OREANDA-NEWS. S&P Global Ratings said today that it assigned its 'BB-' corporate credit rating to New York, N. Y.-based G-III Apparel Group Ltd. (G-III Apparel or the company). The outlook is stable. At the same time, we assigned our 'BB+' issue-level rating and '1' recovery rating to the proposed $350 million first-lien term loan, which indicates our expectation for investors to receive very high (90%-100%) recovery in the event of payment default. The upsized $650 million asset-based revolving commitment and new $75 million junior secured seller note are not rated. We estimate the company's adjusted debt is approximately $990 million at closing, which includes our adjustments for operating leases. The rating on G-III Apparel reflects its diverse portfolio of apparel brands (licensed and owned) with good brand strength, mainly in women's wear, and its participation in the highly competitive apparel industry where success is measured by the ability to manage fashion risk and brand equity. It also reflects G-III Apparel's financial leverage at around 4x post-closing of DKI, which we expect will gradually reduce in coming years. DKI will increase the contribution from owned brands in the portfolio, which has been skewed toward licensed brands (Calvin Klein in particular), and, if successfully integrated, should contribute to improved EBITDA margins over time. Given that owned brands generally have higher margins, the company will be able to capture the full margin that excludes the brand license fee expense. However, DKI requires significant turnaround, as it is currently loss-making and underperforming, which increases integration and acquisition risks in the coming years. Pro forma for the DKI acquisition, debt to EBITDA and funds from operations (FFO) to debt will weaken in 2016 to near 4x and 20%, respectively, from about 1x and 90% in 2015. We expect these measures to strengthen toward 3.5x and 20% in 2017, primarily because we think G-III Apparel will be able to restore profitability at DKI while maintaining adequate operational performance in its remaining portfolio. G-III's apparel portfolio includes outerwear, dresses, sportswear, woman's handbags, and shoes. Its main brand is Calvin Klein (mainly in women's wear), which it licenses from PVH until 2023 and which we expect will contribute about 40% of revenues in 2016. Other main brands include Tommy Hilfiger (licensed), Bass, and Wilsons Leather. The company has never had a significant license terminated and there are no near-term license renewals, which support the business risk profile. G-III Apparel has good scale, with pro forma revenue of about $2.8 billion and the ability to quickly respond to national retailers. Macy's is the largest client, representing about 20% of revenue but the company has broad distribution among a variety of price channels. We expect licensed brands will contribute about 61% of revenues in 2016, but reduce to mid - to low-50% area as DKI starts to contribute and grow revenues. We believe this supports improved brand diversification and the potential for higher operating margins over time. In addition, we consider the company has strong design capability to deliver products with the look and feel of the underlying brand, at appropriate price points, and the ability to manage inventory throughout the seasonal cycle. We expect the company will be able to revitalize the DKI brand over time and broaden the DKI product assortment with mainstream price points. We note that DKI struggled under prior ownership amid stiff competition and a focus on luxury products. We also expect the DKI brand will contribute to increasing profitability beginning in 2018. Nevertheless, our business risk profile assessment incorporates modest execution risk in effectively integrating DKI. We believe G-III Apparel is willing and able to strengthen its credit measures over time. We assume that the company will maintain its focus on reducing leverage, continue its solid expense and working capital management strategy, and retain its historic shareholder reward program. Our expectation is based on the following forecasts:U. S. real annual GDP growth of 2.0% in 2016 and 2.4% in 2017, and U. S. unemployment of 4.8% in 2016 and 4.5% in 2017. Asia-Pacific growth of 5.4% in 2016 and 2017, and Eurozone growth of 1.5% and 0.9% for the same periods. We expect revenue to increase by about 18%-19% in 2016 reflecting the acquisition of DKI, and near 5% in 2017 reflecting increasing breadth of owned products available for sale and solid wholesale licensing revenue growth. Adjusted EBITDA margin of about 9% in 2016 and increasing to near 9.5% in 2017, reflecting weak outerwear revenue, retail performance, transaction-related expenses, and modest operating loss at DKI. In 2017 we expect DKI to operate near breakeven while the company works to broaden the portfolio. FFO of about $185 million in 2016 and near $195 million in 2017.Capital spending of about $55 million in 2016 and close to $50 million in 2017.We forecast no dividends or share repurchases. The stable outlook reflects our expectations that credit measures will improve from near 4x at closing, with EBITDA and free cash flows steadily strengthening subsequent to the acquisition of DKI. We expect G-III Apparel to turn around DKI, which is currently loss-making, by broadening the DKI product offering and channel diversity, as well as through solid working capital and expense management. In addition, we believe the company has good integration capability and track record to manage apparel brands. We expect G-III Apparel to improve profitability by restoring profitability at DKI, maintaining solid execution in the existing wholesale licensing segment, especially the Calvin Klein brand, and continued cost rationalizations. We project debt to EBITDA in the 3.5x-4x area over the next few years as the company's operating measures gradually improve following the DKI acquisition. Downside scenarioWe could lower our rating if G-III Apparel's credit measures begin to weaken considerably, including debt to EBITDA leverage sustained above 4x. This could occur from the inability to integrate DKI, fashion mistakes, an unexpected rise in input costs that cannot be passed to consumers, the cancellation or non-renewal of a licensing agreement, intensifying competition amid a highly promotional environment, the inability to reduce seasonal ABL borrowings, or a change in forecast shareholder rewards. We estimate this could occur if EBITDA at year-end declines by approximately 5% or debt increases by $50 million (assuming current debt and pro forma EBITDA.)

Upside scenarioWe could raise our rating if G-III Apparel continues to strengthen its profitability, successfully completes the integration of DKI, maintains solid revenue growth, keeps shareholder rewards near current forecast levels, and directs future cash flow to debt reductions, resulting in better credit measures such that it sustains year-end debt to EBITDA below 3x. We estimate this could occur if the company pays down approximately $200 million of debt (assuming current debt and pro forma EBITDA.) RATINGS SCORE SNAPSHOTCorporate Credit Rating: BB-/Stable/--

Business risk: FairIndustry risk: LowCountry risk: Very lowCompetitive position: FairFinancial risk: SignificantCash flow/leverage: Significant

Anchor: bb

ModifiersDiversification/portfolio effect: Neutral (no impact)Capital structure: Neutral (no impact)Liquidity: Adequate (no impact)Financial policy: Neutral (no impact)Management and governance: Fair (no impact)Comparable rating analysis: Negative (one notch)RELATED CRITERIAMethodology: Jurisdiction Ranking Assessments, Jan. 20, 2016Key Credit Factors For The Branded Nondurables Industry, May 7, 2015Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014Revised Revolver Usage Assumptions For Recovery Analysis In Corporate Ratings, Nov. 20, 2014Corporate Methodology, Nov. 19, 2013Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013Key Credit Factors For The Retail And Restaurants Industry, Nov. 19, 2013Methodology: Industry Risk, Nov. 19, 2013Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012Use Of CreditWatch And Outlooks, Sept. 14, 2009Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009