Fitch Ratings has affirmed Spectrum Brands, Inc.'s (Spectrum) Issuer Default Rating (IDR) at 'BB-' with a Stable Rating Outlook. Fitch has affirmed Spectrum's secured facilities at 'BB+' reflecting its priority in the capital debt structure and the strength of the underlying security package. Fitch has also affirmed Spectrum's senior unsecured notes at 'BB-'. The ratings are similar for the company's guaranteed subsidiaries Spectrum Brands Canada, Inc. and Spectrum Brands Europe GmbH. A full list of rating actions follows at the end of this release.
Fitch also assigns a 'BB-' IDR to Spectrum Brands Europe GmbH. Previously there was only a rating on the Euro 225 million senior secured term loan at the issue level.
KEY RATING DRIVERS
Diversification and Marketing Strategy Leads to Solid Results
The firm's value-based market strategy and highly diversified product portfolio across seven categories has resonated well with retail customers and consumers. Organic growth rates have averaged 2% over the past five years, near the low- to mid-point of the household and personal care sector. Modest sales growth, accretive acquisitions, and cost controls have led to improving margins and ample free cash flow (FCF). Much of the company's FCF has historically been directed toward debt reduction that Fitch expects to continue. However, improving profitability provided by EBITDA growth will add flexibility for moderate discretionary activities.
Short-Term Increases in Leverage Expected
Spectrum is acquisitive likely resulting in periodic but temporary increases in leverage. Generally, Fitch expects the company to operate with leverage in the sub-4.5x range. The company's track record on acquisitions has been positive. On the whole, acquisitions have been accretive and well-integrated.
Spectrum's leverage increased to the mid-6x range at December 2012 after purchasing Stanley Black & Decker, Inc.'s Hardware & Home Improvement Group (HHI) for $1.4 billion. Fitch's expectation for sub-4.5x leverage at the fiscal year ended Sept. 30, 2014, was comfortably met. The 4.1x result was due to better than expected EBITDA growth and more than $200 million of FCF being directed towards debt reduction. Leverage will once again increase moderately at the end of the first quarter of 2015 to about 4.7x to accommodate roughly $430 million in debt issued during December 2014 mainly to finance the acquisition of Tell Manufacturing, Inc. (Tell) and Procter & Gamble's European pet food business (Pet). However, gross leverage should easily trend to the sub-4.5x level by year end as those profits and cash flows come on-stream. FFO Interest coverage of 3.1x should remain in this range next year.
Improved FCF
Spectrum's FCF improved to the $300 million range in 2014 and meeting Fitch's expectations after being below $200 million in each of the previous five years. HHI, a large acquisition, added roughly $1 billion in revenues and EBITDA margins that were higher than Spectrum's. Efficient working capital management is also a factor in the company's overall improvement although it is not likely to be as strong contributor to cash flows going forward. Fitch expects FCF to remain in the same $300 million to $400 million range next year.
Spectrum began recording residual U.S. and foreign taxes on undistributed foreign earnings since 2012 in order to accelerate pay down of U.S. debt, as well as fund distributions to shareholders etc. As a result, Fitch views much of Spectrum's cash balance as unrestricted and available to reduce debt.
Corporate Governance
Spectrum is a controlled company. Harbinger Group Inc. (HRG, Fitch IDR 'B'/Outlook Positive) owns approximately 59% of Spectrum. HRG has pledged a portion of its spectrum shares as collateral for its own debt and is also dependent on its portfolio companies for cash flow. However, restrictive and financial covenants in Spectrum's debt facilities, as well as HRG's focus on maintaining moderate debt levels at its portfolio companies, should preserve good credit protection measures.
RATING SENSITIVITIES
Negative: Any change in financial strategy such that leverage is consistently and materially higher than mid-4x levels would be of concern and may have negative rating implications. This is likely to be driven by transformative acquisitions, which may make strategic sense, but could limit financial flexibility.
Positive: Spectrum's business momentum and credit protection measures are improving, but potential for an upgrade is low. Fitch thinks leverage may fall below 4.5x next year with FCF in the $300 million to $400 million range over the medium term. Additionally, there is potential for leverage to trend to less than 3x given the company's cash flow generation. However, recent history has shown this likelihood to be low and perhaps not sustainable if achieved, given the company's acquisitive posture.
Fitch affirms Spectrum's ratings as follows:
Spectrum Brands, Inc.
--Long-term IDR at 'BB-'; Outlook Stable;
--$400 million senior secured asset backed revolver (ABL) due May 24, 2017 at 'BB+';
--$510 million senior secured term loan C due Sept. 4, 2019 at 'BB+';
--$648 million senior secured term loan A due Sept. 4, 2017 at 'BB+';
--Euro 150 million ($181 million) senior secured term loan due Dec. 19, 2020 at 'BB+';
--$520 million 6.375% senior unsecured notes due Nov. 15, 2020 at 'BB-';
--$570 million 6.625% senior unsecured notes due Nov. 15, 2022 at 'BB-';
--$300 million 6.75% senior unsecured notes due March 15, 2020 at 'BB-;
--$250 million 6.125% senior unsecured notes due Dec 15, 2024 at BB-.'
Spectrum Brands Canada, Inc.
--Long-term IDR at 'BB-';
--$34 million senior secured term loan B due Dec. 17, 2019 at 'BB+'.
Spectrum Brands Europe GmbH:
--Euro 225M (USD$283 million) senior secured term loan due Sept. 4, 2019 at 'BB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and Subsidiary Linkage' (May 2014);
--'Spectrum Brands: Full Rating Report' (July 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Spectrum Brands, Inc.
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=711535
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=970035
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