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Tempur Sealy International Inc. -- Moody's affirms Tempur Sealy's Ba3 Corporate family Rating; outlook changed to positive

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Rating Action: Moody's affirms Tempur Sealy's Ba3 Corporate family Rating; outlook changed to positiveGlobal Credit Research - 03 Mar 2021New York, March 03, 2021 -- Moody's Investors Service, ("Moody's") affirmed Tempur Sealy International Inc.'s ("Tempur Sealy") Corporate Family Rating ("CFR") at Ba3, Probability of Default rating at Ba3-PD, and senior unsecured debt instrument rating at B1. The Speculative Grade Liquidity rating was changed to SGL-1 from SGL-2. The outlook was changed to positive from stable.The rating affirmation reflects Moody's expectation that Tempur Sealy will continue to demonstrate good operating performance in 2021 as consumers continue to focus on at-home purchases around comfort and the US housing market remains strong. The pandemic has shifted consumer spending towards upgrading their homes rather than for travel and leisure. However, as 2021 progresses into 2022, Moody's expects that demand in mattresses will subside as the rollout of the vaccine will enable consumers to travel more and focus their spending outside of the home. For this reason, Moody's expects that sustainability of the strong operating performance past 2021 is unlikely to continue as consumers redirect their spending habits. Additionally, government stimulus checks will likely not continue past 2021 as the pandemic subsides, thus further dampening spending on discretionary durables products. Moody's expects that EBITDA (Moody's-adjusted) will peak at around $900 million in 2021 and then decline to around $850 million in 2022 as the coronavirus tailwinds subside.The company's aggressive plans to repurchase 6% of its shares in 2021 and 3% thereafter will continue to lead to moderate financial leverage of around 2.0x to 2.5x debt to EBITDA. However, given the cyclicality of mattress purchases and Moody's expectation of some operating performance decline beyond 2021, the company may find its financial leverage well above that level if it does not curtail planned share repurchases. Historically the company has engaged in large share repurchases, though has adjusted these levels during economic uncertainty. The company's stated financial policy of a leverage target of 2.0x to 3.0x net debt to EBITDA (2.5x to 3.5x Moody's adjusted debt to EBITDA) signals that it will comfortably be able to manage leverage such that its metrics remain within the Ba3 rating category. Over the next 12-18 months, Moody's expects Tempur Sealy will maintain debt/EBITDA comfortably below 3.0x however this leverage will likely increase as demand subsides past 2021 and if the company continues to pursue outsized share repurchases.The upgrade of the Speculative Grade Liquidity rating to SGL-1 is due to Tempur Sealy's very good liquidity that is supported by $65 million of cash as of December 31, 2020 and access to a $425 million revolving credit facility that expires in 2024, of which $425 million was available at year-end. This revolver was increased to $725 million in February 2021 to allow for the refinancing of notes and Moody's estimates that around $400 million was available post refinancing. Liquidity is also enhanced by the company's strong annual free cash flows. Moody's expects the company to generate approximately $460 million of free cash flows in 2021 after taking into account approximately $60 million of annual dividends and higher than normal growth capital expenditures associated with the buildout of three facilities to support its growth and expansion into the OEM foam and mattress businesses. Tempur does not have any major debt maturities until 2024 when its revolver and term loan A mature. Moody's expects Tempur will maintain adequate levels of cash on hand and unused revolver capacity to maintain excellent liquidity.The positive outlook reflects Moody's expectation for continued good operating performance over the next 12-18 months that can lead to an upgrade if the company demonstrates a disciplined financial policy approach such that debt to EBITDA remains below 3.0x as the pandemic tailwinds subside. The positive outlook also reflects Tempur's very good liquidity profile over the next 12 months.Upgrades:..Issuer: Tempur Sealy International Inc..... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2Affirmations:..Issuer: Tempur Sealy International Inc..... Probability of Default Rating, Affirmed Ba3-PD.... Corporate Family Rating, Affirmed Ba3....Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD5)Outlook Actions:..Issuer: Tempur Sealy International Inc.....Outlook, Changed To Positive From StableRATINGS RATIONALETempur Sealy's Ba3 CFR reflects the discretionary nature of its products, and sensitivity to the housing market, macroeconomic conditions, and volatility in consumer spending. Tempur Sealy's credit profile is constrained by its financial policy of debt financed share repurchases and sensitivity to economic cycles and cash flows experienced during economic downturns. The rating also incorporates the Company's strong market position, brand strength, product innovation, breadth of products in varying pricing points, and diverse omnichannel approach.Tempur Sealy is moderately exposed to environmental, social and governance (ESG) risks. The company uses, transports, and stores chemicals in its foam manufacturing process. A failure to adhere to environmental regulations and safe practices could result in financial penalties and remediation costs. From a governance standpoint, Tempur Sealy's share repurchases are at times aggressive but there is flexibility to pull back on share buybacks when operating pressures increase, as it did in early 2020. Moody's also views corporate governance as improving and a key driver to the ratings given a more conservative leverage target by management. The majority of Tempur Sealy's board members are independent directors and have extensive consumer product experience. But the Chairman of the Board is also the CEO. Tempur Sealy is a widely held public company.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. Moody's analysis has considered the effect on the performance of Tempur Sealy 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. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The consumer durables industry is one of the sectors most meaningfully affected by the coronavirus because of exposure to discretionary spending.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be downgraded if liquidity deteriorates, the company adopts a more aggressive financial policy, operating performance weakens, or if leverage increases. A significant drop in consumer confidence or any material disruption in the housing market could also lead to a downgrade. Debt to EBITDA sustained above 4.0x or annual share repurchases in excess of free cash flow generation could also lead to a downgrade.Ratings could be upgraded if Tempur Sealy's operating performance remains strong and leverage remains at a low level for a sustained period. Specifically, ratings could be upgraded if debt to EBITDA remains below 3.0x and the company generates consistently strong free cash flow.The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Tempur Sealy International Inc.'s ("Tempur Sealy") develops, manufactures, markets and sells bedding products, including mattresses, foundations and adjustable bases, and other products such as pillows and accessories. Revenue for the publicly-traded company approximates $3.7 billion for the last-twelve-month period ended December 31, 2020.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. Maria Iarriccio 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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