Oriental Trading's proposed bank facility has received speculative-grade ratings from Moody's Investors Service and Standard & Poor's. The $180 million senior secured credit garnered ratings of Ba2 and BB-, respectively, despite strong and improving credit measures for the Omaha, Neb., direct marketer of novelties and home décor items.
According to Marie Menendez, v.p. and senior credit officer at Moody's, the rating reflects Oriental Trading's demonstrated low volatility for product demand, its low inventory risk and its ability to generate sufficient free cash flow from operations to internally finance growth and operating needs as well as amortize debt. Ana Lai, associate director at S&P, also cited the company's stable cash flow generation, which has allowed it to grow the business despite a recession.
Credit measures are strong for the rating and actually strengthen with the new bank facility, which refinances some $80 million in high-cost subordinated debt. Indeed, EBITDA interest coverage improves to more than five times and total debt service coverage comes in at 3.5 times, including required amortization of the credit. But Lai noted that, given Oriental Trading's relatively small cash flow base, these numbers could swing drastically if the company's fortunes turn.
The credit comprises a five-year, $30 million revolver and a seven-year, $150 million "B" term loan. The term loan amortizes at a rate of $6 million per year for the first five years and $60 million for the remaining two years, and Oriental Trading is required to use 75% of excess cash flow to permanently reduce borrowings. The credit is secured by a first lien on all of the assets of the company and its present and future subsidiaries, which Lai said is likely to provide a meaningful level of recovery for the lenders in a default scenario.
Comfortable cash flow protection and manageable debt service requirements provide rating stability, but S&P thinks upside rating potential is limited by Oriental Trading's narrow business focus and competitive conditions in its fragmented market. Moody's, however, believes the company will continue to generate excess cash flow from operations, which could enable it to repay debt more quickly than the required minimum amortization. In that case, future ratings could be higher, Menendez noted. But if the company uses the excess cash for other purposes that increases risk, ratings could decline, she added.