Overview -- U.S.-based Renfro is recapitalizing with a proposed $220 million senior credit facility to refinance existing debt and pay a $75 million dividend to its financial sponsor. -- We are affirming our 'B' corporate credit rating on Renfro. We are also assigning a 'B' issue-level rating on their senior secured debt, with a '4' recovery rating. -- We are revising the outlook to stable from positive based on the additional debt's effect on credit measures, and our belief that the credit measures will not improve enough to support a higher rating during the outlook period as previously expected. Rating Action On Jan. 9, 2013, Standard & Poor's Ratings Services affirmed its 'B' corporate credit rating on North Carolina-based Renfro Corp. and revised the rating outlook to stable from positive. In addition, we assigned our 'B' issue-level rating on Renfro's $220 million term loan B due 2019. The recovery rating is '4', indicating our expectation of average (30% to 50%) recovery for debtholders in the event of payment default. Rationale Today's outlook revision reflects the apparel manufacturer's higher debt level and weaker credit metrics following its recapitalization and our belief that credit metrics will not improve enough over the next year to support a higher rating. The proceeds from the proposed $220 million term loan will mainly refinance existing debt and also fund a dividend to the company's financial sponsor, which we believe contributes to an aggressive financial policy. We estimate pro forma adjusted leverage increases to about 5.0x from 3.7x for the 12 months ended Oct. 27, 2012. The ratings on Renfro reflect our view that the company's financial profile has weakened to "aggressive" from "significant" due to the deterioration of credit metrics following the recapitalization, and our belief that ratios will remain close to current levels. Our financial risk assessment also takes into account the company's ownership and board control by a private equity sponsor and its willingness to distribute debt-financed dividends. We believe Renfro's business risk profile will remain "vulnerable," given its participation in the highly competitive apparel manufacturing industry and its narrow product focus. We believe credit metrics will improve modestly over the next one to two years through debt reduction given its required excess cash flow payment. We estimate adjusted leverage could decrease to about mid-4x from pro forma leverage of about 5x over the next year. We estimate funds from operations (FFO) to total debt and EBITDA coverage of interest will be about 14% and 3.5x, respectively, over the next year. This is commensurate with the financial indicative ratios, which includes leverage between 4x and 5x, for the "aggressive" financial risk descriptor. (Renfro is a private company and does not publicly disclose its financials.) Our assumptions for the next year include sustained positive operating results: -- Good sales growth in fiscal 2013 (benefiting from incremental revenue from acquired brands and moderate organic growth) and modest organic sales growth in fiscal 2014. -- EBITDA margin could decrease in fiscal 2013 from lower-margin products from the company's recent acquisition and a change in product mix but could slightly increase in fiscal 2014 due to improved product mix and operational leverage. -- Moderate capital expenditures. -- We do not factor in any acquisitions or further debt-funded dividends. We believe the company competes in a highly competitive, somewhat fragmented category--sock manufacturing--against major market participants, such as Gildan and HanesBrands. The company's products remain narrowly focused on socks, but its product offerings are extensive and its portfolio includes the well-known Fruit of the Loom, Dr. Scholl's, and Polo brands. Fruit of the Loom makes up a significant portion of the company's revenues, and although Renfro does not own the brand, it does have a long-term license to sell Fruit of the Loom socks until 2026. The majority of Renfro's revenues come from the branded sock category, which typically have higher margins. Renfro's customer base continues to be concentrated, with a mass-market customer accounting for a significant portion of domestic and international net sales. Loss of a customer could have a material impact due to the company's relatively small size and narrow product focus. To maintain its margins, Renfro has shifted the majority of its manufacturing offshore, primarily through wholly-owned subsidiaries and joint ventures. It outsources a small portion of its volume across various countries, which allows for greater flexibility in the event that the company increases its production volume. Liquidity We believe liquidity is "adequate," with sources of cash that are likely to exceed uses for the next 12 months. Our assessment incorporates the following: -- We expect coverage of cash uses to be in excess of 1.2x for the next 12 months. -- We expect net sources would be positive, even in the event of a 15% drop in EBITDA. -- The company has about $1 million of cash on hand and $45 million available on its $60 million asset-based revolving credit facility (unrated) as of Oct. 27, 2012. After the transaction, we expect the company to have about $30 million of cash and to be fully undrawn on its revolver. Also, the revolver maturity will be extended to 2018 from 2015 concurrent with the transaction. -- We understand that the covenants under the bank loan agreement will include maximum leverage and minimum interest coverage, and will be set with about 30% headroom. -- The company has manageable required amortization of about $2.2 million annually and has no debt maturities until 2019, when its term loan B is due. -- Capital expenditures and joint venture investments are expected to be about $22 million for the current year. -- The company appears to have good relationships with its banks, based on its track record. Recovery analysis The issue-level rating on Renfro's $220 million senior secured term B debt is 'B' (the same as the corporate credit rating). The recovery rating is '4', indicating our expectation of average (30%-50%) recovery for debt holders in the event of payment default. For the complete recovery analysis, see Standard & Poor's recovery report on Renfro to be published shortly on RatingsDirect. Outlook Our rating outlook is stable. We expect relatively steady operating performance given the replenishment nature of its products, credit metrics to remain in line with the aggressive financial risk descriptor, and for liquidity to remain adequate over the next year. We could consider an upgrade if the company is able to sustain good operating results, reduces debt, and is able to improve credit metrics, including sustaining leverage near 3.5x. The company would need to reduce debt by about 27% if EBITDA leverage remains at current levels. Alternatively, we could consider a downgrade if operating performance materially deteriorates, possibility due to loss of a major customer, causing liquidity to become constrained, including covenant cushion decreases below 10%, and/or leverage increases to well above 5x. We estimate this could occur if EBITDA decreases by about 13% and debt remains at current pro forma levels. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Standard & Poor's Encyclopedia Of Analytical Adjustments For Corporate Entities, July 9, 2007 Ratings List Rating Affirmed; Outlook Action To From Renfro Corp. Corporate credit rating B/Stable/-- B/Positive/-- Ratings Assigned Renfro Corp. Senior secured $220 mil. term loan B due 2019 B Recovery rating 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.