Nov. 11 (Bloomberg) -- Simmons Co. bondholders may get 5 cents on the dollar if the mattress maker files for bankruptcy after the company’s private-equity owner, Thomas H. Lee Partners, took $375 million in dividends, Moody’s Investors Service said.

THL Partners took dividends that left the company “highly levered” and vulnerable to an economic slump, analysts led by Kevin Cassidy said in a report published today. As a result, Atlanta-based Simmons missed interest payments, had its credit rating cut four steps and said it would file for bankruptcy and be sold to another private-equity firm, the analysts wrote.

Boston-based THL Partners bought Simmons in November 2003 for $1.1 billion, four months before KKR & Co. acquired U.S. mattress maker Sealy Corp. for $1.5 billion. While Thomas H. Lee “monetized” its investment through dividends, New York-based KKR turned to the equity markets, raising $300 million and using about half that to pay back debt, Cassidy, a senior credit officer, said in the report.

“Sealy and Simmons are two fairly similar companies that underwent LBOs with very different approaches to their capitalization,” the analysts said. “But when consumers stopped buying mattresses, the over-leveraged capital structure proved untenable and Simmons was forced to seek bankruptcy protection.”

Simmons announced the plan in September, agreeing to pay senior bank lenders 100 cents on the dollar, while offering holders of the company’s $200 million of senior subordinated notes due in 2014 $190 million, or 95 cents on the dollar, according to a regulatory filing. Investors who own Simmons’ $261 million of senior discount notes will get $15 million, or about 5 cents on the dollar.

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Lenders of Simmons’ $300 million of toggle debt will receive no compensation under the plan, according to Moody’s. The plan is expected to cut debt to $450 million from about $1 billion, the company said in September.

Simmons’ 7.875 percent senior subordinated notes traded at 91.75 cents on the dollar on Oct. 15 to yield 11 percent, up from a low of 13.875 cents on the dollar on Feb. 6, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Simmons’ senior discount notes due in 2014 traded yesterday at 10.125 cents on the dollar, Trace data show.

The Simmons debt restructuring was a result of the economic slump that hurt companies at the center of the housing market, according to THL Partners spokeswoman Robin Weinberg.

“The dividend policies had no impact on the need to do the restructuring,” she said.

Sealy, based in Trinity, North Carolina, was able to weather the recession and retain lender support, according to Moody’s.

“The report reaffirms the importance of focusing on operational improvement as a way of creating value in our portfolio of companies,” KKR spokesman Peter McKillop said.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: November 11, 2009 15:53 EST