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KNS Acquisition Corp. -- Moody's assigns first time B2 CFR to KNS Acquisition (Nutrisystem); outlook stable

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Rating Action: Moody's assigns first time B2 CFR to KNS Acquisition (Nutrisystem); outlook stableGlobal Credit Research - 30 Mar 2021New York, March 30, 2021 -- Moody's Investors Service, ("Moody's") assigned first-time ratings for KNS Acquisition Corp. ("Nutrisystem") including a B2 Corporate Family Rating (CFR), a B2-PD Probability of Default Rating, and B1 ratings on $632 million of proposed senior secured first lien credit facilities consisting of a revolver and term loan. The rating outlook is stable.The rating assignments reflect elevated leverage (projected pro-forma debt-to-EBITDA of 5.1x) and small scale with projected revenues of less than $1 billion (pro-forma for the Direct Digital, LLC "Adaptive Health" merger). The liquidity position is good with expectations to hold nominal cash on the balance sheet and good projected free cash relative to required term loan amortization, along with an undrawn $75 million revolving credit facility that could be used to partially fund future acquisitions.The ratings assignments follow the company's plan to raise new senior secured debt comprised of a $75 million senior secured first lien revolver expiring in 2026 and a $557 million senior secured first lien term loan expiring in 2028. The company will utilize the net proceeds to refinance existing debt put in place to help fund Kainos Capital's acquisition of Nutrisystem for $575 million in December 2020 and to partially finance the proposed $557 million merger with Adaptive Health.The following ratings/assessments are affected by today's action:New Assignments:..Issuer: KNS Acquisition Corp..... Corporate Family Rating, Assigned B2.... Probability of Default Rating, Assigned B2-PD....Senior Secured 1st Lien Term Loan, Assigned B1 (LGD3)....Senior Secured 1st Lien Revolving Credit Facility, Assigned B1 (LGD3)Outlook Actions:..Issuer: KNS Acquisition Corp.....Outlook, Assigned StableRATINGS RATIONALEKNS Acquisition Corp.'s B2 CFR reflects the company's good profitability, predictable free cash flow generation, and highly diversified customer base. Offsetting these factors are the company's relatively small scale with revenues less than $1 billion pro-forma for the merger with Adaptive Health and high financial leverage, estimated to be 5.1x debt to EBITDA on a Moody's adjusted basis pro-forma for the merger and prior to synergies as of December 31, 2020. Moody's projects debt-to-EBITDA will decline to a mid-4x range over the next 12-to-18 months due to synergy realization and reinvestment of free cash flow for acquisitions.Competition within health & wellness is very high as Nutrisystem faces competition from many other meal delivery services that focus on nutrition & wellness. Revenues have historically been volatile, as the company experienced revenue declines from 2007 to 2013, during a post-recession period, and then again from 2017 to 2018, when it was acquired by Tivity Health. Given the competitiveness of the category, marketing strategy is very important. Nutrisystem plans to utilize Adaptive Health's proprietary direct-to-consumer marketing platform to reduce its customer acquisition costs and acquire higher value customers. Customer acquisition is very important for Nutrisystem, as new customers represent over 60% of the company's revenues.Moody's expects that KNS Acquisition Corp will operate with good liquidity. This incorporates the rating agency's estimate of $10 million of pro-forma cash, $50 million of annual projected free cash flow in 2021, undrawn capacity on the $75 million revolver, and no meaningful debt maturities through 2026. The cash sources provide ample resources for the $5.57 million of required annual amortization, reinvestment needs and potential acquisitions.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of corporate assets from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Notwithstanding, Nutrisystem is likely to be more resilient than companies outside of the packaged food and VMS sectors, although some volatility can be expected through 2021 due to uncertain demand characteristics, channel shifting, and the potential for supply chain disruptions and difficult comparisons following these shifts. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.Governance risk includes KNS Acquisition Corp's financial strategies, which we view as aggressive given its high financial leverage, private equity ownership and focus on growth through acquisitions that can lead to increased debt and integration risks..Environmental considerations are not material considerations in the rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's expectation that Nutrisystem will successfully integrate its merger with Adaptive Health. Furthermore, Moody's assumes in the outlook that Nutrisystem will grow its revenues and EBITDA in a low single digit percentage range through continued new customer growth and retention, and generate at least $40 million of annual free cash flow.Nutrisystem's ratings could be upgraded if there is a material diversification in the company's product profile, good liquidity is maintained, and the company is able to sustain debt-to-EBITDA below 4.0x.Ratings could be downgraded if operating performance weakens through factors such as market share losses, pricing pressure or increased marketing spending, liquidity deteriorates, or debt-to-EBITDA is sustained above 5.5x. Debt-financed acquisitions or shareholder distributions could also lead to a downgrade.The proposed first lien credit agreement contains provisions for incremental debt capacity up to the greater of $150 million and 100% of trailing four quarter consolidated EBITDA calculated on a pro forma basis, plus the unused portion of the General debt basket, plus an additional amount subject to pro forma first lien net leverage ratio not to exceed the first lien net leverage ratio at closing. Amounts up to the $150 million may be incurred with an earlier maturity date than the initial term loans.The credit agreement permits the transfer of assets to unrestricted subsidiaries, up to the carve-out capacities, subject to "blocker" provisions which prohibit the transfer to, or ownership or licensing by unrestricted subsidiaries of intellectual property material to the borrower and restricted subsidiaries, taken as a whole.Only wholly owned subsidiaries must provide guarantees; partial dividend of ownership interest could jeopardize guarantees if subsidiary guarantors cease to be wholly-owned subject to limitation prohibiting such release except pursuant to the formation of a bona fide JV with an unaffiliated third party that either ceases to be a direct or indirect subsidiary of the borrower, or the transaction is deemed to be an investment and such investment was permitted by credit agreement.The above are proposed terms and the final terms of the credit agreement can be materially different.The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.KNS Acquisition Corp. ("Nutrisystem") based in Fort Washington, Pennsylvania is a provider of weight management products and services which are sold on-line and through multi-day kits and single items available at retail locations. Customers typically purchase monthly food packages which consist of a four-week program consisting of breakfast, lunch, dinner, and snacks. Through the merger with Direct Digital, LLC "Adaptive Health", the company also markets and manufactures branded condition-specific science-based nutrition supplements which address conditions, such as men's health, joint health, and sleep management, to name a few. Adaptive Health's products are sold through DTC as well as through retail partners.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. Frank Henson Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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