Moody's Investors Service downgraded the Corporate Family Rating ("CFR") of Prestige Brands (NYSE: PBH) to B2 from B1. Accordingly, its Probability of Default Rating was downgraded to B2-PD, the senior secured debt rating to B1 from Ba2 and senior unsecured debt rating to Caa1 from B2. This concludes the review for downgrade initiated on April 28, 2014 following the company's announced $750 million debt-funded acquisition of Insight Pharmaceuticals, LLC ("Insight"). Moody's also assigned a B1 rating to Prestige Brands' proposed $720 million add-on senior secured term loan. The rating outlook is stable.

The rating downgrade reflects substantially increased leverage (6.5 times resulting from the Insight acquisition), as well as the challenges Prestige will face in reversing declining sales among the brands it is acquiring. Debt-to-EBITDA will increase from 4.6 times to 6.5 times on a pro forma basis for the 12 month period ending March 31, 2014. Moody's expects, however, that Prestige's strong free cash flow will support delevering to 5.5 to 6 times by the end of 2015 absent additional acquisitions as the company continues to use its free cash flow to pay down debt. Moody's also affirmed Prestige Brands' SGL-1 speculative-grade liquidity rating.

Moody's expects to withdraw ratings on Insight Pharmaceuticals upon closing of the transaction, assuming all of its debt is repaid.

Ratings Downgraded:

Prestige Brands, Inc.:

Corporate Family Rating to B2 from B1;

Probability of Default Rating to B2-PD from B1-PD;

Senior Secured Bank Credit Facility to B1, (LGD3) from Ba2(LGD2);

Senior Unsecured Bonds to Caa1(LGD5) from B2(LGD5);

Ratings Assigned:

Senior Secured Bank Credit Facility ($720 million add-on), assigned B1(LGD3)

Ratings Affirmed:

Speculative-grade liquidity rating affirmed at SGL-1

Outlook Actions:

Outlook Changed to Stable from Ratings Under Review

RATING RATIONALE

Prestige's B2 Corporate Family Rating (CFR) reflects the stable cash flow generated from the company's portfolio of mature niche branded OTC healthcare products, offset by high pro forma leverage, aggressive financial policies , and ongoing acquisition event risk. The company has good brand names, but operates in categories with flat to low single digit growth and high price elasticity. Prestige is building its portfolio largely through acquisitions, and demonstrates good execution investing in product development, distribution and marketing to stabilize the market share of those brands. But its small scale and OTC business focus create greater relative exposure than its more broadly diversified consumer product peers to category competition, concentrated retail distribution, product recalls and possible legal liability.

Acquiring Insight will meaningfully increase debt-to-EBITDA but also provide product diversification, slightly better geographic diversity, and some cost synergies. Prestige's challenge will be to reverse the sales declines among Insight's brands by providing added advertising and promotional support. Moody's expects Prestige Brands will be able to generate enough free cash flow to reduce leverage to 5.5 to 6 times by the end of 2015, though there is downside risk to the speed at which it will delever to the extent it pursues additional acquisitions or experiences revenue pressure.

Prestige's stable rating outlook reflects Moody's view that the company will generate flat to low single digit organic revenue growth and more than $130 million of annual free cash flow by continuing to reinvest in marketing and product development. However, Moody's does not expect the company to delever sufficiently to warrant an upgrade over the next 12-18 months. Moody's also anticipates that Prestige will continue to complete modestly sized acquisitions and maintain good liquidity.

Prestige's ratings could be downgraded if its financial performance deteriorates as a result of market share erosion, lengthy product interruptions/recalls, increased promotional spending, or the completion of debt-financed acquisitions or shareholder distributions. Specifically, if debt-to-EBITDA remains above 6.5 times for a sustained period, ratings could be downgraded. A deterioration of liquidity could also result in a downgrade.

For an upgrade, Prestige would need to profitably increase its scale and diversity, sustain steady organic growth, and commit to a more conservative financial profile such that debt-to-EBITDA is sustained below 5.0 times and EBIT-to-interest is sustained above 2.0 times factoring in potential acquisitions. Prestige would also need to maintain a good liquidity position to be considered for an upgrade.