(The following statement was released by the rating agency) Overview
-- U.S.-based NBTY Inc. proposed today a $500 million notes issuance in order to fund an approximately $700 million investor dividend; the remainder is to be funded with cash from the balance sheet.
-- We are affirming the 'B+' corporate credit rating on NBTY Inc.
-- We are assigning a preliminary 'B-' issue-level rating to the new debt, which will be held at the holding company. We are affirming the 'BB-' first lien secured debt and the 'B' senior unsecured debt ratings.
-- Our outlook remains stable, reflecting our view that the proposed largely debt-financed dividend will not result in any material change to credit metrics as the company's operating performance continues to improve.
Rating Action On Oct. 10, 2012, Standard & Poor's Rating Services affirmed its 'B+' corporate credit rating on Ronkonkoma, N.Y.-based NBTY Inc. upon the company's announcement of an approximately $700 million dividend. Our outlook remains stable.
We are assigning a preliminary 'B-' issue-level rating (two notches below our corporate credit rating) on the proposed $500 million notes to be issued at the holding company, Alphabet Holding Co. (HoldCo). Our preliminary recovery rating on this notes issuance is '6,' indicating our expectation for negligible (0%-10%) recovery of principal in the event of a payment default.
At the same time, we are affirming our ratings on the company's existing debt: a 'BB-' first lien issue-level rating on the revolver and term loan, with a recovery rating of '2', indicating our expectation for substantial (70%-90%) recovery of principal in the event of a payment default, and a 'B' issue-level rating on the company's senior unsecured notes, with a '5' recovery rating, indicating our expectation for modest (10%-30%) recovery in the event of a default.
In our opinion, NBTY's proposed $500 million notes issuance and $200 million cash outlay to fund an approximately $700 million dividend (less standard fees and expenses) reflects an aggressive financial policy and results in credit protection measures in line with indicative ratios for an "aggressive" financial risk descriptor (namely, an adjusted debt to EBITDA ratio between 4x and 5x and a ratio of funds from operations (FFO) to total debt between 12% and 20%). Specifically, our pro forma 2012 and projected 2013 credit metrics forecast is as follows:
-- Adjusted leverage (as measured by the debt-to-EBITDA ratio) in the high-4x area;
-- EBITDA coverage of interest in the mid-2x area; and
-- FFO to debt in the 12% area.
The following assumptions inform this forecast:
-- The Carlyle Group, the company's private equity sponsor, influences NBTY's aggressive financial governance.
-- The possibility of strategic tuck-in acquisitions in keeping with the company's history of acquisitive growth. We expect these to be funded either through cash or borrowings on the revolver.
-- Mid-single-digit percentage revenue growth rate in 2012 and 2013 as higher-margin segments continue to perform well. We project sales growth to continue to outpace the industry by low-single-digit percentage points. We believe the company's sales lead may narrow but growth in general will continue thanks to the company's scale and capabilities for innovation. Further, we project that the company will continue to experience traction in the growing diet and sports nutrition category.
-- EBITDA margins around 20% sustained through a favorable shift in product mix, scale gains, or improvements to pricing flexibility. Raw material (specifically whey protein) cost increases continue to pressure profitability, in our view, in fiscal 2012 and 2013.
-- Capital expenditures of approximately $90 million annually.
-- Solid free operating cash flow generation approaching $200 million in 2012 and 2013.
-- Minimal additional debt paydown due in large part to the $225 million voluntary debt repayment in fiscal 2012.
Our "fair" business risk profile assessment incorporates NBTY's ongoing exposure to the growing, highly competitive, and fragmented vitamin, mineral, and health supplement (VMHS) industry (which incorporates potential regulatory, sanitary, and international trade barriers) and this industry's high sensitivity to innovations and promotional activities. NBTY's customer concentration is, in our view, a risk, as is its exposure to the pressured private-label environment, which currently accounts for over one-fifth of total sales. However, we expect the company to continue to benefit from its strong market position in its top two markets, the U.S. (approximately $28 billion total market size) and the U.K. We also expect it to benefit from its diversified branded product portfolio, its positive track record of integrating acquired companies, and its strong liquidity, which affords the company the ability to invest in innovation and marketing. We believe its vertical integration, manufacturing efficiency, and scale allow it to produce low-cost products that are diversely distributed through wholesale, retail, and direct-response channels (including mail order and internet sales), presenting NBTY a competitive advantage.
We assess NBTY's liquidity as "strong." We believe the company's sources of liquidity (including cash on hand and revolver availability in addition to cash flow generation) will cover its needs over the next 12 months. As of June 30, 2012, the company reported about $260 million in cash and equivalents, and full availability under its $200 million revolving credit facility due 2015. Even with the application of $200 million of cash from its balance sheet to fund the proposed dividend, the company's over-$180 million of expected free operating cash flow is more than enough to cover maturities and capital expenditures, as well as increases in debt payments over the next 12 months. We expect NBTY to fund prospective acquisitions with a combination of debt and cash flow.
Other factors in our liquidity assessment include:
-- We expect NBTY's sources of liquidity (including cash, availability under the revolving credit facility, and free cash flow) to exceed uses (debt amortizations, capital expenditures, and eventual working capital shortfalls) by over 1.5x in next 12 months.
-- We expect sources will continue to exceed uses over the next 12 months, even if EBITDA declines by 30%.
-- Restrictive financial covenants are only applicable if there is any amount drawn under the revolving facility, and we do not expect NBTY to borrow under the facility.
-- Due to the company's sizable voluntary prepayment in fiscal 2012, its mandatory amortization payments on its term loan have been eliminated until maturity and its 50% excess cash flow sweep will not apply until fiscal 2014.
-- With cash balances and availability under its revolving facility, we believe the company will be able to absorb high-impact, low-probability events.
-- In our opinion, the company has adequate access to debt capital markets.
Recovery analysis Our issue-level rating on the proposed $500 million notes to be issued at HoldCo is preliminary 'B-' (two notches below our corporate credit rating). Our preliminary recovery rating on this notes issuance is '6', indicating our expectation for negligible (0%-10%) recovery of principal in the event of a payment default.
Our issue-level ratings on NBTY's $200 million revolving credit facility and its $1.75 billion term loan B-1 are both 'BB-' (one notch above the corporate credit rating), with recovery ratings of '2', reflecting substantial (70%-90%) expected recovery in the event of a payment default. The company's $650 million senior unsecured notes are rated 'B', with a '5' recovery rating, reflecting modest (10%-30%) expected recovery in the event of a payment default.
For our full recovery analysis, please see our recovery report, to be published on RatingsDirect following this report.
The stable outlook on NBTY reflects our expectation that the company will continue to deliver strong cash flows while sustaining a moderate approach to acquisitions and dividend payments (following the proposed transaction), which should allow it to gradually reduce leverage with organic EBITDA growth.
We could lower the ratings if NBTY pursues acquisition transactions or engages in additional shareholder rewarding activity that could weaken liquidity and deteriorate adjusted total debt to EBITDA to the mid-5x area and FFO to debt below 10%. Weaker economic conditions, higher promotional activities, or pricing inflexibility could also put downward pressure on the rating. We believe EBITDA would need to decline by approximately 10% from current levels for adjusted leverage to rise to the mid-5x area, if debt remains constant. An increase of nearly $315 million of debt would also increase adjusted leverage to the mid-5x area, if EBITDA were to remain constant.
We could consider a positive rating action if NBTY is able to reduce and sustain total debt to EBITDA to about 4x and sustain FFO to debt in the 15% area. Debt reduction with excess cash would contribute to an improved financial profile. We believe a debt reduction of over $500 million at current EBITDA levels would achieve the 4x leverage. Alternatively, a 20% improvement to EBITDA could result in 4x leverage. We could also consider a positive rating action if NBTY were to improve its business profile, perhaps through increased geographic diversification and sustained growth.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
Ratings List Ratings affirmed NBTY Inc. Corporate credit rating B+/Stable/-- Senior secured BB- Recovery rating 2 Senior unsecured B Recovery rating 5 New Ratings Alphabet Holding Co. Senior unsecured $500 mil. notes B-(Prelim) Recovery rating 6(Prelim)
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)