HT Intermediate Holdings #CCC# Rating Affirmed, Senior Notes Rating Raised To #B-# On Torrid Outlook Negative

Stocks and Financial Services Press Releases Wednesday January 17, 2018 09:06
NEW YORK--17 Jan--S&P Global Ratings
NEW YORK (S&P Global Ratings) Jan. 16, 2018--S&P Global Ratings today affirmed the 'CCC' corporate credit rating and negative outlook on California-based apparel retailer HT Intermediate Holdings Corp.

We also raised the issue-level rating on the senior notes to 'B-' from 'CCC', and revised the recovery rating to '1' from '3'. The '1' recovery rating indicates very high (90%-100%; rounded estimate: 95%) recovery in the event of a payment default.

The rating action reflects our belief that the announced guarantee on Hot Topic Inc.'s senior notes by Torrid improves the likelihood that obligations of this debt issue will be paid on time and in full, and that recovery prospects for the issue have improved because the guarantee is secured by a 100% equity pledge from Torrid Inc. Although we believe the settlement agreement could lower the possibility of proactive debt restructuring over the next 12 month, we are affirming the 'CCC' corporate credit rating and negative outlook because the agreement does not enhance Hot Topic's liquidity and has no effect on Hot Topic's ability to service its own debt.

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 area.

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 the risk of a distressed exchange or proactive debt restructuring is minimal.


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