HT Intermediate Holding Corp. Downgraded To #CCC# On Weak Operating P Outlook Negative

Stocks and Financial Services Press Releases Friday December 15, 2017 08:42
NEW YORK--15 Dec--S&P Global Ratings
NEW YORK (S&P Global Ratings) Dec. 14, 2017--S&P Global Ratings today lowered the rating on California-based apparel retailer HT Intermediate Holdings Corp. to 'CCC' from 'B-'. The outlook is negative.

We also lowered issue-level rating on the secured notes to 'CCC' from 'B-', and revised the recovery rating to '4' from '3'. The recovery rating of '4' indicates average (30%-50%; rounded estimate: 45%) recovery in the event of a payment default.

The downgrade reflects the company's continued rapidly deteriorating operating performance, resulting from ineffective merchandising and excess inventory, which led to sharp traffic declines and increased markdowns in the first nine months of 2017. We expect performance will remain challenged over the next 12 months as the Hot Topic brand faces increased competition in key categories, and continues to work through clearing inventory. It is our view that products in some categories have become more commoditized, and while management continues to focus on building Hot Topic's exclusive offerings, we do not expect this effort to meaningfully reverse negative performance trends in the near term.

The negative outlook on HT Intermediate reflects our expectation that operating performance will remain challenged given the increasingly competitive retail environment, resulting in meaningfully negative free operating cash flow generation and tightening liquidity over the next 12 months. At year-end 2017, we expect FFO to debt to be in the 6.0x area, and fixed-charge coverage in the low 1.0x.

We could lower the ratings if we believe a default is inevitable within the next six months. This could happen if the company is unable to meaningfully improve performance trends and show signs of stabilization over the next three to six months. Under this scenario, the pace of cash burn would become unsustainable, causing the company to rely heavily on its $100 million revolving credit facility (availability of about $55 million as of third quarter end) to fund business operations. We could also lower the ratings if we believe the likelihood of a distressed exchange or proactive debt restructuring has increased.

Although unlikely over the next 12 months, we could revise the outlook to stable if operating performance meaningfully improves on a sustained basis, indicating that the company is able to secure more compelling and exclusive merchandise, while also effectively managing inventory. Under this scenario, revenue in 2018 would increase in the low- to mid-single digits (compared with our forecast of a modest sales decline), and gross margin would expand by 400 bps over our base-case forecast. This would lead to moderately positive free operating cash flow, and fixed-charge coverage in the mid-1.0x on a consistent basis. At this time, we would believe that the risk of a distressed exchange or proactive debt restructuring is minimal.

  • Our '4' recovery rating on the senior notes indicates our expectation for average (30%-50%; rounded estimate: 45%) recovery in the event of default.
  • We simulate a default in 2018 because of a steep decline in revenue and income from a slowdown in consumer discretionary spending in a volatile economy that leads to declining consumer spending on discretionary items, and consequently lower sales and operating margins.
  • After adjusting for the value we attribute to estimated administrative expenses, we forecast approximately $227 million in collateral value available to the senior notes.
  • Simulated year of default: 2018EBITDA at emergence: $48 million
  • Implied enterprise value (EV) multiple: 5.0x
  • Estimated gross EV at emergence of about $227 million
  • Net EV after 5% administrative costs: $227 million
  • Valuation split % (obligors/non-obligors/unpledged): 100/0/0
  • Secured Revolver claims: $61 million*
  • --Recovery expectations: N/A
  • Secured Notes claims: $349 million*
  • --Recovery expectations: 30%-50% (rounded estimate: 45%)
All debts amounts include six months of prepetition interest.

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