Fitch Rates SCJ's $750MM Note 'A-'
Similar to several other notes, the indenture contains a change of control repurchase event if any person other than the Exempt Persons and/or employee/shareholders owns more than 50% of the outstanding stock and two of three rating agencies rate the company below investment grade. In this event, each holder can put their notes to the company at 101% of face value plus accrued interest.
This is an opportunistic transaction which increases gross leverage to 2.7x on a pro-forma basis at June 30, 2015. The company's intention is to use the funds in the business with full availability of the funds to reduce debt if required. As a private company, Fitch's concern around the potential of a large debt funded shareholder friendly action is lessened. As a result, until the related proceeds are deployed in an accretive acquisition or to bolster liquidity, Fitch will view SCJ's leverage on net basis terms. Net leverage would thus be at very comfortable levels under 1x on a pro-forma basis at June 30, 2015.
KEY RATING DRIVERS
Brand, Geographic Diversity
SCJ is a privately held household products company with a diverse portfolio of leading brands such as Glade for air care, Raid in pest control, Windex and Mr. Muscle in home cleaning, Ziploc in home storage solutions, and Kiwi in shoe care. Products are sold in more than 100 countries. The U.S. accounts for a meaningful portion of operations; however, the company is not dependent on any one product or region.
Improved Operating Performance
Revenue growth has been, and should remain, in line with the household and personal care sectors' organic range of 1% to 6%. However, foreign exchange translation will hamper near term growth similar to other multinational companies.
On the margin and cash flow front, improvements have been noticeable. Accretive bolt on acquisitions, past disposal of brands with lower-than-corporate average margins, and several successful restructuring efforts, has led to not only sequential EBITDA margin improvements but also free cash flow (FCF) generation over the past four fiscal years. FCF was better than Fitch's expectations in 2015 and should increase going forward.
Limited Equity Capital Market Access
The company intends to maintain its current private-company structure which limits access to the equity capital markets. Nonetheless, SCJ maintains strong access to debt markets.
The strong U.S. dollar will have a negative impact on revenue growth. However, the impact of recently closed acquisition of The Deb Group and Homebrands A.S. should result in flat to positive low single-digit growth in 2016.
--Bolt-on, but accretive, acquisitions will continue and could lead to moderate increase in gross debt levels in the medium term.
--The company retains its current private company structure.
Future developments that may, individually or collectively, lead to a positive rating action or Outlook revision include:
--SCJ has made solid progress in improving its profitability and FCF, in particular. If SCJ commits to operating with gross leverage under 2x while continuing its current business momentum and strong cash flow generation a positive rating action could be contemplated.
Future developments that may, individually or collectively, lead to a negative rating action include:
--If the company engages in a large leveraged acquisition or materially increases its gross leverage over 2.5x (net leverage over 1.5X as the alternate approximation) on a sustained basis or for other reasons that signal a change in its financial strategy.
Significant Liquidity, Stable Credit Profile
Much of the company's liquidity is generated internally and back-up facilities are just a moderate portion of SCJ's total liquidity. Fitch anticipates that the company can continue to finance bolt-on acquisitions internally and that debt balances are likely to remain around the pro-forma \\$3 billion range in the near term.
Virtually all of SCJ's debt is unsecured. The majority has change of control puts and of these, several, including the credit agreement that matures in 2019, have leverage covenants. There is no significant debt maturity until 2024.
FULL LIST OF RATING ACTIONS
Fitch rates SCJ as follows:
--Issuer Default Rating (IDR) 'A-';
--Short-term IDR 'F2';
--Commercial paper 'F2';
--Senior unsecured notes 'A-';
--Bank credit facility 'A-'.