TEXT-S&P revises Renfro Corp outlook to stable from positive

Wed Jan 9, 2013 4:07pm EST

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Overview
     -- U.S.-based Renfro is recapitalizing with a proposed $220 million 
senior credit facility to refinance existing debt and pay a $75 million 
dividend to its financial sponsor. 
     -- We are affirming our 'B' corporate credit rating on Renfro. We are 
also assigning a 'B' issue-level rating on their senior secured debt, with a 
'4' recovery rating.
     -- We are revising the outlook to stable from positive based on the 
additional debt's effect on credit measures, and our belief that the credit 
measures will not improve enough to support a higher rating during the outlook 
period as previously expected.  
 
Rating Action
On Jan. 9, 2013, Standard & Poor's Ratings Services affirmed its 'B' corporate 
credit rating on North Carolina-based Renfro Corp. and revised the rating 
outlook to stable from positive.

In addition, we assigned our 'B' issue-level rating on Renfro's $220 million 
term loan B due 2019. The recovery rating is '4', indicating our expectation 
of average (30% to 50%) recovery for debtholders in the event of payment 
default. 

Rationale
Today's outlook revision reflects the apparel manufacturer's higher debt level 
and weaker credit metrics following its recapitalization and our belief that 
credit metrics will not improve enough over the next year to support a higher 
rating. The proceeds from the proposed $220 million term loan will mainly 
refinance existing debt and also fund a dividend to the company's financial 
sponsor, which we believe contributes to an aggressive financial policy. We 
estimate pro forma adjusted leverage increases to about 5.0x from 3.7x for the 
12 months ended Oct. 27, 2012.    

The ratings on Renfro reflect our view that the company's financial profile 
has weakened to "aggressive" from "significant" due to the deterioration of 
credit metrics following the recapitalization, and our belief that ratios will 
remain close to current levels. Our financial risk assessment also takes into 
account the company's ownership and board control by a private equity sponsor 
and its willingness to distribute debt-financed dividends. We believe Renfro's 
business risk profile will remain "vulnerable," given its participation in the 
highly competitive apparel manufacturing industry and its narrow product 
focus. 

We believe credit metrics will improve modestly over the next one to two years 
through debt reduction given its required excess cash flow payment. We 
estimate adjusted leverage could decrease to about mid-4x from pro forma 
leverage of about 5x over the next year. We estimate funds from operations 
(FFO) to total debt and EBITDA coverage of interest will be about 14% and 
3.5x, respectively, over the next year. This is commensurate with the 
financial indicative ratios, which includes leverage between 4x and 5x, for 
the "aggressive" financial risk descriptor. (Renfro is a private company and 
does not publicly disclose its financials.)

Our assumptions for the next year include sustained positive operating results:

     -- Good sales growth in fiscal 2013 (benefiting from incremental revenue 
from acquired brands and moderate organic growth) and modest organic sales 
growth in fiscal 2014.
     -- EBITDA margin could decrease in fiscal 2013 from lower-margin products 
from the company's recent acquisition and a change in product mix but could 
slightly increase in fiscal 2014 due to improved product mix and operational 
leverage. 
     -- Moderate capital expenditures.
     -- We do not factor in any acquisitions or further debt-funded dividends.
 
We believe the company competes in a highly competitive, somewhat fragmented 
category--sock manufacturing--against major market participants, such as 
Gildan and HanesBrands. The company's products remain narrowly focused on 
socks, but its product offerings are extensive and its portfolio includes the 
well-known Fruit of the Loom, Dr. Scholl's, and Polo brands. Fruit of the Loom 
makes up a significant portion of the company's revenues, and although Renfro 
does not own the brand, it does have a long-term license to sell Fruit of the 
Loom socks until 2026. The majority of Renfro's revenues come from the branded 
sock category, which typically have higher margins. 

Renfro's customer base continues to be concentrated, with a mass-market 
customer accounting for a significant portion of domestic and international 
net sales. Loss of a customer could have a material impact due to the 
company's relatively small size and narrow product focus. To maintain its 
margins, Renfro has shifted the majority of its manufacturing offshore, 
primarily through wholly-owned subsidiaries and joint ventures. It outsources 
a small portion of its volume across various countries, which allows for 
greater flexibility in the event that the company increases its production 
volume.

Liquidity
We believe liquidity is "adequate," with sources of cash that are likely to 
exceed uses for the next 12 months. Our assessment incorporates the following:

     -- We expect coverage of cash uses to be in excess of 1.2x for the next 
12 months.
     -- We expect net sources would be positive, even in the event of a 15% 
drop in EBITDA.
     -- The company has about $1 million of cash on hand and $45 million 
available on its $60 million asset-based revolving credit facility (unrated) 
as of Oct. 27, 2012. After the transaction, we expect the company to have 
about $30 million of cash and to be fully undrawn on its revolver. Also, the 
revolver maturity will be extended to 2018 from 2015 concurrent with the 
transaction.
     -- We understand that the covenants under the bank loan agreement will 
include maximum leverage and minimum interest coverage, and will be set with 
about 30% headroom.
     -- The company has manageable required amortization of about $2.2 million 
annually and has no debt maturities until 2019, when its term loan B is due.
     -- Capital expenditures and joint venture investments are expected to be 
about $22 million for the current year.
     -- The company appears to have good relationships with its banks, based 
on its track record.
 
Recovery analysis
The issue-level rating on Renfro's $220 million senior secured term B debt is 
'B' (the same as the corporate credit rating). The recovery rating is '4', 
indicating our expectation of average (30%-50%) recovery for debt holders in 
the event of payment default. For the complete recovery analysis, see Standard 
& Poor's recovery report on Renfro to be published shortly on RatingsDirect.

Outlook
Our rating outlook is stable. We expect relatively steady operating 
performance given the replenishment nature of its products, credit metrics to 
remain in line with the aggressive financial risk descriptor, and for 
liquidity to remain adequate over the next year. We could consider an upgrade 
if the company is able to sustain good operating results, reduces debt, and is 
able to improve credit metrics, including sustaining leverage near 3.5x. The 
company would need to reduce debt by about 27% if EBITDA leverage remains at 
current levels.  

Alternatively, we could consider a downgrade if operating performance 
materially deteriorates, possibility due to loss of a major customer, causing 
liquidity to become constrained, including covenant cushion decreases below 
10%, and/or leverage increases to well above 5x. We estimate this could occur 
if EBITDA decreases by about 13% and debt remains at current pro forma levels.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable 
Consumer Products Industry, April 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Standard & Poor's Encyclopedia Of Analytical Adjustments For Corporate 
Entities, July 9, 2007
 
Ratings List
Rating Affirmed; Outlook Action
                              To              From
Renfro Corp.
 Corporate credit rating      B/Stable/--     B/Positive/--

Ratings Assigned
Renfro Corp.
 Senior secured
  $220 mil. term loan B 
  due 2019                    B
    Recovery rating           4


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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