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TEXT-S&P cuts Radio Systems ratings
2012年2月29日 / 晚上9点24分 / 6 年前

TEXT-S&P cuts Radio Systems ratings

Overview	
     -- We estimate U.S. pet products supplier Radio Systems' fixed charges 	
covenant cushion to be below 10% for the quarter ended Dec. 31, 2011, and will 	
likely be below 10% for the quarter ended March 31, 2012, reflecting earnings 	
that were more volatile than we expected, and increased levels of fixed 	
charges. 	
     -- We are lowering the corporate credit rating one-notch to 'B-' from 	
'B', and lowering the issue-level rating on the senior secured debt to 'B' 	
from 'B+'. 	
     -- The outlook is stable, reflecting our expectation that credit measures 	
will remain near current levels or slightly improve over the near term.	
	
Rating Action	
On Feb. 29, 2012, Standard & Poor's Ratings Services lowered its corporate 	
credit rating on Radio Systems Corp. to 'B-' from 'B'. The outlook is stable.	
	
At the same time we lowered our issue-level rating on the $225 million senior 	
secured facility, which includes a $75 million revolving credit facility due 	
2015 and $150 million term loan due 2015, to 'B' from 'B+'. The recovery 	
rating remains '2', indicating our expectation for substantial (70%-90%) 	
recovery of principal in the event of default.	
	
Rationale	
The downgrade of Radio Systems Corp. (RSC) to 'B-' reflects Standard & Poor's 	
view that the company will have less than 10% cushion on its fixed charges 	
covenant through early 2012. We estimate the company's adjusted EBITDA for 	
2011 was below our projections, particularly in its fourth quarter results. 	
	
Our rating on RSC reflects our belief the company will continue to have a 	
"highly leveraged" financial profile and "vulnerable" business risk profile, 	
as our criteria define these terms. Key credit factors in our assessment of 	
the company's business risk include our view that the company will continue to 	
have a narrow business focus, discretionary product offerings, some customer 	
concentration, exposure to technology risk, and risks related to outsourcing 	
substantially all of its manufacturing to third parties.  	
	
Our view of RSC's highly leveraged financial risk profile reflects the 	
company's very aggressive financial policy, and our opinion that continued 	
weak domestic economic conditions could lead to further volatility in 	
operating performance. This may result in additional pressure on the company's 	
already thin fixed-charge covenant cushion and further constrain liquidity.	
	
RSC continues to have a narrow product focus in the highly competitive pet 	
supplies industry. The company leads the niche wireless pet containment and 	
training market. We believe RSC benefits from increased scale from recent 	
tuck-in acquisitions, long-time (although heavily concentrated) relationships 	
with customers and suppliers, and patent protection. We estimate adjusted 	
last-12-month EBITDA at Dec. 31, 2011, was slightly higher than the 2010 	
level, primarily due to acquisitions completed in 2010 and 2011, decreased 	
costs from project expenses and better freight management, and exiting 	
underperforming business lines, such as panel kennels, pet insurance, and 	
other identification products. It is our opinion that consumer demand remains 	
weak in a slowly recovering economy, partly because of the discretionary 	
nature of many of RSC's products. Despite these headwinds, we estimate margins 	
have remained above 20% due to incremental EBITDA from acquisitions.	
	
RSC's credit metrics largely remained stable over the 12 months ended Dec. 31, 	
2011, despite fluctuating borrowings under the $75 million revolving credit 	
facility to cover seasonal inventory build-up, higher interest expense, and 	
other fixed charges. Although net sales in 2011 increased by about 11%, we 	
believe revenue growth will be in the low single-digits over 2012, based on 	
our projection that discretionary consumer spending will be low, and our 	
belief that the company will not pursue acquisitions in 2012. We estimate 2011 	
free cash flow is about three times 2010 levels, with higher cash flow from 	
operations due to improved working capital management. We expect free cash 	
flow to remain near these levels in 2012, although we believe ongoing softness 	
in consumer spending could prompt more volatile working capital swings. We 	
estimate interest coverage and the ratio of funds from operations (FFO) to 	
adjusted debt were about 4.5x and 13%, respectively, at Dec. 31, 2011. These 	
ratios could strengthen slightly if the company were to reduce its debt burden 	
over the next 12 months. We estimate the ratio of adjusted total debt to 	
EBITDA improved to about 4.1x in 2011 from 4.5x in 2010. (The leverage 	
calculations take into account Standard & Poor's standard debt adjustments in 	
addition to a put option held by investor TSG on its equity interests, which 	
we have treated as debt.) Adjusted total debt to EBITDA is likely to decline 	
closer to 3.5x by fiscal year-end 2012 if the company uses its free cash flow 	
towards debt repayment.	
	
Liquidity	
We believe liquidity is "less than adequate" (as defined in our criteria) to 	
cover RSC's needs over the next 12 months, primarily because of our belief 	
that covenant cushion could remain below 10%. This is based on the following 	
information and assumptions:	
     -- We estimate EBITDA cushion is currently just above 8% on its 	
fixed-charge covenant as of Dec. 31, 2011. We believe the company's future 	
ability to maintain fixed-charge covenant cushion above 10% will depend on the 	
level of future shareholder payments and discretionary distributions.	
     -- The company is also subject to a total leverage covenant. We estimate 	
the EBITDA cushion on this ratio to remain near 15% over the near term. If 	
consumer spending were to remain soft, we believe this cushion would decline.	
     -- We believe RSC's total net sources of cash will exceed its total net 	
uses of cash over the next 12 months.	
     -- We believe capital-expenditure requirements are manageable, at about 	
$9 million annually.	
     -- We do not expect any acquisitions in 2012.	
     -- As of Dec. 31, 2011, RSC had about $2 million in cash and about $46 	
million of availability under its revolving credit agreement. However, we 	
believe future availability of the revolver could be limited if RSC is unable 	
to comply with its financial covenants.	
     -- Debt amortization of about $7.5 million annually.	
	
Recovery analysis	
The issue-level rating on RSC's senior secured credit facility is 'B' (one 	
notch above the corporate credit rating on the company). The recovery rating 	
is '2', indicating the expectation of substantial (70%-90%) recovery of 	
principal in the event of default. (For a complete recovery analysis, see 	
Standard & Poor's recovery report on RSC published Aug. 18, 2011, on 	
RatingsDirect.)	
	
Outlook	
The stable outlook reflects our opinion that credit metrics will remain near 	
current levels over the next 12 months, but further volatility in earnings 	
could result in constrained liquidity. We could consider lowering the rating 	
or revising the outlook to negative if the company's covenant cushions decline 	
further, if operating performance deteriorates, or if financial policy becomes 	
more aggressive, resulting in limited availability on its revolving credit 	
facility or a further weakening of credit measures. We could consider an 	
upgrade if covenant cushion improves to and is sustained at the level of at 	
least 15% on the total leverage and fixed-charge covenants, along with 	
improved and sustainable operating performance and credit metrics. EBITDA less 	
capital expenditures would need to increase about 8% from current levels 	
(assuming fixed-charge levels remains constant) for this to occur.	
Ratings List	
Downgraded	
                           To              From	
Radio Systems Corp.	
 Corporate credit rating   B-/Stable/--    B/Negative/--	
 Senior secured            B               B+	
  Recovery rating          2               2

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