OREANDA-NEWS. Fitch Ratings expects to assign a 'BB+/RR1' rating to Spectrum Brand Inc.'s (Spectrum) new upcoming \$1.45 billion term loan, Euro300 million term loan, and CAD75 million term loan. The term loans mature in 2022. Additionally, Fitch expects to assign a 'BB+/RR1' rating to a new 5-year \$500 million senior secured cash flow revolver. The cash flow based revolver is a new facility in Spectrum's capital structure. It replaces the \$400 million asset based lending (ABL) facility, providing additional liquidity and financial flexibility. The ABL and the existing term loans will be withdrawn when the refinancing closes.

With these new facilities, Spectrum will replace and refinance all of its existing term loans and the modest \$42 million outstanding balance on the ABL facility at the end of March 2015. The borrower on the new facilities will be Spectrum Brands, Inc. A portion of the proceeds will also be used to retire the \$300 million 6.75% senior unsecured notes due 2020. Fitch expects debt levels to remain about the same after the refinancings.

KEY RATING DRIVERS

Diversification and Marketing Strategy Leads to Solid Results

The firm's value-based market strategy and highly diversified product portfolio has resonated well with retail customers and consumers. Organic growth rates have averaged 2% over the past five years, near the low- to mid-point of the household and personal care sector. Modest sales growth, accretive acquisitions, and cost controls have led to improving margins and ample free cash flow (FCF). Much of the company's FCF has historically been directed toward debt reduction. Fitch expects that to continue into 2015 and 2016.

Short-Term Increases in Leverage Expected

Spectrum is acquisitive which results in periodic but temporary increases in leverage. Over the past five years leverage has been as low as 3.4x and as high as 6.6x but has generally hovered in the 4.5x territory. Generally, Fitch expects the company to operate with leverage just under 4.5x. The company's track record on acquisitions has been positive. On the whole, acquisitions have been accretive and well-integrated.

Corporate Governance

Spectrum is a controlled company. HRG Group Inc (HRG, Fitch IDR rated 'B'/Outlook Positive) owns approximately 59% of Spectrum. HRG has pledged a portion of its Spectrum shares as collateral for its own debt and is also dependent on its portfolio companies for cash flow. However, restrictive and financial covenants in Spectrum's debt facilities, as well as HRG's focus on maintaining moderate debt levels at its portfolio companies, should preserve good credit protection measures.

Cyclicality/Commodity Exposure Increases Modestly

The ArmorAll Brand, which is automotive appearance-related, represented approximately 55% of AAG's \$298 million in reported 2014 revenues. There is some modest cyclicality as these purchases have tended to be more discretionary and correlate to new car purchases. Both ArmorAll and STP use jet fuel as an ingredient, which is currently benefiting from lower oil prices, but prices can be volatile. Nonetheless, given that AAG will contribute less than 10% of Spectrum revenues, any spikes should be manageable within the larger enterprise and likely to be hedged. Fitch estimates that cyclical product lines such as hardware, small appliances and AAG increase the cyclical portion of the company's portfolio by about 5% to approximately 50%.