S&P: BP Ortholite LLC Assigned 'B+' Corporate Credit Rating; Outlook Stable; New Debt Rated
At the same time, we assigned our 'BB' issue-level rating to the company's proposed first-lien credit facilities, including a $12 million revolving commitment expiring in 2021 and a $200 million term loan due in 2023. The recovery rating on the facilities is '1', indicating our expectation for very high recovery (90%-100%) in the event of a payment default. O2 Partners LLC is the issuer.
We estimate the company's adjusted debt will be approximately $205 million at closing, which includes our adjustments for operating leases.
The ratings on Ortholite reflect its narrow business focus and small scale as a provider of customized open-cell foam innersoles used by branded footwear companies. It also reflects Ortholite's participation in the competitive global footwear industry, its exposure to potentially volatile input costs, and the operating risks inherent in high-growth companies. The company's sources of revenue are concentrated among the leading global footwear brands. Our ratings also reflect Ortholite's strong profitability and proprietary technical capability. The superior performance of its insole designs, together with its brand recognition and relationships with leading footwear companies, provide a modest barrier to entry and contribute to the company's solid operating metrics. Ortholite is controlled by private equity firm Blue Point Capital, which is recapitalizing Ortholite with an initial leverage target of 4.2x based on our credit metrics.
We expect the company will further penetrate the global footwear industry based on the superior attributes of its open-cell technology compared with other manufacturers' innersole products. Ortholite's customer base is concentrated among leading footwear companies (Nike, Adidas, Wolverine, Asics, and Clarks) but spread among numerous products. For these firms' products, the attributes of open-cell technology are desirable and contribute to better footwear comfort and performance, supporting higher retail price points. Nevertheless, the loss of a large customer could have a material impact on Ortholite's financial condition due to its relatively small size and narrow product focus.
The stable outlook reflects our expectation that Ortholite's operating performance, profitability, and cash flow will remain healthy following the closing, leading to debt-to-EBITDA approaching 3.8x by year-end 2017 from about 4.2x at closing. We expect the company will maintain its position as a leading supplier of high-end insoles to branded footwear companies based on strong product appeal, continuous innovation, anticipated continued favorable and stable input costs, and improving working capital dynamics. We project debt-to-EBITDA leverage of 3.8x-4.2x over the next year. Nevertheless, we believe the risk inherent with private equity ownership, mainly the intrinsic characteristics and sometimes aggressive nature of financial sponsor's strategies, constrains the long-term potential of a significantly stronger balance sheet.
We could lower the rating if we expected Ortholite's credit metrics to weaken considerably, including debt-to-EBITDA leverage sustained above 5x. This could occur from developments such as the loss of product placement, an unexpected rise in input costs that cannot be recovered through higher prices, or another significant dividend payout. We estimate that leverage would go above 5x if EBITDA at year end were to decline by approximately 12% or debt were to increase by $30 million (assuming current debt and pro forma EBITDA.)
Although unlikely in the next 12 months, we could raise the ratings if the company meaningfully diversifies its customer base, grows scale, and diversifies its product offering and geographic exposure. We could also raise our ratings if Blue Point Capital and other private equity co-investors were to reduce their ownership stake below 40% and Ortholite maintained debt-to-EBITDA below 4x.