TEXT-S&P assigns Calceus Acquisition preliminary 'B' rating

Fri Jan 11, 2013 11:00am EST

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Overview
     -- New York-based Calceus Acquisition Inc., maker of Cole Haan footwear 
and accessories, proposes to issue $270 million in secured debt to fund a 
portion of its $570 million acquisition by a financial sponsor.  
     -- We are assigning Calceus our preliminary 'B' corporate credit rating. 
In addition, we are assigning a preliminary 'B' issue-level rating to the 
company's proposed $270 million senior secured term loan maturing in 2020, and 
a preliminary '3' recovery rating.
     -- The stable outlook reflects our view that Calceus' credit metrics will 
strengthen over the next 12 months as profitability improves, benefiting from 
some cost savings, and as debt levels are modestly reduced with cash flow from 
operations.

Rating Action
On Jan. 11, 2013, Standard & Poor's Ratings Services assigned its preliminary 
'B' corporate credit rating to Calceus Acquisition Inc. The outlook is stable.

At the same time, we assigned Calceus' proposed $270 million senior secured 
term loan our preliminary 'B' issue-level rating (the same as the corporate 
credit rating) with a preliminary recovery rating of '3', indicating our 
expectation for meaningful (50% to 70%) recovery for the lenders in the event 
of a payment default.

Rationale
Our ratings on Calceus reflect our view that the company's financial profile 
is "highly leveraged," given the high debt levels following its acquisition by 
financial sponsor Apax Partners resulting in pro forma adjusted debt-to-EBITDA 
leverage in excess of 7x. Though the company's financial sponsor will be 
making a meaningful equity contribution (about 50% of the purchase price), we 
believe the company's post-transaction leverage is indicative of an aggressive 
financial policy. 

Our ratings further reflect our view of Calceus' "weak" business risk profile, 
underpinned by the company's strong positions in the U.S. premium footwear 
market and good diversification by product category and distribution channel. 
The business risk assessment is constrained by our view of the highly 
competitive market in which Calceus operates, as well as by its limited 
geographic diversification and reliance on a single brand.

The company will have high debt levels after the transaction. We estimate pro 
forma debt-to-EBITDA leverage will initially be in the low-7x area, adjusting 
for operating lease obligations and nonrecurring expenses, including expenses 
related to its prior corporate parent (NIKE Inc.; A+/Stable/A-1) related 
expenses. We believe this should decline to about 6x within the next 12 
months, particularly as the company achieves additional cost savings for the 
stand-alone company and modest debt reduction with cash flow from operations. 
As such, we believe credit measures are in line with indicative ratios for a 
financial risk profile that we characterize to be highly leveraged, which 
includes debt-to-EBITDA leverage of over 5x. (Calceus is a privately held 
corporation and does not publicly disclose its financial statements.)

Our base-case forecast for the next 12 months incorporates the following 
assumptions: 
     -- Organic revenue growth in the mid-single-digit area for fiscal 2013 
(ending May 31) and low-single-digits for fiscal 2014. We expect fiscal 2014 
growth to be lower as the company closes unprofitable retail locations.
     -- EBITDA margins will improve to the 10% area from the company's 
currently low level of about 8.5%. In particular, we expect the company to 
benefit from implementation of a portion of the cost savings management has 
identified related to operating efficiencies across the organization. 
     -- We estimate capital expenditures of in the low-$20 million area for 
the next 12 months. 
     -- We expect the company's cash flow from operations to fully fund all 
capital expenditures and fixed charges.
     -- We assume no shareholder distributions or acquisition activity for the 
next roughly 12 to 24 months. We expect the company to use internally 
generated cash to reduce debt.
 
We believe Cole Haan's business is narrowly focused in the highly competitive 
premium footwear sector. The company, with a little over $500 million in 
sales, will be a relatively small player as compared to other rated footwear 
and apparel companies, including Wolverine World Wide Inc. and Jones Group 
Inc. (both BB-/Stable/--). In addition, the company's geographic 
diversification is somewhat limited, with about 15% of combined sales 
generated outside of North America. Still, we believe the Cole Haan brand will 
continue to hold top market positions across the various men's and women's 
footwear categories in which it competes. In addition, the company's products 
are diversified across many categories, ranging from casual to more formal 
wear, and are distributed across various retail channels, including 
company-operated retail stores (about 40% of EBITDA) and wholesale channels 
(60%). 

Liquidity
We view Calceus' liquidity as "adequate," with sources of cash that are likely 
to exceed uses for the next 12 months. We expect funds from operations for 
2013 to fully cover all capital expenditures and fixed charges.

Our assessment of Calceus' liquidity incorporates the following expectations, 
assumptions, and factors: 
     -- We forecast sources of liquidity to exceed uses of liquidity by more 
than 1.2x over the next 12 months. 
     -- We estimate net sources would be positive even if EBITDA fell 15%. 
     -- Calceus will have a $100 million five-year asset-based revolving 
credit facility maturing in 2018, which will have substantial availability 
upon completion of the transaction.
     -- The proposed secured term loan will be covenant lite. In addition, the 
company's asset-based credit facility will only be subject to a fixed charge 
covenant if availability declines to less than 10% of its borrowing base 
availability. We estimate availability will be well in excess of this level 
during the company's peak seasonal period. 
     -- The company has no term debt maturities beyond principal amortization 
until 2020.

Recovery analysis
The issue-level rating on Calceus' proposed $270 million senior secured term 
loan is 'B', same as the corporate credit rating. The recovery rating on the 
facility is '3', reflecting our expectation for moderate (50% to 70%) recovery 
for the lenders in the event of a payment default. For the complete recovery 
analysis, please see Standard & Poor's recovery report on Calceus, to be 
published on RatingsDirect following the publication of this report.

Outlook
The stable outlook reflects our view that Calceus' profitability will improve 
over the next 12 months thanks to cost reductions, and the company will be 
able to maintain its strong market positions in the U.S. premium footwear 
market. We expect credit metrics to strengthen modestly such that the 
company's debt-to-EBITDA leverage declines to 6x area in the next 12 months. 

However, if debt-to-EBITDA leverage were to increase to over 7.5x on a 
sustained basis (possibly from lower-than-anticipated cost savings or weak 
sales performance), or if there is a meaningful operational stumble in 
connection with the company's spin-off from Nike, we could lower the ratings.

Conversely, if we believe leverage is sustainable below 5x (which would be 
commensurate with a "aggressive" financial risk profile), we could raise the 
rating. This could result from greater-than-anticipated sales or cost savings, 
leading to about a 200 basis points of improvement in margins versus our base 
case.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Assigned
Calceus Acquisition Inc.
 Corporate credit rating          B(prelim)/Stable/--
 Senior secured
  $270 mil. term loan due 2020    B(prelim)
     Recovery rating              3(prelim)

Temporary telephone contact number: Linda Phelps (917-583-1997)


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 
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