Moody's Lifts Outlook on Spectrum Brands (SPB) to Positive; CFR Affirmed
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Moody's Investors Service revised Spectrum Brands, Inc. (NYSE: SPB) rating outlook to positive from stable due to Spectrum's improved operating performance and Moody's expectation of further improvement. The B1 Corporate Family Rating (CFR) was affirmed. The senior secured credit facility was upgraded to Ba1 from Ba2 and the speculative grade liquidity rating was upgraded to SGL 1 from SGL 2.
"Spectrum Brands has demonstrated its willingness to remain disciplined in reducing leverage following acquisitions with a combination of debt repayment with free cash flow and earnings growth, "said Kevin Cassidy, Senior Credit Officer at Moody's Investors Service. Moody's expects Spectrum to continue to be acquisitive, but to keep debt/EBITDA between 3.5 and 4.5 times.
The upgrade in the liquidity rating reflects Spectrum's improving free cash flow generation and strong cash balances. Moody's expects Spectrum to generate over $500 million in free cash flow. The upgrade in the secured credit facility reflects a shift in the proportional loss absorption between the secured and the unsecured debt obligations due to prepayments and amortization of the term loan.
Speculative grade liquidity rating to SGL-1 from SGL-2;
Senior secured credit facility to Ba1 (LGD2) from Ba2 (LGD2);
Corporate Family Rating at B1;
Probability of Default Rating at B1-PD;
Senior unsecured notes at B2 (LGD5)
The B1 Corporate Family Rating reflects Spectrum's significant size with revenue around $5.1 billion, but also the aggressive financial policies of its largest shareholder. Debt/EBITDA is currently near 4.5 times, but Moody's expects it to approach 3.5 times in the next 12 -18 months. Ratings benefit from Spectrum's good product diversification with products ranging from personal care items, to pet supplies and household insect control, small appliances, residential locksets and automotive care. The rating is constrained by its competition with bigger and better capitalized companies along with the shareholder oriented propensity of its largest shareholder, HRG Group. The rating also reflects the general stability in operating performance and Moody's expectation that credit metrics will continue improving in the near to mid-term, despite modest top line organic growth, soft spending for low income consumers and continued macro-economic uncertainty. Spectrum's strong liquidity profile as well as its broad international penetration are important rating factors, although there is concentration in Europe, where there is low growth.
The positive outlook reflects Moody's view that Spectrum will maintain a strong liquidity profile and sustain financial leverage, measured as debt/EBITDA, between 3.5 and 4.5 times. Spectrum's acquisitive nature and shareholder return focus is expected to continue.
The biggest risks that could result in a downgrade are aggressive capital structure moves by Harbinger Group or a severe disruption in discretionary consumer spending. Key credit metrics driving a downgrade are debt/EBITDA sustained over 5.5 times and single digit EBIT margins.
Key credit metrics necessary for an upgrade would be debt/EBITDA sustained below 4 times and EBIT margins maintained in the mid-teens. Based on the existing capital structure, the secured credit facility would likely not be upgraded if the CFR was upgraded one notch.
Subscribers can find further details in the Spectrum Brands credit opinion published on Moodys.com.
The principal methodology used in these ratings was Consumer Durables Industry published in September 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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