-- Prestige Brands' pro forma financial ratios have improved as the
company has increased operating income and applied free cash flow to debt
reduction following its acquisition of GlaxoSmithKline's (GSK) North American
over-the-counter (OTC) brands in early 2012.
-- We are affirming all ratings, including the 'B+' corporate credit
rating, and revising the outlook to stable from negative.
-- The outlook is stable, which reflects our expectation that recent pro
forma credit ratio improvement will continue, with credit protection measures
remaining in line with our indicative ratios for an "aggressive" financial
On Dec. 20, 2012, Standard & Poor's Ratings Services affirmed its 'B+'
corporate credit rating on Irvington, N.Y.-based Prestige Brands Inc. and
revised the outlook to stable from negative.
At the same time, we affirmed the 'BB-' issue-level ratings (one notch higher
than the corporate credit rating) on the company's $660 million senior secured
term loan due 2019 and the $250 million senior secured notes due 2018. The
recovery ratings remain '2', indicating our expectation for substantial (70%
to 90%) recovery in the event of a payment default.
In addition, we affirmed the 'B-' issue-level rating (two notches below
corporate credit rating) on the company's $250 million new senior unsecured
notes. The recovery rating remains '6', indicating our expectation for
negligible recovery (0-10%) in the event of payment default.
The outlook revision reflects our expectation that Prestige Brands will
continue to strengthen its credit measures through the end of fiscal 2013 and
in fiscal 2014. During this time we expect operating performance will remain
steady and the company will further apply free cash flow to debt repayment.
The company has improved credit measures faster than our previous forecast,
which includes a pro forma ratio of total debt to EBITDA of about 4.8x; our
earlier projection called for leverage to fall below 5x by the end of fiscal
2013 (ended March 31, 2013). We now believe leverage will be in the low-4x
area by the end of fiscal 2014.
The ratings on Prestige Brands reflect our view that the company's financial
risk profile will remain "aggressive" over the next year. We believe credit
metrics will remain weak and that the company will continue to maintain its
financial policy for the foreseeable future, actively pursuing an
acquisition-based growth strategy and utilizing debt as its primary source to
fund such transactions.
We continue to view the company's business risk profile as "weak" because of
the company's niche position in a highly competitive OTC health care and
household consumer products market. At the same time, we view Prestige's
management and governance to be "fair." Our assessment recognizes management's
demonstrated ability at integrating its recent acquisitions without material
disruption to date. Prestige acquired many of its brands from larger
competitors who underinvested in them because of the brands' limited potential
to expand globally. The company's strategy is to develop new product
innovations for these brands and, with increased marketing spending, boost
performance, most notably with respect to its core OTC brands.
We believe Prestige's credit metrics will further improve over the next year
as the company continues to increase cash flow generation and benefit from its
recently acquired OTC brands. Nevertheless, we expect credit measures over the
next year to remain weak and to be in line with our indicative ratios for an
aggressive financial risk profile, including a ratio of funds from operations
(FFO) to total debt between 12% and 20% and leverage between 4x and 5x. Our
forecast assumes slow economic growth in the U.S. in 2013, which includes 2.1%
GDP growth in 2013. Specifically, our forecast over the next 12 months for
credit metrics includes the following outcomes:
-- Leverage (the ratio of adjusted debt to EBITDA) in the high-4x area
-- EBITDA coverage of interest expense approaching 3x; and
-- FFO to total debt in the 11%-12% percent area.
The above forecast is based on the following assumptions:
-- Low-single-digit sales growth over the next two years, which assumes
low-single-digit increases in existing and acquired OTC brands more than
offsetting a mid-single-digit continued decline in its Household business.
-- We forecast consolidated EBITDA margins will remain close to 35%
during this time, compared with an EBITDA margin of just over 30% for the
fiscal year ended March 31, 2012. We base this forecast on the belief that the
company has benefited from a favorable mix shift, as the acquired GSK brands
carry higher operating margins, and as increases in brand spending help propel
-- Acquisition activity will be somewhat limited to smaller "bolt-on"
opportunities over the next two years. We do expect Prestige Brands to acquire
niche brands to pursue growth.
-- We expect the company to continue to apply free cash flow to debt
reduction over the next two years.
Our view of the company's business risk profile is based on its lack of
international diversity in its product lines and its participation in the
highly competitive OTC health care and household consumer products segments,
where it competes with much larger and better capitalized companies with
greater resources for product development and marketing, including Johnson &
Johnson and Procter & Gamble. The company benefits from strong market shares
with high-margin brands and established positions in niche markets. In
addition, we believe the company's recent string of acquisitions provide
greater negotiating leverage with its key retail customers and an increased
geographic presence in Canada.
We believe Prestige Brands has maintained good profitability, with good
operating performance in its OTC business offsetting declines in its Household
segment. We believe Prestige Brands has relatively good operating efficiency,
focusing on the marketing and development of its brands, and outsourcing
manufacturing to third parties. Although Prestige Brands is involved in
developing new product innovations, the company also outsources research and
development to third parties. This helps reduce Prestige Brands' expenses;
however, it also potentially limits the company's control of new product
development. Most of its existing brands, such as Compound W, Clear Eyes, and
Chloraseptic, are well established and have strong market positions in their
niche categories. Following the GSK OTC brands acquisition, the company has 14
core OTC brands, nine of which have sales in excess of $20 million.
We believe Prestige Brands will maintain "adequate" liquidity to meet its
needs, as we expect the company's sources to be greater than its uses over the
next 12 to 18 months. Liquidity sources include about $29 million of cash and
equivalents as of Sept. 30, 2012, and under its $75 million asset-backed (ABL)
revolving credit facility due in January 2017, which was upsized from $50
million in September 2012; $25 million was drawn at Sept. 30, 2012. Additional
cash sources include free operating cash flow generation, which we estimate
will range between $80 million and $100 million in fiscal 2013. Uses include
seasonal working capital needs, modest capital expenditures, and potential
Relevant aspects of Prestige's liquidity, in our view, are as follows
-- We expect coverage of uses by sources to be in excess of 1.2x for the
next two years.
-- We expect sources to exceed uses, even if EBITDA drops 20%.
-- Cushion on the company's minimum consolidated net cash interest
coverage covenant and maximum total net leverage covenant to remain above 15%
-- No material near-term maturities
-- We believe the company maintains a satisfactory standing in credit
The issue-level rating on Prestige Brands' $660 million senior secured term
loan due 2019 is 'BB-' (one notch higher than the corporate credit rating;
$565 million was outstanding as of Sept. 30, 2012). The recovery rating on the
secured debt is '2', indicating our expectation for substantial (70% to 90%)
recovery in the event of a payment default. The $50 million senior asset-based
revolving credit facility due 2017 is not rated.
The issue rating on the company's $250 million senior secured notes due 2018
is also 'BB-', reflecting improved recovery prospects for lenders resulting
from the addition of collateral in conjunction with the roll-over of this
debt. The recovery rating on these notes is '2'.
The company's $250 million of senior unsecured notes is rated 'B-' (two
notches below the corporate credit rating), with a recovery rating of '6',
indicating our expectation for negligible recovery (0%-10%) in the event of a
For the complete recovery report on Prestige Brands, please see the recovery
report on Prestige Brands Inc., published Jan. 26, 2012 on Ratings Direct.
The rating outlook is stable. We believe Prestige Brands' credit protection
measures will gradually improve over the next two years given the successful
integration of the GSK brands and our expectation for continued debt reduction
over the next 12 months. We still expect credit metrics to remain in line with
indicative ratios for our "aggressive" financial descriptor.
We could consider raising the rating if Prestige is able to generate modest
organic sales growth, maintain its EBITDA margin close to current levels, and
reduce and sustain an adjusted leverage ratio below 4x, which is more
indicative of a "significant" financial risk profile. Based on pro forma
EBITDA levels, we estimate leverage would approach this threshold or below if
the company reduced debt by more than $175 million. We estimate this could
occur if the company sustains organic sales at a low-single-digit percentage
rate, while maintaining EBITDA margins close to 35% and applying much of its
free cash flow to debt reduction.
Alternatively, we could lower the rating if credit measures weaken as a result
of a more aggressive financial policy or performance declines, either of which
could cause leverage to exceed 5.5x. Based on current pro forma credit
measures, we estimate an increase in debt of about $175 million or more (at
current pro forma EBITDA as of Sept. 30, 2012) would cause leverage to exceed
this level, or a decline in pro forma EBITDA of about 13% or more (assuming
current debt levels) would also lead to leverage exceeding this level. We
believe further declines in the company's household segment coupled with
failure to improve organic sales in its OTC segment (despite higher
advertising and promotional brand support) would cause profitability to
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
-- Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Rating Affirmed; Outlook Revised
Prestige Brands Inc.
Corporate credit rating B+/Stable/-- B+/Negative/--
Prestige Brands Inc.
Recovery rating 2
Bank loan BB-
Recovery rating 2
Recovery rating 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