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Empire Today, LLC -- Moody's assigns B2 CFR to Empire Today; term loan rated B2

Rating Action: Moody's assigns B2 CFR to Empire Today; term loan rated B2Global Credit Research - 10 Mar 2021New York, March 10, 2021 -- Moody's Investors Service, ("Moody's") today assigned Empire Today, LLC ("Empire) a B2 corporate family rating and a B2-PD probability of default rating. In addition Moody's also assigned a B2 rating to the company's proposed $410 million senior secured term loan. The outlook is stable. Proceeds from the proposed new term loan will be used to refinance existing debt and pay a dividend to the sponsor, H.I.G Capital. Ratings are subject to receipt and review of final documentation.Assignments:..Issuer: Empire Today, LLC.... Corporate Family Rating, Assigned B2.... Probability of Default Rating, Assigned B2-PD....Senior Secured Term Loan, Assigned B2 (LGD4)Outlook Actions:..Issuer: Empire Today, LLC....Outlook, Assigned StableRATINGS RATIONALEThe B2 corporate family rating reflects Empire's small scale in a highly competitive business environment with very large and well capitalized competitors and its high leverage. It also reflects the discretionary nature of the company's products, as well as its high susceptibility to macroeconomic factors. Governance is also a key rating factor particularly Empire's financial strategies under private equity ownership which increases the risk of leveraging events. The company is owned by H.I.G Capital who is taking approximately $250 million in a debt financed dividend as part of the proposed refinancing. Following the close of the transaction, Moody's estimates lease adjusted Debt/EBITDA to be at about 5.0 times at the end of fiscal 2021. The pandemic induced recession in 2020 was unusual as work at home mandates, travel restrictions and closure of restaurants and entertainment venues resulted in increased spending on home improvement projects and other home related retail categories which has been a tail wind for Empire. The shift in the company's sales mix towards higher margin hard surface flooring vis-à-vis carpet, lower advertising spend and cost efficiencies have also improved profitability. The company's direct to consumer asset light business model also makes its cost structure quite flexible. However, the gradual normalization of consumer spending in 2021 as the economy reopens will limit the company's topline and EBITDA growth, and due to the company's small scale even small declines in EBITDA can impact credits metrics significantly. Ratings are supported by the solid market position Empire has established in the highly-fragmented floor covering market, and in the direct to consumer segment of that market in particular. Empire also has limited seasonality and good liquidity.The B2 rating on the proposed senior secured term loan is the same level as the B2 CFR reflecting that first lien debt comprises the majority of Empire's capital structure. The B2 term loan rating also reflects its position in the proposed capital structure where it is junior to the $30 million asset based revolving credit facility but senior to Empire's general unsecured claims.As proposed, the term loan is expected to contain covenant flexibility that could adversely affect lenders, including: incremental facility capacity up to: (i) the greater of $100 million and 100% consolidated EBITDA plus (ii) an unlimited amount subject to (a) closing date Consolidated First Lien Net Leverage Ratio (for pari passu debt); closing date Consolidated Secured Net Leverage Ratio (for junior secured debt); closing date Consolidated Net Leverage Ratio (for unsecured debt). Collateral leakage is permitted through the transfer of assets to unrestricted subsidiaries, to the extent permitted under the carve outs, with no additional "blocker" provisions restricting such transfers. Only wholly-owned subsidiaries must provide guarantees, raising the risk of guarantee release following a partial change in ownership. There are leverage-based step-downs to the requirement that 100% of net asset sale proceeds prepay the loans, with step-downs to 50% and 0% based on achieving reductions to closing date First Lien Net Leverage Ratio of 0.50x and 1.00x, respectively. Change of control is permitted within 18 months if i) consolidated first lien net leverage ratio is not greater than 0.50x above the consolidated first lien net leverage ratio on the closing date; ii) new owner shall have made cash equity contribution of at least 40% of the total consolidated pro forma debt and equity capitalization; iii) the borrower shall have obtained a public corporate credit rating and a public corporate family rating of at least B3 (stable) and B- (stable) after giving effect to the Permitted Change of Control; and iv) if new owner is a financial sponsor the entity shall have asset under management or committed capital of at least $1 billion.The above are proposed terms and the final terms of the credit agreement may be materially different.The stable outlook reflects Moody's expectation that the company's operating performance will remain solid despite the potential for a shift back in consumer spending towards leisure and entertainment. The outlook also reflects Moody's expectation that the company will maintain good liquidity and financial policies will not become more aggressive.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAlthough unlikely in the near term, a ratings upgrade could be triggered by sustained improvement in earnings while maintaining good liquidity and financial policies which would support an improvement in credit metrics. Specifically, an upgrade would require debt/EBITDA to be sustained below 4.5 times and EBIT/interest expense sustained above 2.75 times.The ratings could be downgraded if operating performance weakens such that margins erode or topline growth stalls, should financial policies become more aggressive, or liquidity deteriorates. Specifically, the ratings could be downgraded if debt/EBITDA is sustained above 5.5 times or EBIT/interest expense is sustained below 2.0 times.The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Empire Today, LLC ("Empire"), headquartered in Northlake, IL, is a specialty retailer of carpet, hard floor, and window treatments. The company offers shop-at-home sales in the largest metropolitan markets in the U.S. Revenues are about $745 million.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Manoj Chadha VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. 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