Signal Parent, Inc. -- Moody's assigns a B2 CFR to Signal Parent (Interior Logic Group); outlook stable

Rating Action: Moody's assigns a B2 CFR to Signal Parent (Interior Logic Group); outlook stableGlobal Credit Research - 15 Mar 2021Approximately $850 million of debt securities ratedNew York, March 15, 2021 -- Moody's Investors Service (Moody's) assigned a B2 Corporate Family Rating and a B2-PD Probability of Default Rating to Signal Parent, Inc. (Interior Logic Group (ILG)) in connection with the purchase of the company by the Blackstone Group. Moody's also assigned a B1 rating to ILG's proposed $550 million first lien term loan due 2028 and a Caa1 rating to the proposed $300 million senior unsecured notes due 2029. The outlook is stable.ILG is being acquired by the Blackstone Group from its previous owners Littlejohn and Platinum Equity in a transaction valued at $1.6 billion. The transaction will be funded by the proceeds of the proposed term loan and unsecured notes along with $734 million of equity from the sponsor and the management. As a result of the proposed financing, the company's total debt and leverage increase substantially, reflecting aggressive financial policies of the sponsor. Moody's estimates ILG's pro forma debt to EBITDA would have been 6.7x and EBITA to interest coverage would have been 2.6x at December 31, 2020."The assignment of B2 Corporate Family Rating reflects our expectation that within the next 12 months ILG will reduce debt to EBITDA to below 6.0x and improve interest coverage toward 3.0x," says Natalia Gluschuk, Moody's Vice President - Senior Analyst. "ILG will benefit from favorable trends in the homebuilding market and cost cutting initiatives that will contribute to top line and operating margin growth."The following rating actions were taken:Assignments:..Issuer: Signal Parent, Inc..... Corporate Family Rating, Assigned B2.... Probability of Default Rating, Assigned B2-PD....Senior Secured 1st Lien Term Loan B, Assigned B1 (LGD3)....Senior Unsecured Regular Bond/Debenture, Assigned Caa1 (LGD5) Outlook Actions: ..Issuer: Signal Parent, Inc. ....Outlook, Assigned Stable RATINGS RATIONALE ILG's B2 Corporate Family Rating is supported by the following key factors: 1) meaningful size and scale, with revenue of $1.6 billion and a national footprint; 2) a strong competitive position in a fragmented market of installation and design studio services and long-term customer relationships with homebuilders; 3) the ability to execute an aggressive roll up strategy without integration issues; 4) positive free cash flow and good liquidity; 5) an expectation of favorable conditions in the homebuilding market over the next 12 to 18 months that will drive improved results.At the same time, the credit profile is constrained by: 1) the company's high debt to EBITDA leverage; 2) a roll up acquisition strategy that raises the likelihood of execution and integration risks and increasing debt leverage; 3) the volatility and cyclicality inherent to the residential end markets served; 4) exposure to customer pricing pressures, changes in input costs and the mix of products and services, which can impact operating margins; and 5) risks related to private equity ownership, including a financial policy that resulted in a significant leveraging of the balance sheet in a buyout transaction and potential shareholder friendly actions.The stable outlook reflects Moody's expectation that ILG will reduce leverage and improve key credit metrics over the next 12 to 18 months.The B1 rating on the proposed $550 million first lien term loan, one notch above the CFR, reflects the support provided by the presence of the proposed senior unsecured notes in the capital structure. The Caa1 rating on $300 million unsecured notes reflects their junior position with respect to a $100 million ABL revolving credit facility due 2026 and the term loan and the expectation of loss absorption in a default scenario.The proposed first lien term loan is not expected to contain financial maintenance covenants, while the proposed revolving credit facility will contain a springing minimum fixed charge coverage ratio of 1.0x when revolver availability is less than the greater of a) the lesser of 10% of the ABL borrowing base and the ABL commitment, and b) $7.5 million. The proposed credit facilities are expected to provide covenant flexibility that could adversely impact creditors, including an uncommitted incremental first lien term loan and revolving credit facility, in an aggregate amount not to exceed the sum of 1) the greater of a) $140 million and b) 1.0x of EBITDA at time of determination, plus 2) an unlimited amount as long as consolidated first lien net leverage does not exceed 4.5x. Alternatively, the ratio can be satisfied on a leverage neutral basis in connection with a permitted acquisition or investment. The credit facility includes a sublimit for debt up to the greater of a) $140 million and b) 1.0x of EBITDA which can be incurred with an earlier maturity than the term loans. Collateral leakage permitted through the transfer of assets to unrestricted subsidiaries, subject to carve-out capacity, with no additional explicit "blocker" protection. Non-wholly-owned subsidiaries are not required to act as subsidiary guarantors; dividends or transfers of partial ownership interests could jeopardize guarantees with no explicit protective provisions limiting such releases. The company's obligation to prepay loans with net proceeds of asset sales is reduced from 100% to 50% and 0% if consolidated first lien net leverage is 4.0x or less, and 3.5x or less, respectively.Moody's expects the company to maintain good liquidity over the next 12 to 15 months, supported by positive free cash flow, access to a $100 million ABL revolving credit facility, and the flexibility under springing fixed charge coverage covenant.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if the company continues to improve operating margin, reduces debt to EBITDA sustainably below 5.0x, maintains conservative financial policies with respect to leverage, shareholder friendly actions and acquisitions, and maintains good liquidity and strong free cash flow.The ratings could be downgraded if the company's debt to EBITDA does not decline below 6.0x, liquidity weakens, free cash flow turns negative, or market conditions deteriorate resulting in revenue and operating margin declines.The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Irvine, CA, Interior Logic Group is one of the nation's leading providers of design center management and interior installation services, operating through 110 design studios (64 of which are homebuilder-branded), 109 warehousing and logistics centers, and nine countertop fabrication facilities across the United States. The company's customers include single-family homebuilders (approximately 82% of revenue), multi-family, and commercial builders as well as multi-family property owners and big box retailers. Primary products that the company sources include flooring, cabinets, countertops, and window treatments. The Blackstone Group is the company's financial sponsor. In 2020, ILG generated approximately $1.6 billion in revenue.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. 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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. Natalia Gluschuk 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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