TEXT-S&P keeps Interline Brands ratings on watch
Overview -- The parent of U.S.-based distributor Interline Brands Inc. is seeking to issue $365 million senior holding company notes in part to fund its acquisition by affiliates of GS Capital Partners LP and P2 Capital Partners LLC. -- We are assigning a 'B+' corporate credit rating to Interline Brands Inc. (Delaware Corp.), the parent of Interline Brands Inc., and are assigning a 'B-' issue rating to its proposed $365 million holding company notes. -- The ratings on Interline Brands Inc. remain on CreditWatch until the proposed acquisition is completed. -- Assuming the transaction is completed as currently proposed, we would lower the rating on Interline's existing $300 million senior notes to 'B+'. Rating Action On July 11, 2012, Standard & Poor's Ratings Services assigned its 'B+' corporate credit rating to Interline Brands Inc. (Delaware Corp.), the parent company of Interline Brands Inc. The rating outlook is stable. In addition, we assigned a 'B-' issue rating to Interline Brands Inc. (Delaware Corp.)'s proposed $365 million holding company notes. The recovery rating on the notes is '6', indicating our expectation for negligible recovery (0% to 10%) in the event of payment default. Interline Brands Inc. (Delaware Corp.) is a holding company with no direct operations and depends on cash flow from subsidiary Interline Brands Inc. to meet its debt obligations. As a result, we view Interline Brands Inc. as a consolidated enterprise. The ratings on Interline, including the 'BB' rating on the company's $300 million senior notes and the 'BB' corporate credit rating, remain on CreditWatch, where we placed them with negative implications on May 30, 2012. Rationale The rating actions follow the parent company's announcement that it is seeking to issue $365 million of proposed senior holding company notes to fund its acquisition by affiliates of GS Capital Partners LP and P2 Capital Partners LLC (not rated). Total consideration for the acquisition is $1.1 billion, including a $369 million equity contribution, a $250 million revolving credit facility, the proposed $365 million holding company notes, and Interline's existing $300 million operating company notes. The rating on Interline Brands Inc. (Delaware Corp.) reflects Interline's weaker credit metrics following the increase in debt to support the acquisition. Our base-case scenario for 2012 assumes that Interline's revenue growth will be in the mid-single digit area, given improved occupancy and increasing rents among multifamily REITs, a key market for Interline. However, we previously assumed that leverage would be about 3x by year-end 2012, given approximately $300 million of existing balance sheet debt. As a result of the significant increase in debt associated with the leveraged recapitalization, leverage will likely rise to about 6x by year-end 2012 and about 5.5x by year-end 2013, which we believe to be more in line with an "aggressive" financial risk profile and a lower rating. Assuming the transaction is completed as currently proposed, we would lower the rating on Interline's existing $300 million senior notes to 'B+'. The recovery rating on the existing notes would remain '4', indicating our expectation for average (30% to 50%) recovery in the event of payment default. Interline acts primarily as a distributor and direct marketer of broad-line maintenance, repair, and operations (MRO) products that serve facilities maintenance, specialty distributors, and professional contractor markets. Interline competes against numerous local and regional players--some of which are significantly larger and financially stronger--and other traditional sales channels, including retail outlets and large warehouse stores. Recovery analysis For the complete recovery analysis, please see our recovery report on Interline to be published following this report. CreditWatch We expect to resolve our CreditWatch listing upon completion of GS Capital Partners LP's and P2 Capital Partners LLC's proposed acquisition of Interline. Related Criteria And Research -- Issuer Ranking: North American Building Materials Companies, Strongest To Weakest, April 13, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Key Credit Factors: Business And Financial Risks In The Global Building Products And Materials Industry, Nov. 19, 2008 Ratings List New Rating; Outlook Action Interline Brands Inc. (Delaware Corp.) Corporate Credit Rating B+/Stable/-- New Rating Interline Brands Inc. (Delaware Corp.) Senior Unsecured US$365 mil nts due 2018 B- Recovery Rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings referenced herein can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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