Evergreen AcqCo 1 LP -- Moody's assigns B2 CFR to Savers

Rating Action: Moody's assigns B2 CFR to SaversGlobal Credit Research - 07 Apr 2021New York, April 07, 2021 -- Moody's Investors Service, ("Moody's") assigned ratings to Evergreen AcqCo 1 LP (dba Savers) including a B2 corporate family rating (CFR) and a B2-PD probability of default rating. In addition, Moody's assigned a B2 rating to Savers' proposed $600 million senior secured first lien term loan. The outlook is stable. The proceeds will be used to fully repay the company's existing debt as well as fees and expenses associated with the transaction. Moody's ratings and outlook are subject to receipt and review of final documentation.The B2 CFR assignment reflects Savers' moderate pro forma leverage post-transaction with debt/EBITDA in the mid-6x range for the LTM period January 2, 2021. Leverage is expected to rapidly recover to the mid-5x range in the first half of 2021 as Savers anniversaries the period of store closures in the spring of 2020. The rating also reflects Savers' good liquidity including its improved ability to generate free cash flow given its lower interest expense following the close of the transaction. The rating incorporates governance considerations given the company's private equity ownership. Private equity owners tend to have more aggressive financial strategies.Assignments:..Issuer: Evergreen AcqCo 1 LP.... Probability of Default Rating, Assigned B2-PD.... Corporate Family Rating, Assigned B2....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3)Outlook Actions:..Issuer: Evergreen AcqCo 1 LP....Outlook, Assigned StableRATINGS RATIONALESavers' B2 CFR is constrained by its small scale compared to other rated retailers, FX exposure given its Canadian and Australian businesses and its exposure to wage increases as a majority of its employees are low wage workers. An increase in minimum wage above its current wages would cause margin compression. Savers is also exposed to rag price changes however there is less reliance on its recycling business as a driver of EBITDA than in years past.Savers' B2 CFR is supported by Moody's expectation that Savers will use its free cash flow for debt repayment and investment in the core business and that Savers will not complete any leveraging transactions such as debt-financed acquisitions or dividend recapitalizations. The rating also reflects Savers' improved margins from an improved supply mix with a greater proportion of on-site deliveries. Moody's expects the combination of debt repayment and moderate earnings growth to drive leverage to reach 5x over the next 18 months.Savers benefits from its differentiated business model and market position in for-profit thrift in the US and Canada. Savers also benefits from its track record of recession-resistant growth in its core store operations as its average price point is under $5. The company has taken steps to reduce its FX exposure through hedging and also through an increased share of EBITDA in the US vs Canada. Capital investments in new central processing centers ("CPCs") and automated book processing centers ("ABPs") should reduce exposure to wage increases as these investments will reduce the labor needed to sort through product.The stable outlook reflects the expectation that the recent margin enhancement will be sustained and deleveraging will occur through earnings growth while maintaining good liquidity.Savers has good liquidity reflecting Moody's expectation of cash balances of around $50 million following the close of the transaction and free cash flow generation over the next 18 months. Moody's expects the CPC and ABP projects to increase capital expenditures to the $45-$50 million range over the next few years. The capital investments are expected to reduce costs and limit the company's exposure to wage increase. Moody's expects Savers to have sufficient internal liquidity to cover these projects while being free cash flow generative. The company will also have access to an undrawn proposed $60 million first-out revolving credit facility.The credit facilities are expected to contain covenant flexibility for transactions that could adversely affect creditors, including the ability to incur incremental term loan facilities in an aggregate amount not to exceed the greater of (i) Closing Date EBITDA and (ii) 100% of consolidated adjusted EBITDA; plus any amounts available under the general debt basket; plus an unlimited amount subject to a First Lien Net Leverage Ratio to be determined (if secured on a pari passu basis). Amounts up to the greater of 50% of Closing Date EBITDA and 50% of LTM Consolidated Adjusted EBITDA; or under the First Lien Net Leverage Ratio test to be determined, may be incurred with an earlier maturity date than the initial term loans.The credit facilities also include: provisions allowing the transfer of assets to unrestricted subsidiaries, subject to carve-out capacities, with no additional "blocker" provisions restricting such transfers; and the requirement that only wholly-owned subsidiaries act as subsidiary guarantors, raising the risk that guarantees may be released following a partial change in ownership with no explicit protective provisions limiting such guarantee releases. There are no express protective provisions prohibiting an up-tiering transaction. The above are proposed terms and the final terms of the credit agreement can be materially different.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA ratings upgrade would require a significant increase in scale as well as consistent improvement in operating performance and good liquidity evidenced by positive free cash flow. The ratings could also be upgraded with a commitment to conservative financial strategies such that debt/EBITDA is be sustained below 4.25x or EBIT/interest expense sustained over 2.25x.The ratings could be downgraded if there is a deterioration of the company's overall operating performance or liquidity profile. Quantitatively, the ratings could be downgraded if debt/EBITDA is sustained above 5.25x or EBIT/interest expense below 1.5x.Headquartered in Bellevue, Washington, Savers operates roughly 294 for-profit thrift stores in the United States, Canada, and Australia under the Savers, Value Village, and Village des Valeurs banners. Revenues for the twelve months ended December 31, 2020 were approximately $834 million. The company is owned by Ares Management.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.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. 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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. Joe Tringali Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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