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Fitch Assigns Initial 'BB-' IDR to Vogue; Expects to Rate $445MM Bank Facilities 'BB+'

February 3, 2014

NEW YORK --(BUSINESS WIRE)-- Fitch Ratings expects to assign the following initial ratings to Vogue International LLC (Vogue) after The Carlyle Group closes its investment of 49% of the company's equity. The transaction will add $445 million in senior secured facilities and is expected to close by the end of this month: --Long-term Issuer Default Rating (IDR) 'BB-'; -- $30 million Senior Secured 5 year revolver 'BB+'; -- $415 million Senior Secured 6 year term loan 'BB+'. The Rating Outlook is Stable. KEY RATING DRIVERS PROVEN MARKETER Vogue is a small private company whose point of differentiation is in offering products using ingredients that address specific hair conditions similar to the products found in a salon but at more affordable price points. Most of the company's brand support is with retailers rather than investments in national advertising to pull consumers into the store. Consumers make the final purchase decisions in store. Vogues approach has proven successful despite low brand awareness relative to competitors. Vogue has had a growing presence on-shelf with major retailers, particularly in the mass and drug channel, for more than a decade. Major retailers such as Target have grouped Vogues' OGX brand under a 'salon affordable' banner, easily attracting consumers desiring specific hair solutions. Fitch notes that over the past several years many large household and personal care companies have modestly pulled back on advertising and increased trade spending to gain more last minute attention from consumers. Fitch expects the company's business momentum to continue but at a slower rate than in the recent past as its revenue base increases. Near term actions to improve its selling and customer facing organization, beginning with centralizing much of its merchandising activities with a well-known national brokers, are positive steps. GROWING NICHE, GOOD POSITIONING Vogue participates in the mass premium hair care category, which has exhibited solid growth rates vis a vis a relatively flat overall category. Despite the premium pricing to mid-tier brands Fitch notes that Nexxus, a mass premium brand, had strong revenue growth during the recession of 2009. Pressured consumers limited visits to the more expensive salon channel and migrated down to mass premium brands during that time frame. Thus, there is good support for Vogue's subcategory, although there could be modest negative impact during a cyclical downturn. L'Oreal S.A. has commented on the bi-furcation in the beauty market where mid-tier brands have generally lost share to premium or value. IRI scanner data through mid-2013 shows modest or negative growth rates for mid-tier, value brands, and the small portion of private label in this category. These data points support Fitch's view of Vogue's better than average growth prospects. At present, the company's ability to generate new, well-received products has led to increased sales among existing and new customers. It appears however, that new product development is led by the 51% owner (post The Carlyle Group's investment), Todd Christopher . Fitch expects Mr. Christopher to continue leading the business. ATTRACTIVE COST STRUCTURE, FCF Manufacturing is outsourced resulting in a highly variable cost structure. Net sales growth has exceeded the low to mid-single digit average organic rate experienced by the company's significantly larger peers. Margins have improved sequentially for a number of years given higher top line growth and a more modest rate of overhead increases. Limited fixed investments are required. The company's FCF efficiency ( Cash Flow from Operations - Capex)/Net Income) is expected to be in the 90% range and in line with larger consumer product companies such as the Procter & Gamble Company. Fitch anticipates that Vogue should generate significant FCF to reduce debt balances related to its $415 million , six-year senior secured term loan rapidly. Borrowing under the $30 million secured revolver is expected to be modest. There is room in the company's credit protection measures for modest discretionary activities within the rating category as long as its business momentum continues along its current path. SIZE, LACK OF DIVERSIFICATION The company participates primarily in hair care, with the majority of its revenues derived from the United States . Revenues are also small in relationship to its several large peers. Vogue may not have the scale or resources to compete if a large competitor invested heavily in advertising and trade spending for a protracted period of time. EVENT RISK INCREASES The Carlyle Group (Carlyle), a private equity firm, will own 49% of Vogue after its $391 million investment. Carlyle is expected to exit its position in its investment at some point which could increase event risk. Fitch does not rate for the potential, but will review the implication to the ratings when and if an event occurs. DEBT STRUCTURE AND LIQUIDITY Pro-forma leverage for the transaction is 4x. However, given mandatory excess cash flow requirements in Vogue's credit agreement, Fitch expects debt balances to decline meaningfully each year. Protection for creditors is provided by a Net First Lien Leverage Ratio which steps down quickly from 5.25x at June 30, 2014 to 3.75x at March 31, 2016 and thereafter. It is anticipated that the company should ably meet requirements with a solid cushion. Debt maturities on the term loan are structured to be modest at approximately $4.2 million per year. FCF given modest fixed investments is ample. Vogue has moderate room for discretionary activities given its strong FCF. Liquidity is adequate and supported mainly by the FCF and the $30 million , five-year senior secured revolver. RATING SENSITIVITIES What Could Trigger a Rating Action --Given the company's small size and above average business risk given its lack of product and geographic diversification, an upgrade is unlikely. Future developments that may, individually or collectively, lead to a negative rating action include: --Event related increases in leverage of more than one turn from the day the transaction is consummated, such as a dividend recapitalization. --Protracted spending by a large well-funded competitor in the mass premium segment that has the potential to negatively impact Vogue's business profile. Additional information is available at ' www.fitchratings.com '. Applicable Criteria and Related Research : --'Corporate Rating Methodology: Including Short-term Ratings and Parent and Subsidiary Linkage' (August 2013); --'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers ( November 2012 ). Applicable Criteria and Related Research : Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139 Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=819270 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst Grace Barnett , +1-212-908-0718 Director Fitch Ratings, Inc. One State Street New York, NY 10004 or Secondary Analyst Wesley E. Moultrie , +1-312-368-3186 Managing Director or Committee Chairperson Michael Zbinovec , +1-312-368-3164 Senior Director or Media Relations Brian Bertsch , +1-212-908-0549 ( New York ) brian.bertsch@fitchratings.com Source: Fitch Ratings


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