New York, December 10, 2012 -- Moody's Investors Service upgraded Harbinger Group's Corporate Family Rating to B2 from B3, and rated its new $650 million secured notes B3. The upgrade in the CFR reflects the expected cash flow and diversification benefits from its planned joint venture with EXCO Resources, Inc. (B1 stable) and improved credit metrics. The outlook is stable. Should the transaction with EXCO Resources not close, ratings could be downgraded and hence restored to their prior levels.
Proceeds from the notes will be used to refinance the company's existing $500 million secured notes, pay breakage fees, and transaction expenses, and build cash by about $85 million. The existing secured notes were upgraded to B3, but will be withdrawn at close.
In November 2012, Harbinger Group announced a joint venture with EXCO Resources, Inc. to create a private limited partnership (the "EXCO Partnership") that will purchase and operate EXCO's producing U.S. conventional oil and gas assets, for $725 million. The Partnership will own assets in West Texas including and above the Canyon Sand formation as well as in the Danville, Waskom, Holly and Vernon fields in East Texas and North Louisiana. In exchange for its cash investment, Harbinger Group will directly and indirectly have a net 74.5% total equity interest in the EXCO Partnership. The transaction is expected to close in early 2013.
"The upgrade in the Corporate Family Rating reflects the expected credit metric improvement because of the anticipated dividends from the EXCO Partnership," said Kevin Cassidy, Senior Credit Officer at Moody's Investors Service. The upgrade also reflects improved industry diversification as Harbinger expands to another platform beyond consumer and financial services. "Assuming both the EXCO Partnership acquisition and the bond offering close, we expect that dividends Harbinger will receive will cover the interest expense and preferred dividends it pays by around 1.4 times in 2013," Cassidy noted.
The following rating was assigned:
$650 million senior secured notes due December 2017 at B3 (LGD 4, 58%);
The following ratings were upgraded:
Corporate Family Rating to B2 from B3;
Probability of Default Rating to B2 from B3;
The following rating was upgraded, but will be withdrawn at close:
$500 million senior secured notes to B3 (LGD 4, 58%) from Caa1 (LGD 4, 50%);
The following rating was affirmed:
Speculative grade liquidity rating at SGL 3
Harbinger Group's B2 Corporate Family Rating reflects its high financial leverage, thin fixed charge coverage, modest industry and product diversification, and aggressive financial policy. The rating is constrained by the lack of committed dividends to cover interest, preferred dividends and operating expenses, as well as the continuing SEC investigation of Harbinger's CEO. The rating is supported by the credit profile of its subsidiaries (Spectrum Brands at B1 and FG Insurance at Ba1).
The stable outlook reflects Moody's expectation that following the EXCO transaction, Harbinger will receive sufficient dividends to fully cover its own fixed charges, but will remain a highly leveraged operation. The outlook further reflects Moody's expectation that Harbinger Group will maintain an adequate liquidity profile.
The rating could be downgraded if the operating performance of Harbinger Group's subsidiaries deteriorate, resulting in the suspension or reduction of dividends, or if dividends received from the EXCO joint venture are lower than anticipated. Specifically, ratings could be downgraded if cash coverage of fixed charges (dividends received to interest and preferred dividends paid) falls below 1 time. The rating could also be downgraded if charges are brought by the SEC against Harbinger Group or if the transaction with EXCO Resources does not close.
An upgrade would require a substantial improvement in fixed charge coverage and full resolution to the corporate governance issues with certain executive officers. Fixed charge coverage sustained around 2.5 times is necessary for an upgrade to be considered.
Moody's subscribers can find further details in the Harbinger Group Credit Opinion published on Moodys.com.
Located in New York City, Harbinger Group is a holding company whose principal focus is to acquire or enter into combinations with businesses in diverse segments. The company's two operating subsidiaries are Spectrum Brands (B1) and F&G Insurance (Ba1). Harbinger Group will also have a 74.5% total equity interest in a limited partnership (EXCO Partnership) that owns EXCO Resources' (B1) conventional oil and natural gas assets in West Texas if the transaction closes. The company generated approximately $75 million in revenue (dividends received) for the year ending September 30, 2012. Revenues pro forma for the EXCO partnership will be around $120 million.
The principal methodologies used in rating Harbinger Group were Moody's Global Packaged Goods Industry methodology published in July 2009, Moody's Rating Methodology for U.S. Health Insurance Companies published in May 2011, Global Independent Exploration and Production Industry Methodology published in December 2011 and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.
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Kevin Cassidy VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Peter H. Abdill, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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