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ACProducts, Inc. — Moody’s assigns B1 rating to ACProducts Holdings, Inc.’s term loan, B2 CFR assigned; outlook stable

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Rating Action: Moody’s assigns B1 rating to ACProducts Holdings, Inc.’s term loan, B2 CFR assigned; outlook stableGlobal Credit Research – 26 Apr 2021New York, April 26, 2021 — Moody’s Investors Service (“Moody’s”) assigned a B1 rating to the prospective $1.4 billion term loan B of ACProducts Holdings, Inc. (aka Cabinetworks Group). In addition, Moody’s also assigned a Caa1 rating to the company’s prospective $550 million senior unsecured notes, B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR). The senior unsecured notes will initially be issued out of Victors Merger Corporation, the escrow issuer, before merging into ACProducts Holdings, Inc. at close. The outlook is stable.This transaction follows the announcement that Cabinetworks Group will be acquired by Platinum Equity. Proceeds from the new term loan and senior unsecured notes issued by ACProducts Holdings, Inc., together with a $764 million cash contribution from the new equity sponsor, will be used to acquire Cabinetworks Group for $2.65 billion. The company is also entering into a new $200 million asset-based revolving credit facility due 2026, which will be unrated and is expected to be undrawn at closing. Cabinetworks Group’s existing debt, issued out of the entity ACProducts, Inc., of about $1.1 billion will be repaid at closing.When the financing transaction closes and all related debt obligations are repaid, Moody’s will withdraw all existing ratings of ACProducts, Inc., including the B2 CFR, B2-PD PDR, and B2 senior secured first lien term loan rating. Please refer to the Moody’s Investors Service Policy for Withdrawal of Credit Ratings available on its website, www.moodys.com.Assignments:ACProducts Holdings, 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: ACProducts Holdings, Inc…..Outlook, Assigned StableRATINGS RATIONALEThe B2 CFR considers Cabinetworks’ high debt leverage, which will be 8.1x on a pro forma basis for the transaction as of December 31, 2020, and is expected to decline to 5.7x by 2022. The B2 CFR is somewhat prospective in nature, as it incorporates Moody’s expectations for strong topline growth coupled with margin expansion due to favorable fundamentals that support both investment in home improvement as well as new home construction, which bolsters demand for cabinet products. Moody’s expects the overall building products sector to continue to benefit from a shift in consumers’ discretionary spending to home improvement over the next twelve months as many employees continue to regularly work from home as a result of the coronavirus pandemic. Furthermore, margin improvement considers ongoing cost saving measures, including raw material and component part procurement initiatives, manufacturing consolidations, production line optimizations and the active management of freight costs. Moody’s rating also considers the highly discretionary nature of cabinets relative to other building products, in addition to customer concentration with big box retailers that exposes the company to sudden shifts in demand. Cabinetworks does, however, have a diverse sales channel that also includes dealers, single-family and multi-family homebuilders, which collectively make up close to three quarters of sales.Cabinetworks Group’s liquidity is expected to be good over the next 12 to 18 months and considers Moody’s expectation of positive free cash flow of approximately $80 million in both 2021 and 2022. Liquidity is supported by the expectation of full availability under the new $200 million asset-based revolver over Moody’s forecast horizon. The revolver is subject to a 1.0x springing fixed charge covenant that is tested when availability falls below the greater of 10% or $15 million, which Moody’s does not expect the company to trigger over the next 12-18 months. Alternative sources of liquidity are limited as the majority of the company’s assets are encumbered by secured debt.Governance considerations include Moody’s expectations that Cabinetworks Group will maintain an aggressive financial policy that favors shareholders over creditors. The company has historically grown through debt funded acquisitions and Moody’s expects that strategy to continue. The company is not expected to pay out a regular distribution to its equity sponsors, with excess capital likely reinvested back into the business or used for future tack-on acquisitions.The B1 rating assigned to Cabinetworks’ senior secured first lien term loan B is one-notch higher than the B2 CFR, and reflects their senior position in the capital structure relative to the unsecured notes (rated Caa1) and other junior claims including trade payables and operating leases. The Caa1 rating on the unsecured notes reflects their subordination to a significant amount of secured debt and the expectation of considerable loss of value in a distress scenario. The term loan has a first lien on substantially all tangible and intangible assets of the borrower and guarantors not pledged to the revolver while the revolver has a first lien priority on the relatively more liquid ABL collateral, including the company’s accounts receivable, inventory, deposit accounts and cash.The stable outlook reflects Moody’s expectation of stable demand within the repair and remodel and new home construction segments as well as maintenance of good liquidity.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Cabinetworks operates with adjusted debt-to-EBITDA consistently below 4.5x, adjusted EBITA-to-interest consistently above 3.0x and adjusted free cash flow to debt consistently above 5.0%.The ratings could be downgraded if the company’s adjusted debt-to-EBITDA is sustained above 5.5x, adjusted EBITA-to-interest falls below 2.0x, or the company experiences a deterioration in liquidity.Following are some of the preliminary credit agreement terms, which remain subject to market acceptance.As proposed, the new credit facility is expected to provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following:The ratings could be upgraded if Cabinetworks operates with adjusted debt-to-EBITDA consistently below 4.5x, adjusted EBITA-to-interest consistently above 3.0x and adjusted free cash flow to debt consistently above 5.0%.The ratings could be downgraded if the company’s adjusted debt-to-EBITDA is sustained above 5.5x, adjusted EBITA-to-interest falls below 2.0x, or the company experiences a deterioration in liquidity.Following are some of the preliminary credit agreement terms, which remain subject to market acceptance.As proposed, the new credit facility is expected to provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following:Incremental FacilitiesIncremental debt capacity on the incremental debt capacity on the term loan is up to the greater of $300 million and one times consolidated EBITDA, plus unlimited amounts subject to first lien net leverage ratio not to exceed leverage at closing (if pari passu secured). Amounts up to $150 million may be incurred with an earlier maturity date than the initial term loan.Unrestricted Subsidiary Asset TransfersThere are no express “blocker” provisions which prohibit the transfer of specified assets to unrestricted subsidiaries; such transfers are permitted subject to carve-out capacity and other conditions.Guarantee ReleasesNon-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, with no explicit protective provisions limiting such guarantee releases.Subordination/Anti-subordinationThe credit agreement provides some limitations on up-tiering transactions, including provisions that require the consent of each affected lender for changes in pro rata sharing provisions and the “waterfall”.The above are proposed terms and the final terms of the credit agreement may be materially different.The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Cabinetworks Group, headquartered in Ann Arbor, MI, is a national manufacturer and distributor of kitchen and bathroom cabinetry. For the 12 months ended December 31, 2020, the company generated approximately $1.7 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. 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.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. Griselda Bisono 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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