S&P: FDO Holdings Inc. Assigned 'B' Corporate Credit Rating, Stable Outlook; Senior Secured Debt Also Rated
At the same time, we assigned a 'B' issue-level rating and '3' recovery rating to the company's $300 million first-lien secured term loan due 2023. The '3' recovery rating reflects our expectation for meaningful recovery in the event of default, at the lower end of the 50% to 70% range.
As part of the refinancing, the company increased the asset-based lending (ABL) revolving credit facility (not rated) due 2021 to $200 million from $175 million, which will be partially drawn at the close of the transaction.
"The rating reflects the company's small market share in the highly fragmented and cyclical home improvement and floor replacement industry that is dependent on consumer discretionary spending," said credit analyst Olya Naumova. "The company lacks format diversity as the majority of its sales touches a comparatively small amount of stores. Additionally, flooring purchases occur twice in a lifetime for an average residential customer and longer term, performance is exposed to residential housing remodeling market cyclicality."
The stable outlook on FDO reflects our expectation that the company's unique physical store expansion format, diverse in-stock SKU count, and everyday low prices will continue to attract professional customers in the coming year. However, we remain cautious about execution risks associated with aggressive store growth and any potential housing market headwinds.
We would lower the ratings if FDO cannot manage growth on a leverage neutral basis, whether from competitive pressures or traffic and average ticket declines that prompt additional promotions. This would cause revenue growth to slow down to below 14%, gross and EBITDA margins to decline more than 200 basis points, and leverage to increase to the low - to mid-5.0x in the 2017 period. We would also consider a lower rating in the event of a sponsor-led debt-financed transaction.
We could consider a positive rating action if sales accelerate to above 20%, and gross margins expand more than 150 basis points beyond our expectations, with leverage declining and remaining below 4.0x in 2017. In this scenario, the company would continue to benefit from opening profitable new locations, expanding its market share, and sustaining its direct purchasing advantage relative to competitors. Positive free operating cash flow and a further decrease in financial sponsor ownership would also demonstrate the sustainability of an improved financial risk profile.