Fitch Expects to Rate Spectrum's Secured Term Loan 'BB+'; Notes 'BB-'

NEW YORK--()--Fitch Ratings expects to rate Spectrum Brands, Inc.'s (Spectrum) Euro 150 million (approximately US$187 million) senior secured term loan 'BB+' and the $250 million 6.125% unsecured notes maturing in December 2024 'BB-'. Proceeds will be used to refinance short-term debt, pay for acquisitions, and for general corporate purposes.

Near its fiscal year end, Spectrum announced the $32 million acquisition of Tell Manufacturing, Inc. (Tell) in the door and hardware sector which closed on Oct. 2, 2014, and the pending acquisition of Procter & Gamble's European pet food business. The pet food transaction is expected to close in the second quarter of Spectrum's fiscal 2015 year. The Tells acquisition was financed mainly with short-term debt.

The notes will be guaranteed by Spectrum Brands' direct parent company, SB/RH Holdings, LLC, as well as by existing and future domestic subsidiaries. All other material terms, conditions and covenants related to the term loan and the notes are materially the same as the existing debt instruments. However, Fitch notes a modest increase in financial flexibility to incur debt to the $500 million range at the foreign subsidiary level while the $300 million 6.75% notes maturing in 2020 limit structural subordination to $250 million. The notes contain the standard repurchase upon change of control language found in Spectrum's other unsecured notes.

RATING RATIONALE

Leverage Increases, Remains Appropriate for Category

Spectrum's 'BB-' rating and Stable Outlook is supported by its solid track record of improving margins, low single-digit organic growth rates since 2009, and ample levels of free cash flow (FCF) that has been used to reduce debt. The rating and Outlook also consider the firm's value-based market strategy which resonates well with challenged consumers in developed markets.

Spectrum's leverage increased to the mid-6x range at December 2012 after purchasing Stanley Black & Decker, Inc.'s Hardware & Home Improvement Group (HHI) for $1.4 billion. Fitch expected leverage of sub-4.5x at the fiscal year ended Sept. 30, 2014. LTM leverage of approximately 4.2x is better than expected given EBITDA growth and the company directing more than $200 million to debt reduction. On a pro forma basis at September 2014, leverage would be in the 4.7x range but is likely to be moderately less with a full year of EBITDA from the pet food and Tell acquisitions. Fitch expects Spectrum to operate at the sub-4.5x level or less going forward, given the firm's strong cash generation,

Improved FCF:

Spectrum's FCF (including dividends) improved to the $300 million range in 2014 and met Fitch's expectations with increased sales, greater cost control efforts and higher margins from the HHI acquisition. Fitch expects FCF to remain in this range, with the bulk directed towards debt reduction.

Corporate Governance:

Spectrum is a controlled company. Harbinger Group Inc. (HRG, Fitch Issuer Default Rating (IDR) 'B'/Outlook Positive) owns approximately 59% of Spectrum. HRG has pledged a portion of its spectrum shares as collateral for its own debt, and is also dependent on its portfolio companies for cash flow. However, restrictive and financial covenants in Spectrum's debt facilities, as well as HRG's focus on maintaining moderate debt levels at its portfolio companies, should preserve good credit protection measures.

Acquisitive Posture:

Spectrum has been acquisitive, closing both transformational acquisitions such as HHI and a myriad of bolt-on deals over the past four years. As a result, there has and could be periodic increases in leverage. However, Fitch believes that the company's acquisitions have been accretive and well-integrated.

RATING SENSITIVITIES

Negative: Any change in financial strategy such that leverage is consistently and materially higher than mid-4x levels would be of concern and may have negative rating implications. This is likely to be driven by transformative acquisitions which, while they may make strategic sense, could limit financial flexibility.

Positive: Spectrum's business momentum and credit protection measures are improving. Leverage is expected to be below 4.5x next year with FCF (including dividends) in the $300 million range going forward. There is potential for leverage to trend to less than 3x given the company's cash flow generation. However, recent history has shown this likelihood to be low and perhaps not sustainable if achieved, given the company's acquisitive posture. The potential for an upgrade is low.

Fitch currently rates Spectrum as follows:

--Long-term IDR 'BB-';

--$400 million senior secured asset backed revolver (ABL) due May 24, 2017 'BB+';

--$510 million senior secured term loan C due Sept. 4, 2019 'BB+;

--$648 million senior secured term loan A due Sept. 4, 2017 'BB+'

--$520 million 6.375% senior unsecured notes due Nov. 15, 2020 'BB-';

--$570 million 6.625% senior unsecured notes due Nov. 15, 2022 'BB-';

--$300 million 6.75% senior unsecured notes due March 15, 2020 'BB-'

Fitch currently rates Spectrum Canada as follows:

--Long-term IDR 'BB-';

--$34 million senior secured term loan B due Dec. 17, 2019 'BB+'.

Fitch currently rates Spectrum Brands Europe GmbH as follow:

-- Euro 225M (USD$283 million) senior secured term loan due Sept. 4, 2019 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-term Ratings and Parent and Subsidiary Linkage' (May 2014);

--'Spectrum Brands: Full Rating Report' (July 2014).

Applicable Criteria and Related Research:

Spectrum Brands, Inc.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=711535

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=939736

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Contacts

Fitch Ratings
Primary Analyst
Grace Barnett
Director
+1-212-908-0718
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3186
or
Committee Chairperson
Mike Paladino, CFA
Senior Director
+1-212-908-9113
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Grace Barnett
Director
+1-212-908-0718
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3186
or
Committee Chairperson
Mike Paladino, CFA
Senior Director
+1-212-908-9113
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com