Norcraft Companies, a kitchen and bathroom cabinet company, has a narrow product line that is tied to residential new construction and remodeling markets. "This could tend to magnify the risks inherent in the general effect of economic cycles on residential construction and remodeling," states Moody's Investors Service in a report that rates the company's $70 million credit at B1. There are also limited barriers to entry for Norcraft's business. "There are hundreds of producers," noted Joseph Snider, v.p., senior analyst at Moody's. The rating further reflects Norcraft's short operating history in its current configuration and its relatively small size compared to industry leaders. Before 2000, Norcraft was a smaller regional entity, Snider explained.
The rating also reflects concern over the non-compete agreement between Norcraft's president designate, Mark Buller, and his former employer, Fortune Brands. Buller was president of Omega Cabinets when Fortune Brands bought it in 2002 and he is subject to the agreement until year-end 2004. "Should Fortune Brands object to Mr. Buller's affiliation with Norcraft at this time, there could be time expended by the company or activities that are restricted for Mr. Buller, litigation expense, and/or possible judgments to pay," Moody's explains.
On the plus side, Norcraft has strong free cash flow generating ability and satisfactory balance sheet leverage together with healthy margins and returns, Moody's states. "It used to be a very small regional producer of cabinets with not a lot of variations in its product line, and now [Norcraft has broad variations] in its product line," Snider added. The company has grown to be the fifth largest cabinet producer in the U.S., trailing industry leaders Masco Corp. and Fortune Brands. Nonetheless, "The two of them dwarf Norcraft," Snider said.
The credit, $150 million in B3-rated senior subordinated notes and $135.8 million in equity will be used to fund the acquisition of Norcraft by Trimaran Capital Partners, Saunders, Karp & Megrue, Buller and management (LMW, 10/6). The credit includes a $45 million "B" loan and a $25 million revolver. The covenants include a 50% excess cash flow sweep, Moody's notes. Pro forma total debt-to-adjusted EBITDA is 4.5 times for the last 12 months ending Aug. 31, 2003. UBS and Wachovia Securities launched syndication of the deal on Oct. 2. A Norcraft official did not return calls.
| Other Newly Rated Deals* | |||
| Borrower | Loan Size | Rating | Agency |
| CenterPoint Energy | $2.35 billion | Ba1 | Moody's |
| Nebraska Book Co. | $160 million | B+ | S&P |
| Reddy Ice | $45 million (add-on) | B1 | Moody's |
| *Thurs, Oct. 2 through Wed, Oct. 8 |