Harbor Freight Tools USA Inc.'s Senior Secured Term Loan Rated 'BB-' (Recovery Rating: '3')

NEW YORK (S&P Global Ratings) Jan. 18, 2018--S&P Global Ratings today assigned its 'BB-' issue-level rating and '3' recovery rating to California-based tool and equipment retailer Harbor Freight Tools USA Inc.'s (HFT) proposed $2.16 billion senior secured term loan due 2023. HFT will use proceeds from the new facility to refinance existing debt. The '3' recovery rating indicates our expectation for meaningful (50%-70%; rounded estimate: 50%) recovery for term loan lenders in the event of a payment default. Our 'BB-' corporate credit rating and stable outlook on HFT remain unchanged because we view this transaction as leverage neutral. The rating reflects HFT's niche position in the value-priced tools sector and benefits from its vertically integrated business model. Partly offsetting these

...economic activity concurrent with a decline in the housing and light industrial markets. + The simulated default scenario assumes HFT would reorganize as a going concern in a distressed scenario to maximize lenders' recovery prospects. + Our recovery analysis assumes the senior secured term loan lenders benefit from a perfected first-priority lien on substantially all of the company's non-working capital assets and a second lien on the ABL collateral, which primarily consists of working capital assets. Simulated default assumptions: + Simulated year of default: 2022 + EBITDA at emergence: $286 million + Implied enterprise value multiple: 5.5x + Gross enterprise value at emergence: $1.57 billion Simplified waterfall: + Net enterprise value at default (after 5% administrative costs): $1.50 billion + ABL claims: $429 million + Collateral value available to secured creditors: $1.07 billion + Senior secured term loan claims: $2.13 billion + Recovery expectations: 50%-70% (rounded estimate: 50%)...

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