Overview -- New York City-based consumer products company Iconix Brand Group announced a proposed $600 million securitization program that could be further upsized to $1.1 billion. -- We forecast pro forma credit ratios to weaken, and believe the company's incremental debt capacity points to a continued aggressive financial policy, particularly with respect to future potential debt-financed acquisitions and share repurchases. -- We are revising our 'B+' rating outlook on the company to stable from positive, since we now do not believe the company will reach the credit ratios previously specified for an upgrade. -- The stable outlook reflects our expectation for overall profit stability and for credit metrics to remain near estimated pro forma levels, including leverage in the mid-3x area. Rating Action On Nov. 2, 2012, Standard & Poor's Ratings Services revised Iconix Brand Group Inc.'s rating outlook to stable from positive. The company's 'B+' corporate credit rating remains unchanged. We estimate that total debt outstanding as of Sept. 30, 2012 was about $470 million. Rationale The outlook revision to stable from positive reflects Standard & Poor's Ratings Services' view that Iconix will not reach the credit ratios previously specified for an upgrade, which included maintaining leverage at or below 2.5x. In addition, we continue to view the company's financial risk profile as "aggressive," particularly with respect to future potential debt-financed acquisitions and share repurchases. We estimate that credit ratios will deteriorate meaningfully due to the $600 million proposed debt financing, including leverage rising to the mid-3x area and funds from operations (FFO) to total debt in the low 20% area. If Iconix successfully issues its proposed $600 million securitization debt, we estimate pro forma debt will total around $925 million. We believe the company may add more debt in the future considering its ability to upsize the securitization financing to $1.1 billion, based on the initially securitized assets. Iconix' highly acquisitive nature causes its credit metrics to be somewhat volatile. Although estimated pro forma credit ratios are stronger than levels typical of an "aggressive" financial risk profile, which include leverage between 4x and 5x, we think there is good probability that the company could issue more debt, resulting in credit ratio deterioration. The company's continuing participation in the highly competitive, unpredictable fashion apparel industry and its licensing contract renewal risk contribute to what we continue to view as a "weak" business risk profile. The company benefits from a predictable royalty income-based business model and high margins. Our assumptions for Iconix over the next 12 to 18 months include: -- Low-single-digit organic sales growth. -- A market-based purchase price multiple applied to the Umbro acquisition, resulting in a moderate increase in EBITDA. -- The company uses $600 million of new securitization debt for general corporate purposes, including funding the Umbro acquisition and repaying debt under the existing revolving credit facility and asset backed notes. -- The adjusted EBITDA margin will remain near current levels. We forecast leverage to remain well above 3x, compared to about 2.3x before the transactions, and EBITDA interest coverage to weaken to below 4x, compared to 4.5x before the transactions. However, a future leveraging event is a risk factor. Overall, the vast majority of the company's portfolio continues to enjoy strong brand recognition. Iconix' portfolio includes certain brands that required revitalization, and the company has enlarged these brands, including Bongo, London Fog, and Rampage. The portfolio has several already popular brands, such as Mossimo, Candie's, and Mudd, some of which were successfully rejuvenated recently. The royalty-based business model is predicated on providing brand management and trend direction for the licensees, which generate a predictable stream of royalty income. This model generates very significant margins, as the licensee is responsible for design, manufacturing, logistics, and working-capital management. However, there remains licensing contract renewal risk, as most of the licensing contracts are between three and five years, and contain an option to renew upon expiration. Liquidity We believe liquidity is "adequate," with sources of cash that are likely to exceed uses for the next year. Our view of the company's liquidity profile incorporates the following expectations and assumptions: -- We expect sources of liquidity to exceed uses by more than 1.2x for the next 12 months. -- We estimate that pro forma cash levels after the proposed $600 million securitization, debt repayment, and Umbro acquisition will increase significantly, potentially to as high as $250 million, though this cash could be used for additional acquisitions or share repurchases. -- We believe net sources would be positive, even with a 15% drop in EBITDA. -- The company appears to have good relationships with its banks, based on its track record. Outlook The outlook is stable. We currently expect overall profit stability and anticipate that the company's credit metrics will remain near estimated pro forma levels, including leverage in the mid-3x area. We could lower the rating if the company cannot generate the expected levels of royalty income, resulting in its financial condition deteriorating, or if the company adds significant amounts of incremental debt such that credit ratios weaken to levels consistent with a "highly leveraged" financial risk profile, including leverage above 5x. We believe that a drawdown of the remaining $500 million securitization capacity without significant acquired EBITDA would lead to a rating downgrade. While unlikely over the near term, considering Iconix' recent debt-financed transaction and the potential to add more debt, we could upgrade the company if we believe Iconix will sustain leverage at 2.5x over the next year. We estimate that this could occur if the company directs all free cash flow toward reducing debt by around $300 million. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- 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 Iconix Brand Group Inc. Corporate Credit Rating B+/Stable/-- B+/Positive/-- 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.