Approximately $200 million of rated debt affected
New York, November 07, 2012 -- Moody's Investors Service placed Schiff Nutrition International, Inc.'s B1 Corporate Family and B2 Probability of Default Ratings as well as its B1 Senior Secured ratings under review for upgrade. This follows the company's announcement that it has entered into an agreement to be acquired by Bayer HealthCare LLC (a wholly owned subsidiary of Bayer AG -- A3 senior unsecured rating) for approximately $1.1 billion in cash. The review for upgrade reflects the potential for Shiff to be acquired by a company with a much stronger credit profile. The transaction, barring any superior offers made for the company, is expected to close by the end of 2012.
Moody's review will focus on any structural enhancements, debt protection features, or additional support from Bayer that may result from an amendment to the bank facilities should the acquisition close as contemplated. To the extent Bayer chooses to repay the facilities, ratings on Schiff's existing debt will be withdrawn.
Ratings placed under review for upgrade are as follows:
Corporate family rating of B1;
Probability of default rating of B2;
$60 million senior secured revolver expiring 2017 rated B1 (LGD 3, 33%), and
$140 million senior secured term loan due 2019 rated B1 (LGD 3, 33%)
Schiff's B1 Corporate Family and B2 Probability of Default ratings (currently under review for upgrade) reflect its relatively small scale and the inherent business risks of negative publicity and product liability associated with the VMNS industry. The rating is also constrained by significant customer concentration with Costco and Walmart, as well as a certain amount of event risk of debt-funded acquisitions as the industry consolidates. Schiff also operates in an intensely competitive product category with very large competitors. The ratings take into account the relatively balanced branded portfolio of VMNS products and favorable demographic trends supporting continued growth in the industry. Further, the ratings incorporate Schiff's good EBITA margins, modest leverage and low-capital expenditures. Schiff's proven ability to innovate and differentiate its branded products, coupled with its longstanding customer relationships in the mass retail channel, are credit positives that support the ratings. Moody's believes that the favorable demographic trends for VMNS products will continue to grow and that Schiff's product categories are well positioned to benefit from those trends
For an upgrade (independent of the possible acquisition by Bayer Healthcare), Schiff would need to increase its scale significantly beyond its current level and demonstrate strong organic growth and good liquidity. Financial metrics would also need to remain strong such that debt-to-EBITDA can be sustained below 3.5 times and EBITA-to-interest sustained above 3 times.
Schiff's ratings could be downgraded if the company's financial performance deteriorates as a result of unexpected weakness in its portfolio, material supply chain disruptions, aggressive debt funded acquisitions, or any material product recalls or liability claims. Erosion in interest coverage, leverage sustained above 5 times, or any deterioration in liquidity are all additional factors that could contribute to a downgrade.
The principal methodology used in rating Schiff was the Global Packaged Goods Industry Methodology published in July 2009. Other methodologies used include Loss given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Schiff, headquartered in Salt Lake City, Utah, develops, manufactures, markets and distributes branded and private label vitamins, minerals and nutritional supplements in the U.S. and abroad. Key brands include Schiff Move Free®, Schiff® Vitamins, Schiff MegaRed®, Schiff Mega-D3®, Tiger's Milk®, Schiff Sustenex®, and Schiff Digestive Advantage®. For the twelve months ended August 31, 2012 the company generated revenue of about $286 million.
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Nancy Meadows Vice President - Senior Analyst 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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