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Jason Group Inc. -- Moody's assigns Caa2 CFR to Jason Group Inc. following emergence from Chapter 11

·14 mins read

Rating Action: Moody's assigns Caa2 CFR to Jason Group Inc. following emergence from Chapter 11

Global Credit Research - 28 Aug 2020

New York, August 28, 2020 -- Moody's Investors Service assigned new ratings for Jason Group Inc. (Jason) following its emergence from bankruptcy, including a Caa2 corporate family rating (CFR) and a Caa2-PD probability of default rating (PDR). Concurrently, Moody's assigned instrument ratings to the company's exit financing, including a Caa1 on its $76.6 million first lien term loan and Caa3 on its $50 million junior lien convertible term loan. The company's debt capitalization also includes an unrated $30 million asset-based revolving credit facility (ABL), which is expected to have approximately $10 million outstanding as of the emergence date. The ratings outlook is stable.

"Jason has materially reduced its debt load through the bankruptcy process, but financial risk still remains high due to persistently weak earnings resulting in very high leverage, heavy debt service costs and weak cash generation," said Shirley Singh, Moody's lead analyst for the company. "While certain credit agreement provisions such as PIK interest and no debt amortization requirement until March 2022 will help alleviate near term cash flow pressure, the current rating incorporates our expectation of negative cash generation until 2021 and the uncertainty as to whether earnings and margin recover sufficiently to restore positive free cash flow thereafter", added Singh.

Assignments:

..Issuer: Jason Group, Inc.

.... Probability of Default Rating, Assigned Caa2-PD

.... Corporate Family Rating, Assigned Caa2

....Senior Secured 1st Lien Term Loan, Assigned Caa1 (LGD3)

....Senior Secured Jr Lien Convertible Term Loan , Assigned Caa3 (LGD5)

Outlook Actions: ..Issuer: Jason Group, Inc. ....Outlook, Assigned Stable RATINGS RATIONALE

Jason's Caa2 CFR broadly reflects the company's very high adjusted debt-to-EBITDA (leverage) in excess of 17.0x (pro forma as of June 2020) despite an approximately 62% reduction in debt from pre-emergence levels, uncertainty related to the recovery prospects that will reverse the declining revenue and EBITDA trends and weak cash flow generation. To reduce leverage and return free cash flow to break-even levels, Jason will need to achieve meaningful recovery in earnings in the second half of 2020 and 2021, following the sharp contraction in second quarter of 2020. Nonetheless, Moody's expects Jason's leverage to remain above 9.0x and annual free cash flow to remain negative through 2021. Liquidity is deemed adequate, based on expected cash balance of $25 million and availability under its $30 million ABL facility as well as absence of near-term debt maturities.

The rating is supported by its solid market position across several businesses, its global footprint, and a diversified customer base.

The stable outlook reflects Moody's expectation of slow revenue and earnings recovery after a sharp contraction in second quarter of 2020 and adequate liquidity through the course of 2021.

The rapid spread of the coronavirus outbreak, weak global economic outlook, low oil prices and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Jason remains susceptible to deterioration in credit quality triggered by the coronavirus outbreak given its exposure to the industrial sector has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

The proposed terms of first lien credit agreement contains provisions for incremental debt capacity up to $25 million subject to first lien net leverage test. Expected terms allow the release of guarantees when any subsidiary ceases to be wholly owned; there are no anticipated "blocker" provisions providing additional restrictions on top of the covenant carve-outs to limit collateral leakage through transfers of assets to unrestricted subsidiaries. There are no leverage-based step-downs to the asset sales proceeds prepayment requirement.

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

Ratings could be upgraded if the revenue and earnings grow such that adjusted debt-to-EBITDA is sustained below 8.0x and free cash flow returns to breakeven to modestly positive levels.

Ratings could be downgraded should the company's liquidity deteriorates, or the company fails to stabilize the revenue and earnings declines.

Headquartered in Milwaukee, Wisconsin, Jason Group Inc. is an industrial manufacturer serving diverse end markets. Its products generally fall into two categories: the industrial segment (industrial brushes, buffing wheels and compounds) and engineered products (static and suspension seating for motorcycle, construction, agricultural, lawn and turf-care equipment) categories. Revenue for the twelve months ended June 2020 was $247 million.

The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/research/Manufacturing-Methodology--PBC_1206079. 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.

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.

Shirley Singh 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 Russell Solomon 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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