leverage (3.7x LTM 6/30/14 incorporating Moody's standard adjustment and cash related restructuring costs as a reduction to EBITDA) is high for the rating. The willingness to pursue shareholder-oriented moves such as the spin-off also creates event risk. However, Moody's expects that Energizer will continue to pursue a balanced financial strategy with debt reduction following the spin-off, leading to a moderate leverage profile. Energizer is targeting a July 1, 2015 separation date and Moody's believes there is a very high likelihood of transaction completion.

Energizer has a strong liquidity position with $1.1 billion of existing cash and projected free cash flow of $300 million or more over the next 12 months providing strong coverage of its minimal debt maturities. Unused capacity on Energizer's $450 million revolver ($175 million drawn as of 6/30/14) that expires in May 2016 provides additional liquidity support. Moody's expects that Energizer will maintain a comfortable cushion within the revolver's financial maintenance covenants. The liquidity assessment is based on Moody's projections for Energizer's combined personal care and household products businesses. Moody's expects Energizer to maintain a good liquidity position following the spin-off, although the company has not finalized the post-split debt structure.

An upgrade is unlikely given modest scale following the spin-off and event risks. Energizer's ratings could nevertheless be upgraded if the company improves its scale and diversification, demonstrates consistently positive organic revenue and earnings growth, sustains debt-to-EBITDA in a low 2x range, and maintains a strong liquidity position.

Energizer's ratings could be downgraded if Moody's does not expect the company will reduce and sustain debt-to-EBITDA leverage in a 3x range following the spin-off, or if the company does not maintain conservative financial policies. A downgrade could result from a deterioration in operating performance or other actions that increase leverage such as acquisitions and shareholder distributions. A deterioration of liquidity could also create downward rating pressure.

Please see the credit opinion at www.moodys.com for additional information on Energizer's credit ratings.

The principal methodology used in this rating was Global Packaged Goods published in June 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.



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