Fitch Affirms Spectrum's IDR at 'BB-'; Upgrades Secured Debt
NEW YORK -- August 28, 2013
Fitch Ratings has affirmed Spectrum Brands, Inc.'s (Spectrum) Issuer Default
Rating (IDR) at 'BB-'; Stable Outlook. The secured facilities are upgraded to
'BB+' from 'BB-', reflecting the strength of the underlying security package
and the presence of a material amount of unsecured debt in the company's
capital structure. Fitch also assigns ratings for Spectrum Brands Canada, Inc.
(Spectrum Canada). Spectrum Canada is an obligor with a CDN$100 million
tranche in the company's existing $800 million senior secured term loan
maturing in December 2019. See full list of rating actions at the end of this
KEY RATING DRIVERS:
Declining Leverage Expectations
Spectrum purchased Stanley Black & Decker's Hardware & Home Improvement Group
(HHI) in a two-part transaction totaling $1.4 billion. This sizeable
acquisition should catapult Spectrum's revenues from $3.3 billion in its
fiscal year ended Sept. 30, 2012 (FYE 2012) to $4.2 billion in 2014.
The acquisition was financed entirely with debt, with the largest portion of
the transaction closing in December 2012. Debt increased to $3.2 billion at
June 30, 2013 from $1.7 billion at FYE 2012. Leverage on a pro-forma basis was
4.8x through the last 12 months ended June 30, 2013. Spectrum is focused on
reducing leverage to the 2.5x-3.5x range by calendar year-end (CYE) 2014.
Fitch anticipates leverage of less than 3.5x by the end of 2014 to be a
challenge. Nonetheless, leverage should decline materially to the 4x range by
the end of CYE 2014 due to a combination of EBITDA growth and debt reduction.
EBITDA will improve significantly from $487 million last year to the $640
million range this year. HHI's EBITDA margin is higher than legacy Spectrum by
approximately 300 to 400 basis points. Spectrum's focus on cost controls had
already contributed to sequential margin improvement, from 13.6% in FY2010 to
15% in FY2012. With HHI, Fitch expects Spectrum's margins to continue
improving through 2014. The company has been focused on debt reduction and has
historically made voluntary debt repayments in the $200 million range from
free cash flow (FCF), which should continue.
Spectrum's FCF after dividends should be in the $200 million range in 2013,
and should improve to the $300 million range next year with a full year of HHI
and lower interest expense. Spectrum is in the process of refinancing a $950
million 9.5% secured note with $1.15 billion in secured term loans at
significantly lower interest rates. Interest costs should decline by
approximately $50 million next year. In keeping with the company's
de-leveraging goals, debt amortization on the new loans is markedly higher.
Debt maturities, while increasing from less than $10 million to almost $75
million annually through 2016, remain moderate in relation to the company's
FCF. As a result, there is some flexibility for the $200 million, two- year
share repurchase authorization. Nonetheless, Fitch expects the bulk of the
company's improving FCF to be directed towards debt reduction.
The product portfolio and go-to-market strategy is focused on providing
value-based brands with comparable performance to premium-priced brands; this
matches well to a cautious economic environment.
Spectrum is a controlled company. Harbinger Group, Inc. (HRG; Fitch IDR rated
'B'; Outlook Stable) owns 59.3% of Spectrum. HRG itself is a controlled
company majority owned by Harbinger Capital Partners, LLC, a hedge fund. Both
companies directly or indirectly have pledged Spectrum shares as collateral.
HRG uses the value of its portfolio investments as collateral for its own
debt. HRG has pledged its Spectrum shares as part of the collateral for its
7.875%, $925 million notes. HRG is in compliance with its covenants with a
comfortable collateral cushion. Fitch monitors HRG's cushion as part of
Harbinger Capital Partners Master Fund I, Ltd. (an affiliate of Harbinger
Capital) owns 50.9% of HRG on a fully diluted basis and has also pledged all
of its shares in HRG. If there was a foreclosure or sale of the HRG shares
pledged as collateral, it would be a change of control of both HRG and
Spectrum. The change could not only accelerate all of Spectrum's and HRG's
debt and preferred stock, but could reduce the company's usage of its net
operating losses. Spectrum would need a waiver on its term loan and revolver,
and might also need a waiver on its notes, as it is required to offer to
repurchase those instruments.
Negative: Any change in financial strategy such that leverage is consistently
and materially higher than mid-4x levels would be of concern and may have
negative rating implications.
Governance Implications Potentially Negative: A change of control due to
issues with the majority owner could have negative rating implications. An
event of default could occur if an entity or group, other than HRG and its
affiliates, acquires more than 35% of Spectrum. If there is a change of
control, it would most likely be due to foreclosure on the assets (i.e.
Spectrum shares) collateralizing debt at the parent level. In this event, all
of Spectrum's debt could accelerate unless the company obtains waivers. Fitch
would address this event upon its occurrence.
Positive: An upgrade is unlikely in the near term. Leverage is high and
acquisition, integration and refinancing charges will dampen profitability
this year. As credit protection measure improves with good business momentum,
the potential for a positive rating action could increase.
Fitch has taken the following rating actions on Spectrum:
--Long-term (IDR) affirmed at 'BB-';
--Senior secured asset backed loan (ABL) upgraded to 'BB+' from 'BB-';
--Senior secured term loans upgraded to 'BB+' from 'BB-';
--Senior secured note upgraded to 'BB+' from 'BB-';
--Senior unsecured notes affirmed at 'BB-'.
Fitch has assigned the following ratings to Spectrum Canada:
--Senior secured term loan 'BB+'.
Spectrum has received the requisite consents to call the $950 million, senior
secured notes and have received replacement financing to repay these notes in
September. These notes will be withdrawn at that time.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and
Subsidiary Linkage' (August 2013);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
--Fitch To Rate Spectrum's Proposed New Term Loans 'BB-' (August 2013);
--Fitch Affirms Harbinger Group Inc.'s Ratings: Outlook Stable (August 2013)
--Spectrum Brands: Full Rating Report (July 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Spectrum Brands, Inc.
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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