S&P Expects Low Recovery For Prestige 'C' Loan

Prestige Brands' $100 million second-lien "C" loan will likely offer only a 0-25% recovery of principal in the event of a default, according to Standard & Poor's. S&P has assigned a CCC+ rating to the credit and given it a recovery rating of five. The debt is part of a financing package that also includes a $355 million "B" loan and a $50 million revolver both rated B, and $210 million of senior subordinated bonds rated CCC+.

Citibank, Bank of America and Merrill Lynch Capital are leading the financing, which partly backs GTCR Golder Rauner's acquisition of Prestige from MidOcean Partners (LMW, 3/22). The financing will primarily be used to complete the acquisition of Medtech Holdings, The Denorex Company, The Spic and Span Company and Bonita Bay Holdings for around $860 million and repay debt at these entities.

Pro forma total debt-to-EBITDA is high at 6.5 times, notes S&P. The ratings also reflect the company's participation in a highly competitive industry where other larger companies, such as Schering Plough and Colgate Palmolive, have greater resources for product development and marketing, S&P adds.

But Prestige's brands are well established and have number one or two market positions in their categories. Also, operating margins are expected to exceed 30% as manufacturing and product development are outsourced through partnerships with larger companies. Due to minimal capex and working capital requirements, Prestige is expected to generate significant free cash flow from its established product lines.

But S&P expects further debt-financed acquisitions. Also, Prestige's strategy of developing new lines by outsourcing to third parties, reduces costs but diminishes control over the development of new products, S&P notes. Calls to Prestige were referred to officials at GTCR, who declined comment.