VC GB Holdings Inc. (f/k/a Generation Brands Holdings Inc.) #B# Rating Affirmed Following Visual Comfort Acquisition

Stocks and Financial Services Press Releases Wednesday February 8, 2017 08:56
CHICAGO--8 Feb--S&P Global Ratings

CHICAGO (S&P Global Ratings) Feb. 7, 2017--S&P Global Ratings said today that it affirmed its 'B' corporate credit rating on Skokie, Ill.-based VC GB Holdings Inc. (formerly known as Generation Brands Holdings Inc.). The outlook is stable.

At the same time, we assigned a 'B' issue-level rating to the company's proposed $490 million senior secured first-lien term loan maturing in 2024 and a '3' recovery rating, indicating our expectation for meaningful recovery (50%-70%, lower half of the range) in the event of a payment default. We also assigned a 'CCC+' issue-level rating to the company's proposed $160 million senior secured second-lien term loan maturing in 2025 and a '6' recovery rating, indicating our expectation for negligible recovery (0%-10%) in the event of a payment default.

The company expects to use proceeds from the debt offering along with about $147 million of common equity contributed by AEA Investors LP to fund the acquisition of Visual Comfort. We estimate the company will have $695 million of adjusted debt at close.

All ratings are based on preliminary terms and are subject to review upon receipt of final documentation.
We will withdraw our existing issue-level and recovery ratings at the close of the transaction.

The rating affirmation reflects leverage of about 6x at transaction close as compared to about 5x estimated for the year ended Dec. 31, 2016. The cash flow contribution from the transformational Visual Comfort & Co. acquisition, in addition to the carry-forward of the legacy Generation Brands net operating losses, will allow for significantly higher free cash flow that can be used towards debt prepayment. While we expect the company to delever over the next few quarters, we believe leverage will remain above 5x at fiscal year-end 2017. We believe its financial sponsor majority owner will largely shape the company's financial policies, which is likely to prevent the company from permanently reducing leverage to levels commensurate with a better financial risk profile assessment over the next 12 months. We also believe the company could continue to make acquisitions to increase its scale in the highly fragmented lighting industry.

"The stable outlook reflects our expectation for positive trends in the U.S. housing market and residential remodeling trends leading to pro forma revenue growth of mid-to-high single digits in 2017 and 2018. We expect debt to EBITDA at close to be near 6x and to be managed above 5x over the next 12 months," said S&P Global Ratings credit analyst Stephanie Harter.

We could lower the ratings if the U.S. housing market deteriorates and consumer demand for the company's products declines, or if competition increases, leading to declining revenues and EBITDA contraction to the low-teens area. We would also consider a lower rating if a sizeable debt-funded acquisition or shareholder-friendly transaction occurred, whereby debt to EBITDA were to increase to over 7x or the company sustained negative free operating cash flow.

While unlikely in the next 12 months, we could raise the ratings if the company's owners demonstrate a more conservative financial policy that would support leverage to be sustained below 5x. This could occur if the company does not make large debt-financed acquisitions or dividends and applies excess cash flow beyond our expectation to debt reduction.


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