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Hillman Group Inc. (The) -- Moody's places Hillman under review for upgrade following merger with SPAC Landcadia III and proposed debt reduction

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Rating Action: Moody's places Hillman under review for upgrade following merger with SPAC Landcadia III and proposed debt reduction

Global Credit Research - 27 Jan 2021

New York, January 27, 2021 -- Moody's Investors Service, ("Moody's") placed the corporate ratings of The Hillman Group Inc. (Hillman) under review for upgrade, including its B3 Corporate Family Rating (CFR), and its B3-PD Probability of Default Rating (PDR). The company's existing senior unsecured rating of Caa2, senior secured credit facility rating of B2, and the SGL-2 Speculative Grade Liquidity are unchanged. This action follows HMAN Group Holdings, Inc., the parent company of Hillman, and Landcadia Holdings III, Inc. (Landcadia III), a special purpose acquisition company (SPAC), announcement [1]that they entered into a definitive merger agreement that will result in Hillman becoming a publicly listed company and Hillman's existing debt will be repaid.

Under the proposed merger agreement, Landcadia III will purchase Hillman for $2,642 million or 11.0x management's projected 2021 pro forma adjusted EBITDA of $240 million. Estimated cash proceeds from the transaction include $500 million of cash from SPAC investors, $375 million from private investment in public equity (PIPE) investors, and a new $835 million term loan. Cash proceeds are expected to be used to fund the acquisition, to repay Hillman's existing debt at approximately $1,544 million, and to pay related fees and expenses. The transaction is expected to close in the second quarter of 2021, and its subject to shareholder approval and other customary closing conditions.

Pro forma for the merger transaction, Moody's estimates Hillman's financial leverage will meaningfully improve, with debt/EBITDA expected at around 3.9x at fiscal year end 2020, down from about 7.0x as of the last twelve months period ending September 26, 2020. In addition, the anticipated $710 million debt reduction will benefit Hillman's liquidity with improved free cash flow generation as the company estimates interest expense savings of about $50 million annually.

Governance considerations include the broader shareholder ownership post closing of the merger, with 49% owned by the existing Hillman shareholders, 26% by public investors, 20% by the PIPE investors, and 5% by the Landcadia III sponsors, assuming no redemptions by shareholders. In addition, the company has publicly indicated a more conservative financial policy reflected by its commitment to not increase financial leverage above the level at the close of the transaction.

On Review for Possible Upgrade:

..Issuer: Hillman Group Inc. (The)

.... Corporate Family Rating, Placed on Review for Possible Upgrade, currently B3

.... Probability of Default Rating, Placed on Review for Possible Upgrade, currently B3-PD

Outlook Actions:

..Issuer: Hillman Group Inc. (The)

....Outlook, Changed To Rating Under Review From Stable

RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating review will focus on Hillman's operating performance, the final capital structure and post-closing credit metrics, taking into consideration that the company's existing debt is expected to be repaid. In addition, the review will consider the company's financial policies, in particular as it relates to financial leverage, acquisition strategy and shareholder distributions.

Notwithstanding the rating review, Hillman's B3 CFR broadly reflects its currently high financial leverage, high interest burden and growth capital expenditures that pressure free cash flows, and its high customer concentration. Governance factors include the company's aggressive growth through acquisition strategy. The rating also reflects the relatively stable demand for Hillman's products as a result of their replenishment nature and low price points, resulting in modest exposure to cyclical downturns. The company has long-standing relationships with well-recognized retailers, good geographic diversification within the US and Canada, and a track record of successfully integrating acquisitions. Hillman benefits from some product diversification, and strong consumer demand for the company's construction fasteners and personal protection equipment products in fiscal 2020 more than offset weakness in its key duplicating business. The company's good liquidity reflects our expectation for positive free cash flows over the next 12-18 months.

The Hillman Group Inc. headquartered in Cincinnati, OH, is a product and services provider in the hardware and home improvement industry. The company sells hardware including fasteners, rods, keys, tags and signs to retailers in the United States, Canada, Mexico, Latin America, and the Caribbean, and provides related services, including installing and maintaining key duplication and engraving machines. As of June 2014, Hillman is majority-owned by CCMP Capital Advisors with Oak Hill Capital Partners holding a minority interest ownership of approximately 17%. Annual revenue for the fiscal year end 2020 is estimated at $1.368 billion.

The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For 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.

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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.

REFERENCES/CITATIONS

[1] Announcement of merger agreement 25-Jan-2021

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.

Oliver Alcantara Analyst 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 John E. Puchalla, CFA 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

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