(The following statement was released by the rating agency) Overview
-- U.S. women's specialty apparel retailer Jill Holdings LLC amended financial 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 Lease Funding Corp.'s $120 million term loan B to 'B-' from 'CCC' and revising the recovery rating to '3' from '4'.
-- The negative outlook reflects our concerns that performance over the next year could be weak, thus pressuring liquidity and covenant cushions.
Rating Action On Oct. 8, 2012, Standard & Poor's Ratings Services raised its corporate credit rating on Quincy, Mass.-based, women's specialty apparel retailer Jill Holdings LLC to 'B-' from 'CCC'. The outlook is negative.
At the same time, we revised our issue-level rating on subsidiary JJ Lease Funding Corp.'s senior secured term loan B to 'B-' from 'CCC'. We also revised the recovery rating on the loan to '3' from '4'. The '3' recovery rating indicates our expectation for meaningful recovery (50% to 70%) for noteholders in 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 has made a $27.5 million partial paydown of its existing term loan B, using proceeds from a new $30 million unsecured mezzanine term loan facility. As a result, we have revised the recovery rating to '3' as the recovery prospects for the term loan B have improved. The ratings on Jill reflect its "vulnerable" business risk profile and "highly leveraged" financial risk profile.
The company's vulnerable business profile incorporates competition from a number of different retailers, including department stores, other specialty retailers, and mass merchandisers. Jill is a smaller participant than many of its direct competitors, in both store count and sales, which, in our opinion, limits its ability to reach and retain customers more competitively. The company's performance in 2011 was weak, and we remain concerned that prior merchandising issues may resurface over the next year. However, we anticipate sales to be modestly higher as the company adds new stores. In our view, a reduction 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 and lower 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 filing is unlikely to significantly affect Jill's operations. For fiscal 2013, we anticipate that metrics will continue to improve gradually, if the company does not have any additional merchandising missteps. We expect debt to EBITDA to decrease to low-7.0x area, EBITDA coverage to remain flat, and funds from operations (FFO) to debt will increase to about 15%. Total debt to EBITDA was about 8.1x at July 31, 2012, and EBITDA interest coverage was about 1.2x. FFO to total debt was approximately 18% during the same period.
We assess Jill's liquidity as adequate as we believe that cash sources are likely to exceed uses over the next 12 months, even in the event of moderate, unforeseen EBITDA declines. Sources of liquidity for the company include excess cash, projected available borrowings under its $40 million revolving credit facility, and FFO. Cash uses over the near term are its current portion of 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 by 1.2x or more;
-- Sources will continue to exceed uses, even if EBITDA were to drop by 20%;
-- 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 loan amortizations.
Jill is required to meet amended financial covenants under its term facility, including a maximum leverage ratio and a minimum interest coverage ratio. We anticipate Jill will maintain adequate covenant headroom on all covenants over the next year.
Recovery analysis For the full recovery analysis, please see the recovery report on Jill, to be published after this report on RatingsDirect.
The negative outlook reflects our concerns that the company may not be able to solve its merchandising issues over the next year. Performance could suffer as a result, as future step-downs could put additional pressure on its liquidity. We anticipate the credit ratios will remain reflective of a highly leveraged financial risk profile over the next year.
We could lower the ratings if weaker-than-expected performance results in inadequate covenant headroom, pressuring the company's liquidity position. For this to occur, there would be EBITDA deterioration such that financial covenant cushion falls to less than 10%.
Alternatively, we could revise the outlook to stable if the company consistently maintains adequate cushion under their financial covenants. This will be predicated on if we believe the company will be able to maintain covenant 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 List Upgraded To From Jill Holdings LLC Corporate Credit Rating B-/Negative/-- CCC/Negative/--
Upgraded; Recovery Ratings Revised
To From Jill Holdings LLC JJ Lease Funding Corp. Senior Secured B- CCC Recovery Rating 3 4
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)