PFS Holding Corp. Ratings Affirmed On Stabilized Credit Outlook Stable

Stocks and Financial Services Press Releases Wednesday January 27, 2016 09:07
CHICAGO--27 Jan--Standard & Poor's
CHICAGO (Standard & Poor's) Jan. 26, 2016--Standard & Poor's Ratings Servicestoday affirmed its 'B-' corporate credit rating on Easton, Pa.-based PFSHolding Corp. The outlook is stable.

At the same time, we affirmed our 'B-' rating on the company's first-lien termloan with a recovery rating of '4', indicating our expectation that lenderscould expect average (30%-50%) recovery in the event of a payment default orbankruptcy. We have revised our recovery expectations for first-lien term loanlenders to the lower half of the 30% to 50% range, reflecting our reducedemergence enterprise value estimate.

We also affirmed our 'CCC' rating on the company's second-lien term loan witha recovery rating of '6', indicating our expectation that lenders could expectnegligible (0% to 10%) recovery in the event of a payment default orbankruptcy. Debt outstanding as of Sept. 30, 2015, was $455 million.

"Our affirmation of the 'B-' corporate credit rating on PFS reflects our viewthat management has stabilized the company's operations and should be able tocontinue to grow profitability, partly due to incremental business with Marsand expansion into new territories, notwithstanding tough competition and lackof pricing power," said Standard & Poor's credit analyst Gerald Phelan. "Weforecast credit metrics will strengthen modestly over the next year but thatthe company will not improve credit measures to levels previously specifiedfor an upgrade over the next 12 months, which includes debt to EBITDA below6.5x. We do not expect debt to EBITDA to fall below 6.5x until after 2017.Still, we expect the company to generate positive free cash flow and view itsliquidity as adequate."

Standard & Poor's ratings on PFS reflect its ownership by a financial sponsor(which exhibits aggressive financial policies), its low profit margins, andvery weak credit ratios. The company has made some progress in strengtheningcredit metrics following a significant deterioration in the second half of2014 stemming from acquisition integration missteps and the loss ofdistribution rights to a profitable product line. The ratings also incorporatethe substantial bargaining power of several large pet product suppliers towhich the company has meaningful concentration, and the risk that these large

vendors could continue to consolidate the supply chain and further dictateterms. Our ratings assume PFS maintains satisfactory relations with itslargest suppliers. In addition, the potential expansion of national retailers(including financial sponsor-backed PetSmart Inc. and Petco Holdings Inc.) at

the expense of smaller independent store operators (which is a core PFScustomer channel) could erode PFS' sales over time.

We believe PFS benefits from its extensive distribution network connectingvendors to thousands of primarily non-national chain retail store locations;the moderate-growth, low-cyclicality nature of demand for pet products; andrelatively low capital expenditure requirements. In our opinion, the potentialfor large suppliers to further expand direct distribution to retailers is alow-probability but high-impact risk. It's possible this could occur over timeif the retail pet channel becomes more concentrated, making directdistribution easier for suppliers.

The stable outlook reflects our forecast that profits will strengthenmodestly, primarily due to volume gains and lower restructuring costs, suchthat over the next 12 months debt to EBITDA and EBITDA interest coverage willimprove to below 7.5x and the low-2x area, respectively, while maintainingadequate liquidity and positive free cash flow.


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