TEXT-S&P affirms Collective Brands B rating

Fri Sep 7, 2012 9:45am EDT

Overview
     -- Blum Capital, Golden Gate Capital, and Wolverine World Wide Inc. are 
acquiring global footwear retailer Collective Brands in a $2 billion 
transaction.
     -- Concurrently, Collective Brands is issuing a $275 million term loan 
and $250 million asset-based revolver to fund the transaction. 
     -- We are affirming the 'B' corporate credit rating on Collective Brands 
and removing the rating from CreditWatch with negative implications, while 
assigning a 'B' issue-level rating with a '4' recovery rating to the term 
loan. 
     -- The stable outlook reflects our belief that despite modest operational 
improvement, credit protection metrics will remain in line with our financial 
risk assessment over the intermediate term.

Rating Action
On Sept. 7, 2012, Standard & Poor's Ratings Services affirmed its 'B' 
corporate credit rating on Topeka, Kan.-based Collective Brands Inc. At the 
same time, we removed the rating from CreditWatch with negative implications, 
where it was placed on May 3, 2012. The outlook is stable.

We also assigned a 'B' issue-level rating with a '4' recovery rating to the 
new term loan. The '4' recovery rating indicates our expectation for average 
(30% to 50%) recovery of principal in the event of a payment default. 

Blum and Golden Gate are funding the transaction with financial sponsor common 
equity, the term loan, and the unrated revolver. This new revolver will 
replace the company's existing $300 million unrated revolving loan facility. 
The company is using the proceeds from the financing mainly to purchase $600 
million in public stock. We expect Collective will repay its existing $480 
million in senior secured term loan and $126 million in senior subordinated 
notes after the completion of the transaction by the end of 2012, at which 
time we will withdraw our ratings on both pieces of debt. 

Rationale
The rating on global footwear retailer Collective reflects Standard & Poor's 
expectation that the company's financial risk profile will remain "highly 
leveraged" and its business risk profile will remain "vulnerable" this year 
despite efforts to improve merchandising and pricing and continue closing 
certain unprofitable Payless ShoeSource stores. 

Collective is increasing total debt to EBITDA from 4.8x in the year ended July 
28, 2012, to 5.7x pro forma for the deal, reflecting the Golden Gate and Blum 
acquisition. Pro forma debt includes the $275 million term loan, $75 million 
of drawn revolver, and other debt mainly related to pensions and leases. We 
expect interest coverage to decline to an estimated 2.1x from 2.9x before the 
transaction. We also expect credit metrics to improve slightly by year-end due 
to stronger back-to-school and holiday sales compared to 2011. 

Our outlook for the footwear sector that includes Collective's main Payless 
ShoeSource stores remains negative due to oversupply. The outlook is more 
favorable for the Performance & Lifestyle Group (PLG) Wolverine is acquiring 
as part of this transaction. That unit includes wholesale brands Saucony, 
Keds, Stride Rite, and Sperry Top-Sider and has experienced faster growth than 
Payless in the past year. 

Collective's "vulnerable" business risk profile reflects Payless' 
participation in the highly fragmented global footwear industry, which has 
seen increased competition in recent years from mass market discounters and 
specialty retailers considered more moderately priced. This trend hurt 
Collective as it skewed toward more expensive shoes during the recession, when 
high unemployment reduced disposable income for the company's core 
demographic. However, Payless has since refocused on its traditional lower 
price market and is seeing improved results in the first half of 2012. 

We expect a 3.4% adjusted EBITDA increase for the fiscal year ending Dec. 30, 
2012, due to slightly positive comparable-store sales. We project the 
company's adjusted EBITDA margin will increase 30 basis points (bps) to 8.8% 
in fiscal 2012 as modest labor cost savings from store closures propel 
improved operating leverage. We believe future growth will come from expanding 
Payless stores overseas to cater to the emerging middle class, especially in 
Latin America, rather than adding stores in the saturated U.S. market. We 
expect the U.S. store base will continue to shrink in coming years and do not 
expect new franchised stores.  

Principal economic factors we considered in our forecast include real GDP 
growth of 2.1% in 2012 and 1.8% in 2013, consumer spending growth of 2% in 
2012 and 2.3% in 2013, and the unemployment rate remaining at or above 8% 
through 2013. Further specific details underlying our fiscal 2012 forecast for 
Collective include:
     -- We expect overall sales will remain flat as positive same-store sales 
offset continued net store closures. 
     -- We believe gross margin will stay flat as the company liquidates 
seasonal inventory and reduces promotional selling in favor of consistently 
low prices.
     -- We anticipate total selling, general, and administrative (SG&A) 
expenses will decrease in the low-single-digit percent rate due to a reduced 
retail base and the sale of PLG. 
     -- We forecast funds from operations (FFO) to total debt will be in the 
25% range after the deal from the low-20% range due to slightly lower pro 
forma debt. 

Liquidity
We view Collective's liquidity as "adequate," as we expect sources of 
liquidity to be greater than uses over the next 12 to 18 months. Sources of 
cash include the new revolver, FFO, and modest excess cash following the 
transaction. Cash uses include debt amortization and reduced capital spending. 

Our assessment of the company's liquidity profile includes the following 
factors and assumptions:
     -- We forecast cash sources will exceed cash uses by more than 1.2x over 
the next 12 months and remain positive over the next 24 months.
     -- We also forecast net sources would remain positive even if EBITDA were 
to decline 15%.
     -- The company consistently maintained sound covenant cushions under its 
previous credit agreement and will have a springing fixed-charge covenant 
under the new revolver depending on availability. 
     -- There are no near-term debt maturities.

Recovery analysis
For the complete recovery analysis, see the recovery report on Collective, to 
be published soon after this report on RatingsDirect.

Outlook
The stable outlook reflects our expectation that modest operational 
improvement, coupled with limited debt reduction, will result in slightly 
improved credit measures in the coming year. We could lower the rating if 
comparable-store sales turn negative again due to merchandise or pricing 
missteps, leading to a weaker-than-expected second half of 2012. This would 
result in gross margin falling 200 bps and EBITDA declining about 20% from our 
expectations for fiscal 2012. In this scenario, interest coverage would fall 
below 2x, leverage would approach 7x, and FFO to total debt would decline 
below 10%. Given Collective's expected credit measures and strategic 
realignment, as well as our industry outlook, we are not expecting to raise 
our ratings over the near term.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- Key Credit Factors: Business And Financial Risks In The Restaurant 
Industry, Dec. 4, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed And Off CreditWatch
                                        To                 From
Collective Brands Inc.
 Corporate Credit Rating                B/Stable/--        B/Watch Neg/--

New Ratings

Collective Brands Inc.
 Senior Secured                                           
  US$275 mil term loan bank ln due 2019 B                  
   Recovery Rating                      4                  

Ratings Affirmed And Off CreditWatch; Recovery Ratings Unchanged
                                        To                 From
Collective Brands Inc.
 Senior Secured                         B+                 B+/Watch Neg
   Recovery Rating                      2                  2
 Subordinated                           CCC+               CCC+/Watch Neg
   Recovery Rating                      6                  6


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action 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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