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Rating Action: Moody's upgrades At Home's CFR to B3, assigns Caa1 rating to new notes
Global Credit Research - 13 Aug 2020
New York, August 13, 2020 -- Moody's Investors Service (Moody's) upgraded At Home Holding III Inc.'s (At Home) corporate family rating (CFR) to B3 from Caa1 and probability of default rating (PDR) to B3-PD from Caa1-PD. Concurrently, Moody's assigned a Caa1 rating to the company's proposed senior secured notes. The speculative-grade liquidity rating was upgraded to SGL-2 from SGL-3 and the ratings outlook was changed to stable from negative.
"At Home's strong performance coming out of coronavirus-related shut downs and its curtailed capital spending on store expansion have improved liquidity," said Moody's senior analyst and Vice President Raya Sokolyanska. "While consumer spending on home goods will retreat to more normalized levels, we expect At Home to continue gaining share as a value price point retailer, which will support results going forward," added Sokolyanska.
Proceeds from the proposed $250 million notes due 2025 and revolver borrowings will be used to refinance the company's existing senior secured term loan due 2022 ($332 million outstanding amount) and pay for transaction expenses.
The CFR and PDR upgrades reflect the company's significant revenue and earnings growth in Q2 fiscal 2021 and Moody's expectations for stable to modestly lower operating performance over the near term. The SGL upgrade to SGL-2 from SGL-3 incorporates the lack of near-term maturities following the proposed refinancing transaction, as well as Moody's expectations for good revolver availability and lower capital spending, which will result in positive free cash flow over the next 12-18 months.
Moody's took the following rating actions for At Home Holding III Inc.:
- Corporate family rating, upgraded to B3 from Caa1
- Probability of default rating, upgraded to B3-PD from Caa1-PD
- Proposed senior secured notes due 2025, assigned Caa1 (LGD4)
- Speculative grade liquidity rating, upgraded to SGL-2 from SGL-3
- Outlook, changed to stable from negative
The ratings on the existing term loan will be withdrawn upon close of the transaction.
At Home's B3 CFR is constrained by its high lease-adjusted leverage, modest scale, and operations in the discretionary and highly competitive home décor segment. The rating incorporates Moody's expectations that as consumer spending returns to more normalized patterns, At Home's earnings may decline from LTM levels. This will result in leverage increasing to 5.5 times from an estimated 5 times (pro-forma LTM Q2 FY 2021) and EBIT/interest expense declining to 1.5 times from 1.8 times. In addition, as a retailer, At Home needs to make ongoing investments in its brand and infrastructure, as well as in social and environmental drivers including responsible sourcing, product and supply sustainability, privacy and data protection.
At the same time, the rating is supported by Moody's expectations for good liquidity over the next 12-18 months as a result of continued solid performance, reduced capital expenditures and the extension of its debt maturities. The credit profile also benefits from the company's moderate funded leverage and differentiated home décor "fast fashion" value proposition. Moody's positively views the company's accelerated implementation of buy-online/pick-up in store and curbside pick-up capabilities during the pandemic-driven store shutdowns, which both demonstrates solid execution and improves omni-channel growth prospects. The rating also reflects governance considerations, specifically the company's increased focus on cash generation and deleveraging.
The stable outlook reflects Moody's expectations for solid operating performance and adequate liquidity over the next 12-18 months.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if operating performance declines or liquidity deteriorates for any reason, including constrained revolver availability. Quantitatively, the ratings could be downgraded if Moody's-adjusted EBIT/interest expense is expected to fall below 1 time.
An upgrade would require consistent comparable sales growth and solid margins, as well as continued good liquidity, including positive free cash flow generation. Quantitatively, the ratings could be upgraded if Moody's-adjusted debt/EBITDA is sustained below 6.0 times and EBIT/interest expense is sustained above 1.5 times.
At Home Holding III Inc., an indirect wholly owned subsidiary of At Home Group Inc., operated 219 home décor and home improvement retail stores and generated about $1.4 billion of revenue for the last twelve months ended July 25, 2020. The company is publicly traded since 2016, and funds affiliated with the company's former private equity sponsor AEA Investors LP owns approximately 16.55% of outstanding common stock.
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.
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.
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_1133569.
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.
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.
Raya Sokolyanska Vice President - Senior 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 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
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