Serta Simmons Bedding, LLC -- Moody's downgrades Serta Simmons' CFR to Ca; outlook negative

Rating Action: Moody's downgrades Serta Simmons' CFR to Ca; outlook negativeGlobal Credit Research - 31 Aug 2022New York, August 30, 2022 -- Moody's Investors Service ("Moody's") downgraded Serta Simmons Bedding, LLC's ("Serta Simmons") Corporate Family Rating ("CFR") to Ca from Caa3, Probability of Default Rating to Ca-PD from Caa3-PD, first lien super-priority "first-out" term loan (FLFO) to B3 from B2, first lien super-priority "second-out" term loan (FLSO) to Ca from Caa2, and first lien term loan to C from Ca. The outlook is negative.These downgrades capture Moody's view that a debt restructuring is likely as Serta Simmons' liquidity and solvency position face acute pressure from $1.9 billion of debt maturities that come due in the second half of 2023. Serta Simmons' capital structure is untenable due to weak operating performance, very high leverage, and a high interest rate burden. Liquidity is weak relative to the company's expected cash uses over the next year to service debt, working capital, and capital expenditures. Serta Simmons has $345 million of cash as of 2Q 2022 (down from $518 million at year-end 2021) and $171 million of capacity on its ABL revolver (factoring in $29 million letters of credit outstanding). Moody's expects negative free cash flow of $125 million to $145 million over the next 12 months (including cash priority term loan interest payments that the company records as a financing outflow).Serta Simmons is under pressure to execute on its turnaround plans to stem market share losses in recent years, address inefficiencies in the company's supply chain that were exacerbated during the pandemic, and return to profitability and organic cash generation. These plans will be further challenged as mattress volumes have inflected down across the industry after a strong 2021 while margins remain impacted from elevated commodity, transportation, and labor costs.The B3 rating on the FLFO term loan is four notches above the company's Ca CFR, while the Ca rating on the FLSO is in line with the CFR. The remaining first lien term loan is rated one notch below the CFR at C. This notching reflects the term loans' priority payment positions and accounts for recovery expectations in a default scenario. The FLSO rating is a notch below the loss given default model implied rating reflecting a heightened risk for lower than expected recovery relative to the model outcome. The instrument ratings are based on the current priority of claims. One non-exchanging lender and its affiliatess in the 2020 debt restructuring has a pending lawsuit against Serta Simmons disputing the validity of the transactions. Should this litigation lead to the transaction being disallowed, or to other negative outcomes, this could weaken the company's liquidity position and potentially lead to default.Downgrades:..Issuer: Serta Simmons Bedding, LLC.... Corporate Family Rating, Downgraded to Ca from Caa3.... Probability of Default Rating, Downgraded to Ca-PD from Caa3-PD....Senior Secured 1st Lien Term Loan , Downgraded to C (LGD5) from Ca (LGD5)....Senior Secured 1st Lien "first-out" Term Loan, Downgraded to B3 (LGD2) from B2 (LGD2)....Senior Secured 1st Lien "second-out" Term Loan, Downgraded to Ca (LGD3) from Caa2 (LGD3)Outlook Actions:..Issuer: Serta Simmons Bedding, LLC....Outlook, Remains NegativeRATINGS RATIONALESerta Simmons' Ca CFR reflects the company's negative free cash flow, unsustainable leverage and weak liquidity that creates elevated default risk. The company does not have sufficient liquidity to service its large debt wall maturing in August and November 2023 even though a sizable cash balance can fund its business needs such as working capital and capital expenditures until the maturities. Financial leverage is high, greater than 30x debt-to-EBITDA as of June 2022 and Moody's does not expect meaningful improvement in the next 12-18 months. The very aggressive financial policy under private equity ownership is also a credit negative evidenced by the $670 million debt financed dividend paid in 2016, discounted debt repurchases, and debt exchanges that adversely affected the collateral priority of existing creditors. The rating is also constrained by Serta Simmons' declining earnings trend prior to and during the coronavirus and the continued challenges it faces to executing a material earnings turnaround amid growing competition. The company is vulnerable to weakness in cyclical consumer spending and higher input costs. Positive consideration is given to Serta Simmons' large scale as the second largest mattress company, well-known brand names and multiple distribution channels.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe negative outlook reflects uncertainty around recovery rates in a debt restructuring given the weak operating performance and continued negative free cash flow. The negative outlook also reflects Moody's view that Serta Simmons' ability to materially improve revenues, earnings and free cash flow is weakened by lower mattress volumes, increasing competition, and poor investment flexibility. Ongoing debt restructuring litigation also creates uncertainty regarding the debt restructure and could consume cash.Ratings could be downgraded if Serta Simmons' recovery values on debt weaken because of continued weak operating performance, negative free cash flow or a negative litigation outcome.An upgrade would require that Serta Simmons materially improve its operating performance and reduce its financial leverage. Moody's would also need to gain greater comfort that the company's capital structure is sustainable and the company will generate positive free cash flow and successfully address upcoming maturities before considering an upgrade.Serta Simmons' exposure to environmental risks reflects reliance on energy-intensive manufacturing and reliance on natural capital including raw materials such as wood, steel, and cotton in its products. Waste and pollution risks reflect that mattresses are typically not recycled at the end of their useful life as often it is cost prohibitive to do so. Some municipalities require mattress recycling programs that are expensive to run and may require additional investment in more recycled products.Serta Simmons' exposure to social risks reflects health and safety and responsible production risks. Health and safety reflects the large and cumbersome nature of mattress manufacturing. Initiatives to increase automation and reduce labor intensity of Serta Simmons' plants requires significant investment. Responsible production reflects the need to responsibly source component products in its supply chain.Serta Simmon' governance risk exposure reflects a very aggressive financial strategy under private equity ownership as evidenced by high financial leverage, continued underperformance of its operations and an unsustainable capital structure. The willingness to execute a lender-adverse priming transaction while preserving equity ownership also elevates governance risks. Concentrated ownership and decision making creates potential for event risk and decisions that favor shareholders over creditors.The principal methodology used in these ratings was Consumer Durables published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74987. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Serta Simmons Bedding, LLC ("Serta Simmons") manufactures, distributes and sells mattresses, foundations, and other related bedding products. The company's brand names include, Serta, Beautyrest, Tuft & Needle and Simmons. The company has been majority owned by Advent International since 2012 and generated about $2.2 billion in revenue for the twelve months ending June 2022.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 on https://ratings.moodys.com/rating-definitions.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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.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 https://ratings.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 https://ratings.moodys.com.Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Maria Iarriccio VP - Senior Credit Officer 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 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​