November 6, 2012 / 10:56 PM / 5 years ago

TEXT-S&P rates Tempur-Pedic 'BB-'

-- Tempur-Pedic International Inc. recently signed an agreement to 
acquire Sealy Corp. (B/Watch Pos/--) in a transaction valued at about
$1.3 billion.
     -- We are assigning our 'BB-' corporate credit rating to Tempur-Pedic. We 
are also assigning a 'BB' issue-level rating to Tempur-Pedic's proposed $1.77 
billion senior secured credit facilities, and a 'B+' issue-level rating to 
Tempur-Pedic's proposed $350 million senior unsecured notes due 2020. 
     -- We expect the proceeds to fund the acquisition of Sealy, repay 
existing debt at both companies, and cover transaction fees and expenses. We 
will withdraw the ratings on Sealy Corp. following the close of the 
transaction.
     -- The outlook for Tempur-Pedic is stable, reflecting our expectation 
that the company will maintain adequate liquidity and improve credit measures 
over the next year.
    
     Nov. 6 - Standard & Poor's Rating Services today assigned its 'BB-'
corporate credit rating to Lexington, Ky.-based Tempur-Pedic International Inc.
The outlook is stable.

At the same time, we assigned a 'BB' issue-level rating to Tempur-Pedic's 
proposed $1.77 senior secured credit facilities, consisting of a $350 million 
revolving credit facility and a $650 million term loan A due 2017, and a $770 
million term loan B due 2019. The recovery rating is '2', indicating our 
expectation for substantial  (70% to 90%) recovery for lenders in the event of 
a payment default. We also assigned a 'B+' issue-level rating to 
Tempur-Pedic's proposed $350 million senior unsecured notes due 2020, with a 
recovery rating of '5', indicating our expectation for modest (10% to 30%) 
recovery in the event of default. All ratings are subject to review upon 
receipt of final documentation.

At the close of the transaction, we estimate Tempur-Pedic will have about 
$1.95 billion in total debt outstanding.

The ratings on Tempur-Pedic International Inc. reflect our view that the 
company will have a "fair" business risk profile and an "aggressive" financial 
risk profile following the pending acquisition of Sealy Corp. Key credit 
factors in our assessment of Tempur-Pedic's fair business risk profile include 
its portfolio of well-recognized brands, its geographic diversification, and 
its strong market position in the North American mattress industry. Other key 
credit factors include its narrow business focus in a highly competitive 
industry, exposure to raw material cost volatility, and vulnerability to 
reduced discretionary spending in an economic downturn. 

Our view of Tempur-Pedic's financial profile reflects credit measures 
following the transaction that we estimate will be in line with the indicative 
ratios for an aggressive financial risk profile, which includes adjusted 
leverage of 4x to 5x and funds from operations (FFO) to total debt of 12% to 
20%. We estimate that pro forma for the proposed transaction, credit measures 
will weaken given the substantial increase in debt, with adjusted leverage of 
about 4.4x and FFO to total debt of about 10%. We estimate leverage for 
Tempur-Pedic before this transaction was close to 1.5x and FFO to total debt 
was more than 40% for the 12 months ended Sept. 30, 2012.

On a combined basis, Tempur-Pedic and Sealy have grown revenues over the past 
year as the companies have benefited from new products, distribution gains, 
and strong consumer demand in the specialty bedding segment. However, sales 
and profitability for Tempur-Pedic have shown some weakness over the past six 
months, with revenues declining 6.6% as a result of increased competition in 
the North American market. Although we believe economic and retail conditions 
remain somewhat uncertain and the industry will experience some cost inflation 
over the near term, we believe Tempur-Pedic's credit measures will strengthen 
as profitability improves and the company repays debt. Our forecast 
assumptions include:
     -- Low-single-digit revenue growth for 2013, reflecting a continued 
recovery in consumer bedding demand and contributions from new specialty 
bedding products for both Tempur-Pedic and Sealy. 
     -- EBITDA margins decline about 30 basis points in 2013, primarily 
reflecting spending on new products and promotions. Thereafter, we expect 
synergy benefits, a more favorable product mix, and volume leverage will lead 
to modest margin expansion starting in 2014.
     -- Annual capital expenditures of about $61 million for 2013.
     -- Discretionary free cash flow of about $145 million in 2013.
     -- No share repurchases, as we expect free cash flow will be used for 
debt reduction.

Based on our forecast, we estimate that by the end of the fiscal year ending 
December 2013, adjusted leverage could improve closer to 4x and FFO to total 
debt should exceed 13%.

Tempur-Pedic markets and manufactures proprietary viscoelastic foam mattresses 
and pillows under the TEMPUR and Tempur-Pedic brands. The acquisition of Sealy 
will broaden the company's product line to include both inner-spring and foam 
mattresses under the Sealy, Sealy Posturepedic, Stearns & Foster, and Optimum 
brands. We believe the U.S. mattress industry, with an estimated $6.8 billion 
of wholesale sales as of June 2012, is highly competitive, with the top five 
manufacturers accounting for more than 68% of the market, and the remaining 
portion of the market being very fragmented. The combination of Tempur-Pedic 
and Sealy provides the company with an estimated 30% share of the overall 
wholesale bedding market, and close to 50% share of the specialty bedding 
segment, which we believe improves its competitive position and enhances its 
ability to secure floor space for new products over the next year. In 
addition, we believe the combined company has good international 
diversification, with close to a third of revenue generated outside of the 
U.S. While the bedding industry has historically demonstrated stability in 
various economic environments, the most recent recession and weakness in the 
housing industry caused unit declines for the industry overall during 2009 and 
2010. Industry growth resumed as the economy began to recover in 2011, and has 
continued to improve during the first nine months of 2012. Input cost 
inflation, especially for foam and steel, has been a headwind for the industry 
over the past two years, but we expect some moderation going forward due to a 
slowing global economy.

We believe Tempur-Pedic will have "adequate" sources of liquidity to meet its 
needs during the next 12 months. We expect Tempur-Pedic's sources of liquidity 
during this period will exceed uses by more than 1.2x and that net sources 
will be positive, even with a 15% drop in EBITDA. This is based on the 
following information and assumptions:
     -- We estimate that immediately following the transaction the company 
will have close to $40 million in cash on its balance sheet.
     -- We believe availability on its new $350 million revolving credit 
facility expiring 2017 and cash flow will be sufficient to meet working 
capital needs. 
     -- We expect financial maintenance covenants in the proposed credit 
facility will include maximum net leverage and minimum interest coverage ratio 
tests, with at least 20% EBITDA cushion over the next year.
     -- The company will not have any significant debt maturities until 2017.
     -- We believe Tempur-Pedic will generate more than $230 million of FFO 
over the next 12 months, more than sufficient to cover an estimated $61 
million of annual capital spending. 
     -- We believe Tempur-Pedic has sound relationships with its banks and a 
satisfactory standing in the credit markets.

The issue-level ratings on Tempur-Pedic's proposed $1.77 senior secured credit 
facilities is 'BB', with a recovery rating of '2',  indicating our expectation 
for substantial  (70% to 90%) recovery for lenders in the event of a payment 
default. The senior secured credit facilities include a  $350 million 
revolving credit facility due 2017, a $650 million term loan A due 2017, and a 
$770 million term loan B due 2019. The issue-level rating on Tempur-Pedic's 
proposed $350 million of senior unsecured notes due 2020 is 'B+', with a 
recovery rating of '5', indicating our expectation for modest (10% to 30%) 
recovery in the event of default.

The outlook for Tempur-Pedic is stable, reflecting our expectation that the 
company will maintain adequate liquidity and improve operating performance and 
cash flows over the near term, while strengthening credit measures over the 
next year as profitability improves and the company repays debt. 

We could consider raising the ratings if the company is able to strengthen its 
operating performance, repay debt, and improve credit measures, including 
reducing leverage to below 3.5x and FFO to total debt close to 20%. We 
estimate the company could achieve these metrics by the end of 2014 in a 
scenario where sales increased close to 10% while EBITDA margins improved 
about 100 basis points from the end of 2012, reflecting growth for new 
higher-margin products and the realization of cost savings and synergy 
benefits. 

Alternatively, we could consider a lower rating if the company experiences 
operating difficulties such that credit measures deteriorate, resulting in 
leverage of more than 5x. We could also consider a lower rating if the 
company's liquidity is materially pressured or if the company pursues a more 
aggressive financial policy, including debt-financed share repurchases.

Related Research And Criteria
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

Ratings List
Ratings assigned
 Tempur-Pedic International Inc.
 Corporate credit rating              BB-/Stable/--
 Senior secured
  $350 mil. revolver due 2017         BB
    Recovery rating                   2
  $650 mil. term loan A due 2017      BB
    Recovery rating                   2
  $770 mil. term loan B due 2019      BB
    Recovery rating                   2
 Senior unsecured
  $350 mil. notes due 2020            B+
    Recovery rating                   5

Temporary telephone contact number: Rick Joy (973) 943-5794 


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.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below