(The following statement was released by the rating agency)Overview
-- U.S. women's specialty apparel retailer Jill Holdings LLC amendedfinancial covenants under its existing term loan.
-- We are raising our corporate credit rating on Jill to 'B-' from 'CCC'.
-- We are also raising the issue-level rating on subsidiary JJ LeaseFunding Corp.'s $120 million term loan B to 'B-' from 'CCC' and revising therecovery rating to '3' from '4'.
-- The negative outlook reflects our concerns that performance over thenext year could be weak, thus pressuring liquidity and covenant cushions.
Rating ActionOn Oct. 8, 2012, Standard & Poor's Ratings Services raised its corporatecredit rating on Quincy, Mass.-based, women's specialty apparel retailer JillHoldings LLC to 'B-' from 'CCC'. The outlook is negative.
At the same time, we revised our issue-level rating on subsidiary JJ LeaseFunding Corp.'s senior secured term loan B to 'B-' from 'CCC'. We also revisedthe recovery rating on the loan to '3' from '4'. The '3' recovery ratingindicates our expectation for meaningful recovery (50% to 70%) for noteholdersin the event of a payment default.
The upgrade reflects our revision of the company's liquidity profile to"adequate" from "weak," based on its amended financial covenants. Jill hasmade a $27.5 million partial paydown of its existing term loan B, usingproceeds from a new $30 million unsecured mezzanine term loan facility. As aresult, we have revised the recovery rating to '3' as the recovery prospectsfor the term loan B have improved. The ratings on Jill reflect its"vulnerable" business risk profile and "highly leveraged" financial riskprofile.
The company's vulnerable business profile incorporates competition from anumber of different retailers, including department stores, other specialtyretailers, and mass merchandisers. Jill is a smaller participant than many ofits direct competitors, in both store count and sales, which, in our opinion,limits its ability to reach and retain customers more competitively. Thecompany's performance in 2011 was weak, and we remain concerned that priormerchandising issues may resurface over the next year. However, we anticipatesales to be modestly higher as the company adds new stores. In our view, areduction of promotional activities will benefit margins.
Additional factors in our forecast for 2013 include:
-- Revenue increases in the mid-single digits;
-- EBITDA margins to moderately increase due to sales leveraging andlower promotional activity;
-- Modest positive free operating cash flow (FOCF); and
-- No financial support from Arcapita.
We view the company's financial risk profile as highly leveraged,characterized by high debt from its LBO by Arcapita in June 2011. Although,Arcapita filed for Chapter 11 in March 2012, we continue to believe the filingis unlikely to significantly affect Jill's operations. For fiscal 2013, weanticipate that metrics will continue to improve gradually, if the companydoes not have any additional merchandising missteps. We expect debt to EBITDAto decrease to low-7.0x area, EBITDA coverage to remain flat, and funds fromoperations (FFO) to debt will increase to about 15%. Total debt to EBITDA wasabout 8.1x at July 31, 2012, and EBITDA interest coverage was about 1.2x. FFOto total debt was approximately 18% during the same period.
We assess Jill's liquidity as adequate as we believe that cash sources arelikely to exceed uses over the next 12 months, even in the event of moderate,unforeseen EBITDA declines. Sources of liquidity for the company includeexcess cash, projected available borrowings under its $40 million revolvingcredit facility, and FFO. Cash uses over the near term are its current portionof long-term debt and estimated capital expenditures.
Relevant aspects of the company's liquidity are as follows:
-- Sources of liquidity over the next 12 months will exceed its uses by1.2x or more;
-- Sources will continue to exceed uses, even if EBITDA were to drop by20%;
-- Sufficient covenant headroom for forecasted EBITDA to decline by 15%without the company breaching coverage tests; and
-- No meaningful near-term maturities and manageable term loanamortizations.
Jill is required to meet amended financial covenants under its term facility,including a maximum leverage ratio and a minimum interest coverage ratio. Weanticipate Jill will maintain adequate covenant headroom on all covenants overthe next year.
Recovery analysisFor the full recovery analysis, please see the recovery report on Jill, to bepublished after this report on RatingsDirect.
The negative outlook reflects our concerns that the company may not be able tosolve its merchandising issues over the next year. Performance could suffer asa result, as future step-downs could put additional pressure on its liquidity.We anticipate the credit ratios will remain reflective of a highly leveragedfinancial risk profile over the next year.
We could lower the ratings if weaker-than-expected performance results ininadequate covenant headroom, pressuring the company's liquidity position. Forthis to occur, there would be EBITDA deterioration such that financialcovenant cushion falls to less than 10%.
Alternatively, we could revise the outlook to stable if the companyconsistently maintains adequate cushion under their financial covenants. Thiswill be predicated on if we believe the company will be able to maintaincovenant cushion over 20%.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Ratings Criteria: Ratios And Adjustments, April 15, 2008
Ratings ListUpgradedTo FromJill Holdings LLCCorporate Credit Rating B-/Negative/-- CCC/Negative/--
Upgraded; Recovery Ratings Revised
To FromJill Holdings LLCJJ Lease Funding Corp.Senior Secured B- CCCRecovery Rating 3 4
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)