June 14 -
— Private-equity firms Leonard Green & Partners L.P. and TPG Capital, in partnership with Savers Inc. Chairman Thomas Ellison and the company’s management team, are acquiring the U.S. thrift store chain in a $1.7 billion leveraged buyout.
— Concurrently, Savers is replacing its rated $500 million credit facility with a new $75 million revolver, a $655 million term loan and $295 million in unsecured notes.
— We are lowering our corporate credit rating on Savers to ‘B’ from ‘B+’ and assigning new ‘B’ issue-level and ‘3’ recovery ratings to the proposed revolver and term loan.
— The stable outlook reflects our belief that despite moderate operational improvement, credit protection metrics will remain in line with our financial risk assessment over the intermediate term. Rating Action On June 14, 2012, Standard & Poor’s Ratings Services lowered its corporate credit rating on Bellevue, Wash.-based for-profit thrift store operator Savers Inc. to ‘B’ from ‘B+’. The outlook is stable. At the same time, we assigned ‘B’ issue-level and ‘3’ recovery ratings to the company’s proposed $75 million revolver and $655 million term loan. The ‘3’ recovery ratings indicate our expectation for meaningful (50% to 70%) recovery of principal in the event of a payment default. Private-equity firms Leonard Green & Partners L.P. and TPG Capital, in partnership with Savers Inc. Chairman Thomas Ellison and the company’s management team, are acquiring Savers in a $1.7 billion LBO. Savers expects to fund the LBO with proceeds from the term loan, $295 million in unsecured notes (unrated), $8 million in revolver borrowing and $764 million in common equity from the private-equity sponsors, Mr. Ellison, and the management team. Rationale The rating on Savers reflects Standard & Poor’s expectation that despite moderate operational gains the company’s financial risk profile will remain “highly leveraged” in the coming year. Freeman Spogli & Co. is selling its investment in Savers after holding the company for about six years. Savers is adding significant leverage to fund the buyout, increasing total debt to EBITDA from 4.7x in the year ended March 31, 2012 to 7.9x pro forma for the deal. Pro forma debt includes the $8 million drawn on the revolver, $655 million term loan, and $295 million of unsecured notes. Interest coverage will decline to an estimated 2.5x from 3.5x before the transaction. Savers has posted strong performance under Freeman Spogli, with annual sales almost doubling since 2006 to about $1 billion in the latest 12 months and EBITDA more than doubling to $163 million. The company has generated positive same-store sales for more than 15 consecutive years and saw a double-digit percentage increase in the most recent quarter. Our outlook for the thrift industry remains positive in the intermediate term, as customers remain frugal in the still-weak economy and merchandise reuse and recycling garner growing acceptance. We view Savers’ business risk profile as “weak,” reflecting its narrow focus and potential for merchandise shortages if charitable donations decline. Other risks include increased competition from mass merchants and exposure to foreign currency exchange rates. We expect an estimated 20% EBITDA increase for the fiscal year ending Dec. 31, 2012, as Savers continues to grow its comparable-store sales and U.S. store base. We project this operational enhancement will push leverage down to the low-7x range by the end of fiscal 2012 and to the low-6x range by the end of fiscal 2013 as it benefits from continued high repeat traffic and improved operating leverage. We expect Savers’ EBITDA margin will increase 110 basis points (bps) to 16.8% in fiscal 2012 as benefits from integrating highly efficient Apogee stores acquired last year offset expansion in the U.S., where margins are lower than in Canada. Standard & Poor’s economists currently forecast a 20% likelihood of a U.S. recession, with GDP growing 2.1% in 2012 and 2.4% in 2013, unemployment remaining at or near 8%, and consumer spending growing 2.2% in 2012 and 2.1% in 2013. Considering these economic assumptions, our forecast for Savers’ operating performance for fiscal 2012 includes the following:
— We expect overall sales will increase 12% as the company opens between 20 and 25 new stores and comparable-store sales remain in the high-single-digit percentage area.
— We believe gross margin will increase 20 to 30 bps, reflecting an increase in higher margin on-site donations.
— We anticipate total selling, general, & administrative (SG&A) expenses will increase in the 10% range because of store growth.
— We expect adjusted funds from operations (FFO) to debt will remain in the mid-to-low teens due to continued earnings expansion. We project Savers will generate $20 million to $25 million in free cash flow in fiscal 2012, similar to recent years. We believe debt reduction will be modest, given expectations for increased capital spending to support new store openings and other initiatives. While the company uses various hedging techniques to partially mitigate exchange rate volatility between the Canadian and U.S. dollars, some risk exists given all of company’s debt is denominated in U.S. dollars, while a large amount of cash flow is generated in Canadian dollars. Liquidity Savers has “adequate” sources of liquidity. Relevant aspects of the company’s liquidity, in our view, are as follows:
— Coverage of sources over uses over the next 12 to 18 months to be above 1.2x;
— We expect net sources would be positive, even with a 15% drop in EBITDA;
— No debt maturities over the near term;
— No covenants on the term loan (“covenant lite”) and no financial maintenance covenants on the revolver unless borrowings exceed $15 million; and
— The company appears to have good relationships with its banks, based on track record. Sources of liquidity mainly consist of $8 million of pro forma cash on the balance sheet, the revolver, and FFO. Uses include term loan amortization and capital expenditures. We expect the company’s expansion plans to require capital expenditure of approximately $50 million to $60 million per year (inclusive of maintenance spending). We also expect continued minimal use of the revolver in the near term. Recovery analysis We rate the revolver and term loan ‘B’ (the same as the corporate credit rating) with a recovery rating of ‘3’, indicating the expectation for meaningful (50%-70%) recovery in the event of payment default. (For the complete recovery analysis, see the recovery report on Savers, to be published on RatingsDirect following the release of this report.) Outlook The rating outlook is stable. We believe Savers will continue to perform well over the near term as still-high unemployment and a weak U.S. housing market spur demand for used goods. We would consider lowering our rating if the integration of the Apogee store base faltered or if U.S. and Canadian economic slowdowns led to lower-than-expected charitable donations and subsequent merchandising supply shortages. This would lead to slower revenue growth and margin contraction such that leverage would remain in the 7x-range. In our view, that could occur if sales grow in the single-digit percentage area or gross margin declines 50 bps in fiscal 2012. This would result in EBITDA declining about 5% from current pro forma levels. We could also lower ratings if the company’s new owners add significant additional debt in the coming year to fund a dividend or acquisition in the intermediate term. Given Savers’ credit measures, U.S. expansion plans, and Apogee integration risks, we are not expecting to raise our ratings over the coming year. Related Criteria And Research
— Criteria Methodology: Business Risk/Financial Risk, May 27, 2009
— Methodology And Assumptions: Standard & Poor’s Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010 Ratings List Downgraded
To From Savers Inc. Corporate Credit Rating B/Stable/— B+/Stable/— New Ratings Savers Inc. Senior Secured US$75 mil revolver bank ln due 2017 B
Recovery Rating 3 US$655 mil term B bank ln due 2019 B
Recovery Rating 3