Moody's rates Michael's note Caa1

Moody's Investors Service said it assigned a Caa1 rating with a loss-given-default assessment of LGD6 (95%) to Michael's Stores, Inc.'s proposed $250 million issue of junior subordinated discount notes.

The agency also affirmed the company's B2 corporate family and probability-of-default ratings, SGL-3 speculative grade liquidity rating, proposed B2 $2.4 billion senior secured term loan (LGD 4, 50%), proposed B2 $750 million senior note issue (LGD 4, 57%) and proposed Caa1 $400 million senior subordinated note (LGD 6, 92%). Moody's does not rate the company's proposed $1 billion secured revolving credit facility.

The outlook is stable.

Proceeds from the new debt, together with incremental equity investment from the new owners Blackstone and Bain, will be used to finance the leveraged buyout of the company for total consideration of about $6 billion. Relative to the prior capital structure that was rated on Sept. 28, the senior notes were upsized to $750 million from $700 million, the senior subordinated notes were downsized to $400 million from $700 million and the $250 million issue of subordinated discount notes was newly created.

The agency said the ratings are constrained by the weak post-transaction credit metrics, including high leverage, low fixed charge coverage and minimal free cash flow, and by the company's aggressive financial policy in which forward financial flexibility is being severely diminished for the benefit of pre-transaction shareholders.

Partially offsetting these risks are the history of low cyclicality and seasonality for Michael's stores compared to many other specialty retailers, the geographic diversity across the United States and Canada and the strong market position relative to other traditional and non-traditional craft retailers, Moody's said.

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