Moody's Upgrades Michaels Cos. (MIK) to 'Ba2'; Outlook is Stable

Moody's Investors Service, ("Moody's") today upgraded Michaels Companies, Inc. (Nasdaq: MIK) Corporate Family Rating to Ba2 from Ba3 and Probability of Default Rating to Ba2-PD from Ba3-PD. Concurrently, the rating on Michaels Stores, Inc.'s ("Michaels Stores") 5.875% subordinated notes due 2020 was upgraded to B1 from B2. The company's senior secured term loan due 2020 was affirmed at Ba2. Michaels' Speculative Grade Liquidity Rating was also affirmed at SGL-1. The rating outlook is stable.

"The upgrade reflects Michaels' consistently solid operating performance, ample cash flow generation, and very good liquidity," said Moody's Vice President, Christina Boni. The stable outlook represents our expectation that the company will maintain healthy operating margins relative to its specialty retail peers by continuing to drive positive same store sales, thus leveraging fixed costs.

Upgrades:

..Issuer: Michaels Companies, Inc. (The)

.... Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD

.... Corporate Family Rating, Upgraded to Ba2 from Ba3

..Issuer: Michaels Stores, Inc.

....Senior Subordinated Regular Bond/Debenture, Upgraded to B1(LGD5) from B2(LGD5)

Outlook Actions:

..Issuer: Michaels Companies, Inc. (The)

....Outlook, Changed To Stable From Positive

..Issuer: Michaels Stores, Inc.

....Outlook, Changed To No Outlook From Positive

Affirmations:

..Issuer: Michaels Companies, Inc. (The)

.... Speculative Grade Liquidity Rating, Affirmed SGL-1

..Issuer: Michaels Stores, Inc.

....Senior Secured Bank Credit Facility, Affirmed Ba2(LGD3)

RATINGS RATIONALE

Michaels' Ba2 Corporate Family Rating reflects the company's scale and strong market position in the highly fragmented arts and craft segments of retail. Michael's has a demonstrated track record of driving growth while maintaining strong operating margins that have averaged in the mid-teens over the past five years. The rating is also supported by the relative stability of the arts and craft segment industry. We recognize, though, Michaels participates in some categories that are more sensitive to economic conditions, such as seasonal decor and custom framing. Liquidity is very good, reflective of strong positive free cash flow generation, no near dated debt maturities, and access to a sizable $850 million asset-based revolver to support seasonal working capital requirements.

Michaels' ratings are constrained by financial sponsors Blackstone Group and Bain Capital Partners controlling interest in the company. Despite our view that Bain and Blackstone have thus far applied prudent financial policies and continue to reduce their ownership position, the sponsors could consider re-leveraging the company.

The stable outlook reflects our opinion that Michaels will be able to maintain solid credit metrics despite the seasonality of the business and highly fragmented market segment. There is also an expectation for measured growth and ongoing conservative financial policies.

An upgrade would require Michaels to maintain profitable growth with operating margins in the mid-teens. It would also require the company to show evidence that its controlling owners, Blackstone and Bain, support financial policies which allow the company to maintain credit metrics consistent with a higher rating over the medium term. Quantitatively and upgrade would require debt to EBITDA below 3.0 times and EBIT to interest expense above 4.25 times.

Rating could be downgraded should Michaels' financial policies become more aggressive. A ratings downgrade could also occur if Michaels' operating performance deteriorate or debt levels increase such that debt to EBITDA is sustained above 4.0 times or EBIT to interest expense fall below 3.0 times.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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