High-Yield Retail Checkout5028d845-0f8d-41ff-a64f...High-Yield Retail Checkout ... Online spending...

Volume V January 2016

High-Yield Retail Checkout Comprehensive Analysis of Major High-Yield Retailers

Leveraged Finance

High-Yield Retail Checkout January 22, 2016

Table of Contents Executive Summary .........................................................................................................1 High-Yield Retail Coverage with Key Financial Metrics ............................................ 11–12

Company Reports 99 Cents Only Stores LLC ............................................................................................... 13 Ascena Retail Group, Inc. ................................................................................................ 28 The Bon-Ton Stores, Inc. ................................................................................................ 42 Burlington Stores, Inc. .................................................................................................... 55 Claire’s Stores, Inc. ......................................................................................................... 68 Dollar Tree, Inc. ............................................................................................................... 85 GNC Holdings, Inc. ....................................................................................................... 101 The Gymboree Corporation ........................................................................................... 113 Hanesbrands Inc. ........................................................................................................... 127 J.Crew Group, Inc. ......................................................................................................... 139 J. C. Penney Company, Inc. ......................................................................................... 154 Kate Spade & Company ................................................................................................ 170 L Brands, Inc. ................................................................................................................ 186 Levi Strauss & Co. ........................................................................................................ 201 The Men’s Wearhouse, Inc. ........................................................................................... 214 The Michaels Companies, Inc. ...................................................................................... 228 NBTY, Inc. .................................................................................................................... 242 Neiman Marcus Group LTD LLC ................................................................................... 258 PVH Corp. ...................................................................................................................... 276 Sally Beauty Holdings, Inc. ........................................................................................... 290 Sears Holdings Corporation ........................................................................................... 303 SUPERVALU Inc. ......................................................................................................... 321 Toys ‘R’ Us, Inc. ............................................................................................................. 342

Leveraged Finance

www.fitchratings.com January 25, 2016

Retailing / U.S.A.

High-Yield Retail Checkout Comprehensive Analysis of Major High-Yield Retailers Special Report

Improved Macro, but Challenges Remain: Fitch Ratings expects overall U.S. retail sales (excluding auto) to grow at 3%–4% in 2016, in line with or modestly better than the 3% growth projected for 2015. While the economic environment is expected to remain fairly stable, in-store sales are expected to remain muted at 1.5%–2.0% due to reduced store traffic, given increased online penetration, continued spending shift to consumer services, and moderate replenishment needs across certain categories (e.g. apparel).

Online Share Gains to Continue: Fitch expects e-commerce to grow in the low teens in 2016 to well over $300 billion, or 15% of total retail sales, and account for 50% of total retail spending growth. Online spending growth will likely remain strong in general merchandise, apparel, consumer electronics, toys and office supplies, while more restrained in categories such as grocery, home improvement and auto parts. Comparable store sales (comps) growth at department stores and brick-and-mortar specialty apparel retailers is predominantly being driven by growth in their online businesses.

Spend Shifts to Services: Fitch believes consumer budgets have been reset given the increased spend on services, particularly subscriptions for cable/broadband, cellular telephony and streaming media. Once-physical media purchases are increasingly becoming digital assets, accelerating market share shift to online vendors. This shift, in addition to recent growth in experiential spending (restaurants, travel) will limit sales growth within Fitch’s coverage.

Uneven Performance by Sector: Within Fitch’s high-yield coverage, the battle to offer the customer value is most prominent in general merchandise, grocery, mid-tier apparel and accessories (department stores and specialty), and toys. Most players are using savings from cost structure management to fuel lower prices to generate modestly positive sales growth. Sectors with more resilient positioning include beauty, crafts and off-price apparel, while the vitamin category may be losing resilience on increased competition from alternate channels.

Issuers with Positive Trajectory: Burlington Stores, Inc. (Burlington); Levi Strauss & Co. (Levi); Kate Spade & Company (Kate Spade), and J. C. Penney Company, Inc. (J. C. Penney) should continue to see growth in both top line and EBITDA, and see further improvement in their credit metrics over the next 12–24 months.

Issuers with Negative Trajectory: Continued weakness and upcoming maturities at Sears Holdings Corporation (Sears); Claire’s Stores, Inc. (Claire’s); Toys ‘R’ Us, Inc. (Toys); and 99 Cents Only Stores LLC (99 Cents Only) raise liquidity concerns and questions about long-term business viability for some. J.Crew Group, Inc. (J.Crew), Neiman Marcus Group LTD LLC (Neiman) and The Men’s Wearhouse, Inc. (Men’s Wearhouse) have seen declines in sales and EBITDA, but liquidity is comfortable in the near term.

Ratings Restricted by Leverage Target: Several companies within Fitch’s coverage have leverage targets that restrict ratings despite EBITDA momentum. These include L Brands, Inc. (L Brands); Hanesbrands Inc. (Hanesbrands); GNC Holdings, Inc. (GNC); PVH Corporation (PVH) and Sally Beauty Holdings, Inc. (Sally). The Michael’s Companies, Inc. (Michaels) could continue to reduce leverage using FCF to pay down debt. The company will conclude a capital structure review in early 2016. Fitch believes this could lead to a dividend and/or share-buyback program, limiting its ability to delever meaningfully

Related Research 2016 Outlook: U.S. Retailing (Organic Growth Narrows) (November 2015) U.S. Grocery Retailing (Supermarkets Play Defense; Grocery Market Share Shifting to Discount and Specialty Formats) (July 2015) Department Stores: A Shrinking Slice of the Pie (June 2014) U.S. Retail Case Studies in Bankruptcy Enterprise Values and Creditor Recoveries (April 2013)

Analysts Monica Aggarwal, CFA +1 212 908-0282 [email protected]

David Silverman, CFA +1 212 908-0840 [email protected]

Carla Norfleet Taylor, CFA +1 312 368-3195 [email protected]

Grace Barnett +1 212 908-0718 [email protected]

Jemini Patel +1 212 908-0586 [email protected]

JJ Boparai +1 212 908-0543 [email protected]

https://www.fitchratings.com/creditdesk/reports/report_frame_render.cfm?rpt_id=874082












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Leveraged Finance

High-Yield Retail Checkout 2 January 25, 2016

Stacking up the High-Yield Retailers Fitch sorts the retailers into three main categories — Best in Class, Muddlers and Share Donors — based on how effectively they are defending their market share positioning and maintaining their profitability.

Best in Class The Best-in-Class companies stand out positively due to their combination of strong differentiation, compelling brand and/or demonstrated consumer loyalty, which enable them to assert solid competitive traction, and a greater degree of overall stability.

Through acquisitions, core brand focus, and selective geographic expansion and product extensions, Hanesbrands and PVH have established track records of strong growth in a stagnant industry. Some retailers benefit from stronger sector fundamentals, such as NBTY, Inc. (NBTY), which is supported by midsingle-digit growth in the vitamin, mineral and herbal supplement category and Michaels, which benefits from solid growth in crafting and resilience to competitive incursion.

Similarly, Sally, NBTY and L Brands’ Bath & Body Works brand have proven to be among the more consistent businesses in the retail sector because products are consumable in nature and are used as part of a daily regimen. Neiman Marcus and Kate Spade have benefited from the strong growth in luxury spending and successful merchandising efforts, although the recent slowdown in luxury spending is expected to hurt performance at Neiman over the next few quarters. Both companies are exposed primarily to A-rated malls, which continue to see solid sales productivity. Conversely, Dollar Tree, Inc.’s (Dollar Tree) low-priced assortment has appealed to consumers who seek strong value messaging, especially given a reduction to the stigma of cross-shopping at discount formats.

The Best-in-Class players can consistently generate FCF and deleverage as needed/desired. These companies are likely to accelerate market share gains in a strong economy and demonstrate resilience in a weak economy. Furthermore, their capital structures are better equipped to withstand external shocks than those of retailers in the other two groups. The clear category leadership these companies possess is a key tenet to their market share defensibility and distinction as Best in Class.

Related Criteria Recovery Ratings and Notching Criteria for Equity REITs (December 2015) Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (December 2015) Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (August 2015) Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (November 2014)

Stacking Up the High-Yield Retailers

aIndicates movement between categories compared to prior year.Source: Fitch Ratings.

Best in Class

Muddlers

Share Donors

Dollar Tree, Inc.Hanesbrands Inc.Kate Spade & CompanyL Brands, Inc.The Michaels Companies, Inc.NBTY, Inc.Neiman Marcus Group LTD LLCPVH CorporationSally Beauty Holdings, Inc.

Ascena Retail Group, Inc.Burlington Stores, Inc.GNC Holdings, Inc.aJ.C. Penney Company, Inc.aLevi Strauss & Co.The Men’s Wearhouse, Inc.

99 Cents Only Stores LLCThe Bon-Ton Stores, Inc.Claire’s Stores, Inc.The Gymboree Corporation J.Crew Group, Inc.aSears Holdings CorporationSUPERVALU Inc.Toys ‘R’ Us, Inc.














Leveraged Finance


With regard to targeted leverage, Fitch expects both L Brands and Sally will continue to manage their capital structures within the context of maintaining their leverage at current levels, and will therefore not likely see rating movement. Michael’s could reduce leverage from the current 5.0x range to the 4.0x range over the next 24–36 months if it uses its healthy FCF to pay down debt. However, the company is amid a capital structure review, which Fitch believes will lead to a dividend and/or share-buyback program. We await further details on the company’s leverage targets post the capital structure review.

A number of Best-in-Class retailers, including Neiman Marcus, PVH, Hanes, NBTY and Michaels, added debt in recent years to fund transactions or pay special dividends to their equity sponsors. However, they generally remain strong candidates to continue to deleverage given their strong FCF characteristics, with PVH and NBTY likely to have the most upside over the 12–24 months. Neiman’s ability to deleverage (post its acquisition by Ares Management LLC and the Canada Pension Plan Investment Board in October 2013) has been stalled by a slowdown in luxury spending that could reduce EBITDA by about 25% in fiscal 2016.

Muddlers High-yield retailers that muddle along are generally holding onto their market share or experiencing slight losses, and have a manageable capital structure. Levi and J.C Penney have seen gradually improving results, with the latter migrating here from the Share Donor category following two years of positive comps. Conversely, GNC’s recently negative comps in a growing category have caused it to migrate here from the Best-in-Class category.

Burlington continues to produce strong results, as consumer trade-down to the off-price channel continues, although productivity metrics still trail those of direct competitors. Ascena Retail Group, Inc.’s (Ascena) collection of mid-market, primarily women-focused apparel brands is generally performing in line with a slow growth apparel sector. The company is focused on expense reductions (especially post the ANN, Inc. acquisition) to drive EBITDA. Men’s Wearhouse is currently a tale of two brands, with the Men’s Wearhouse chain producing market share gains while Jos. A. Bank is amid a period of significantly negative comps.

Share Donors Share Donors are the notable laggards of their respective subsectors. They exhibit weak business profiles in the face of operationally and financially stronger competitors. Their generally high leverage not only creates greater risk of refinancing or asset sales to pay down debt, but maturity schedules can limit their ability to redeploy FCF (if any) to business reinvestment. Fitch remains concerned about the long-term viability of these businesses given operational headwinds, weak cash flow generation and onerous debt loads. Most of Fitch’s Share Donors fall into the ‘CCC’ and ‘CC’ categories given near-term liquidity concerns, with only J.Crew and SUPERVALU Inc. (SUPERVALU) in the ‘B’ category.

Many of Fitch’s Share Donors are apparel retailers, a category that has seen significant supply/demand imbalance due to stagnant category growth yet increased competition, including fast-fashion retailers, off-price retailers, general merchants with apparel exposure, online-only players and the online businesses of brick-and-mortar competitors. Changes to consumer shopping habits — including reduced mall traffic and increased pre-purchase research — price perception and willingness to explore new channels (including off-price and online) have complicated the business models for many companies.

Leveraged Finance


Sears and The Bon-Ton Stores, Inc. (Bon-Ton), traditional department stores whose weak cash flow yields an inability to invest in merchandising, omnichannel infrastructure and the stores’ physical plant, have seen meaningful traffic declines. This creates a vicious cycle of limited cash flow generation and therefore minimal opportunity to re-invest.

The Gymboree Corporation’s high price perception has caused consumers to look elsewhere for children’s apparel. J.Crew’s similarly high price perception, coupled with fashion misses, has created sharp traffic declines and aggressive markdowns necessary to clear excess inventory. This has caused the company to migrate from Muddlers to Share Donors. General mall traffic declines have also affected Claire’s impulse purchase model, and its attempts to diversify its real estate exposure could stem some but not the entire decline. Its heavy debt load and tight liquidity remain concerns.

Several of the Share Donors are single-category retailers that have suffered due to the rise of the discount model. Toys continues to seek its competitive advantage in a highly seasonal, hit-driven business, with top-selling toys that are used as loss-leaders for discount competitors during the holiday selling period. Online growth in the toy category is also a concern. For SUPERVALU’s grocery businesses post the announced Save-A-Lot spinoff, generally weaker regional market shares versus its competition have limited the company’s ability to use scale and expense reductions to continually reduce prices and leverage marketing spend. Finally, 99 Cents Only’s flat to negative comps trend is largely a result of over-expansion, cannibalization and weak execution due to a diffused management focus, now exacerbated by the need to tightly manage inventory to increase gross margins and address potential liquidity concerns.

The Revenue and EBITDA Today Versus Recession Trough table below demonstrates that EBITDA for most of these retailers have continued to decline post the 2008/2009 recession due to secular and competitive pressures, despite sales growth at several companies. Only Claire’s has shown a modest increase in EBITDA, though LTM EBITDA remains nearly 25% below pre-recession peak levels.

Revenue and EBITDA Today Versus 2009 Recession Trough

($ Mil.) Pre-Recession

Peak Recession

Trough LTM

LTM Versus Recession

Trough (% Change)

Revenue 99 Cents Only Stores LLCa 1,187 1,345 1,199 (10.9) Bon-Ton Stores, Inc. (The) 3,639 3,035 2,803 (7.7) Claire’s Stores, Inc. 1,511 1,342 1,413 5.2 Gymboree Corp. a 921 1,015 1,231 21.3 J.Crew Group, Inc. a 1,335 1,578 2,500 58.4 J. C. Penney Company, Inc. 20,186 17,556 12,522 (28.7) Sears Holdings Corporation 52,761 44,043 25,942 (41.1) Toys ‘R’ Us, Inc. 14,098 13,172 11,932 (9.4)

EBITDA 99 Cents Only Stores LLCa 38 114 55 (51.6) Bon-Ton Stores, Inc. (The) 282 162 120 (26.0) Claire’s Stores, Inc. 292 210 217 3.2 Gymboree Corp.a 162 221 79 (64.1) J.Crew Group, Inc.a 214 276 189 (31.6) J. C. Penney Company, Inc. 2,387 1,416 678 (52.1) Sears Holdings Corporation 3,558 1,584 (575) N.A. Toys ‘R’ Us, Inc. 1,103 968 714 (26.2) aDid not experience a trough during the recession. Pre-recession peak figures are as of fourth-quarter 2007 and recession trough figures are as of fourth-quarter 2009. N.A. – Not applicable. Source: Company filings, Fitch Ratings.

Leveraged Finance


Companies with the biggest opportunity to improve EBITDA from here include 99 Cents Only, if the company is able to resolve its inventory missteps, and J.Crew, given a combination of improved fashion and better perceived pricing.

Profitability Reflects Business Profile

The average EBITDA margin for the 23 companies in this report is 11.0%, although margins range from negative for Sears to the positive 20% range for L Brands. High margins are a credit positive, as they generally indicate a differentiated product offering, a meaningful brand and/or structural advantages, such as vertical integration, scale or dominance of a respective subsector. The ability to sustain above average margins over the long term is a Best-in-Class attribute that demonstrates market share defensibility, and enables a stronger FCF profile and the ability to deleverage.

Margins on the lower end tend to reflect a more commoditized product offering, or a saturated subsector where price transparency is high and the ability to use price to offset other margin pressures is low. If the business is inherently a lower margin business because of an undifferentiated offering, and selling, general and administrative (SG&A) expenses are heavily fixed and already running lean, there may be little in the way of catalysts to drive margin higher.

(5)

0

5

10

15

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25

EBITDA Margin Average EBITDA Margin = 11.0

LTM EBITDA Margin

SHLD – Sears Holdings Corporation. NDN – 99 Cents Only Stores, LLC. BONT – The Bon-Ton Stores, Inc. SVU – SUPERVALU Inc. JCP – J.C. Penney Company, Inc. TOY – Toys 'R' Us, Inc. GYMB – The Gymboree Corporation. JCG – J.Crew Group, Inc. ASNA – Ascena Retail Group, Inc. BURL – Burlington Stores, Inc. DLTR – Dollar Tree, Inc. MW – The Men's Wearhouse, Inc. LVI – Levi Strauss & Co. NMG – Neiman Marcus Group LTD LLC. PVH – PVH Corp. CLE – Claire’s Stores, Inc. NBTY – NBTY, Inc. SBH – Sally Beauty Holdings, Inc. HBI – Hanesbrands Inc.MIK – The Michaels Companies, Inc. KATE – Kate Spade & Company. GNC – GNC Holdings, Inc. LTD – L Brands, Inc. Source: Company filings, Fitch Ratings.

(%)

Leveraged Finance


Key Issuers to Watch in 2016/2017 The high-yield retailers under coverage have varying trends in terms of leverage trajectory. Some companies have shown leverage stability or improvement through a combination of EBITDA momentum and/or debt paydown. Others are seeing worsening trends, due to operational challenges and/or limited ability to reduce debt through FCF. Below, we categorize our coverage into companies with reasonable or declining leverage, and those with elevated or worsening leverage. We also provide details on companies whose leverage and/or leverage trend is particularly notable.

0

2

4

6

8

10

12

Adjusted Leverage (x) Average Adjusted Leverage = 6.3

Adjusted Leverage

HBI – Hanesbrands Inc. LTD – L Brands, Inc. LVI – Levi Strauss & Co. KATE – Kate Spade & Company.SVU – SUPERVALU Inc. SBH – Sally Beauty Holdings, Inc. BURL – Burlington Stores, Inc. GNC – GNC Holdings, Inc. PVH – PVH Corp. MIK – The Michaels Companies, Inc. MW – The Men's Wearhouse, Inc. ASNA – Ascena Retail Group, Inc. DLTR – Dollar Tree, Inc. NBTY – NBTY, Inc. NMG – Neiman Marcus Group LTD LLC. JCP – J. C. Penney Company, Inc. TOY – Toys 'R' Us, Inc. BONT – The Bon-Ton Stores, Inc. JCG – J.Crew Group, Inc. CLE – Claire’s Stores, Inc. GYMB – The Gymboree Corporation. NDN – 99 Cents Only Stores, LLC.Source: Company filings, Fitch Ratings.

(x)

Expected Leverage Trends Over the Next 12–24 Months Elevated/Worsening Reasonable/Declining 99 Cents Only Stores LLC Ascena Retail Group, Inc. Claire’s Stores, Inc. Burlington Stores, Inc. Bon-Ton Stores, Inc. (The) Dollar Tree, Inc. Gymboree Corporation (The) GNC Holdings, Inc. J.Crew Group, Inc. Hanesbrands Inc. The Men’s Wearhouse, Inc. J. C. Penney Company, Inc. Neiman Marcus Group LTD LLC Kate Spade & Company Sears Holdings Corporation L Brands, Inc. Toys ‘R’ Us, Inc. Levi Strauss & Co.

The Michaels Companies, Inc.

NBTY, Inc.

PVH Corporation

Sally Beauty Holdings, Inc.

SUPERVALU Inc.

Note: For retailers with negative EBITDA, further EBITDA deterioration is denoted as an increase in leverage while an improvement in EBITDA from 2015 expected levels is denoted as a decrease in leverage. Source: Fitch Ratings.

Leveraged Finance


Issuers on a Negative Trajectory

Claire’s Stores, Inc. — Potential Debt Restructuring

Fitch does not see much upside to Claire’s business, with comps expected to remain flat to modestly negative given declining mall traffic in the U.S. and tough macroeconomic conditions in Europe. Fitch expects 2015 EBITDA to be modestly over $200 million and 2016 and 2017 EBITDA to be $185 million–$190 million, assuming negative 2% top-line growth and modest EBITDA margin compression. The contribution from its concession business, which could grow to $100 million–$120 million in revenue over the next 12–18 months, could keep EBITDA at approximately $200 million.

Total liquidity has tightened materially over the last three quarters on EBITDA declines, with LTM FCF of negative $49 million. Liquidity at the end of 2015 is projected to be around $130 million, but with FCF expected to be negative $40 million in 2016, Claire’s will most likely have to raise additional funds mid-year 2016 to fund the holiday season.

The company’s substantial debt load suggests a near-term balance sheet restructuring given tightened liquidity, seasonal working capital needs and the need to address the maturity of $260 million senior subordinated notes due June 2017. Fitch notes the junior ranking of the maturing notes in the debt structure adds complexity to the refinancing process, as even the more senior tranches have less than full recovery prospects. Fitch recognizes Claire's owner, Apollo Management (Apollo) could provide additional equity to address near term maturities and operating liquidity.

Sears Holdings Corporation — Further Liquidity Injection Required

Fitch expects Sears’ EBITDA to be in the negative $600 million–negative $650 million range in 2015 and potentially worse in 2016. Comps are expected to be in the negative midsingle-digit range in 2016 and 2017, with top-line declining potentially in the high single-digit range as Sears continues to close stores.

Fitch expects cash burn (CFO after capex and pension contributions) of $1.0 billion–$1.1 billion in 2015. Cash burn could potentially worsen in 2016, assuming EBITDA losses approach $800 million–$1 billion. Fitch expects Sears to end 2015 with about $1.8 billion–$2.0 billion in liquidity based on current EBITDA expectations. Sears is consequently likely to require an additional $1.3 billion–$1.5 billion in annual liquidity in 2016 and 2017 via further real estate transactions and/or higher borrowings, plus another $500 million to fund annual seasonal working capital needs.

Toys ‘R’ Us, Inc. — Near-Term improvement; Long-Term Headwinds

An improved traditional toy market appears to have lifted holiday 2015 sales, with Toys reporting positive 2% consolidated comps for November/December, the first positive comps in more than five years. However, competitive intensity — including channel shifts to discount and e-commerce formats, secular issues given low birth rates in developed markets and digitalization of gaming products — is still expected to pressure Toys’ top line. Fitch Ratings expects comps to remain flat to modestly negative over the medium term.

Fitch expects EBITDA to improve to approximately $750 million in 2015, with the potential to cross $800 million in 2017, assuming relatively flat gross margin and modest reduction in selling, general and administrative (SG&A) expense. Liquidity is adequate and Fitch expects FCF to be around $70 million in 2015 and $100 million in 2016, barring any material swings in working

Leveraged Finance


capital. However, the company remains highly reliant on the capital markets to refinance debt, with $1.175 billion of debt due in 2017 and an additional $650 million due in 2018.

Neiman Marcus LTD LLC — Growth Stalled on Luxury Downturn

Comps trends at Neiman have decelerated markedly through the first nine months of 2015 — turning negative 5.6% in the third quarter (the company’s fiscal first quarter ended Oct. 31, 2015) — after sustaining positive midsingle-digit comps for a number of years. This reflects the adverse impact of the strong dollar on tourist traffic in key gateway markets and the impact of lower crude oil prices on the net worth of many of Neiman’s core customers.

Fitch expects comps to decline 6% in fiscal 2016 (ended July) and be flat in fiscal 2017. EBITDA could decline 25% from LTM levels to $500 million in fiscal 2016 given higher markdowns and promotional costs incurred due to lower expected volumes.

Fitch expects FCF to be negative $100 million in fiscal 2016 and negative $50 million in fiscal 2017. However, liquidity is expected to be adequate over the next 24 months, and Neiman could pay in kind interest on $600 million notes due 2021 and pull back on capex given a prolonged retraction in top line.

The Men’s Wearhouse, Inc. —Jos. A. Bank a Drag on Results

Fitch expects flattish sales results in 2016 as modestly positive growth at the Men’s Wearhouse brand is mitigated by significantly negative comps at Jos. A. Bank, the result of an aggressive pullback in promotions and resulting traffic declines. EBITDA in 2016 is expected to be up modestly from 2015 to approximately $400 million on growth at the Men’s Wearhouse brand and integration cost synergies, although lower than the $414 million pro forma EBITDA at the time the Jos. A. Bank acquisition was consummated. EBITDA growth should accelerate in 2017, reaching $415 million–$425 million, assuming Jos. A. Bank’s sales rebound to slightly positive growth. This is well short of management’s 2014 expectation of reaching over $630 million in annual EBITDA by 2017.

Despite the projected shortfall, the company’s near-term liquidity is adequate, with $490 million in liquidity as of Oct. 31, 2015. Fitch projects Men’s Wearhouse will generate positive annual cash flow beginning 2015. The company’s next maturity is a $1 billion term loan in 2021.

J.Crew Group, Inc. — EBITDA Halved

Since peaking at $354 million in both 2012 and 2013, J.Crew’s EBITDA has fallen precipitously and Fitch expects it to be in the $160 million–$170 million range in 2016, similar to our expectations for 2015. Fitch expects FCF of negative $80 million in 2015 and negative $20 million in 2016; however, overall liquidity remains adequate over the near-term.

Negative comps at J.Crew stores have led the decline, causing a heightened promotional cadence to clear excess inventory. Fitch believes the comps decline has stemmed from fashion misses combined with elevated price points at a time when the market has increasingly traded out of mid-tier apparel in favor of either value-priced channels — including fast fashion and off-price — or high-end retailers, which are aspirational in terms of either quality or brand value.

Fitch senses a lack of urgency on management’s part to make changes required to improve the sales trend. The company has recently outlined some opportunities, including replacing the head of women’s design, improving pricing perception through mix and refocusing the assortment toward classic pieces. However, Fitch believes more aggressive changes are required.

Leveraged Finance


99 Cents Only Stores LLC — Poor Execution Leads to Liquidity Concerns

Rapid new store development in 2014 has stressed 99 Cent Only’s system, resulting in poor execution, comps declines, excess inventory and gross margin compression. SSS have been negative for three straight quarters through Oct. 30, 2015 and Fitch projects SSS will decline 2.5% in 2015 and slowly recover through 2017 as the firm laps new store cannibalization, resolves inventory issues causing out of stocks, and improves the shopping experience.

Fitch projects $55 million in EBITDA in 2016 and $85 million in 2017, from an expected level of $25 million in 2015. EBITDA could gradually recover toward $100 million if the company generates low single-digit SSS and improves gross margin to the low 30% range from 28% currently.

Liquidity concerns have increased given three years of negative FCF. Fitch projects liquidity of about $50 million at the end of 2015, on negative FCF of about $100 million. 99 Cent Only’s asset-based loan expires on Jan. 1, 2017, and will need to be refinanced in 2016 and possibly upsized given Fitch’s view that liquidity may worsen if results do not improve.

Issuers on a Positive Trajectory

J. C. Penney Company, Inc. — Pathway to $1 Billion EBITDA

J. C. Penney has demonstrated a meaningful turnaround in its business over the last eight quarters. There is good visibility on J. C. Penney’s ability to improve EBITDA to approximately $800 million in 2016 and move toward $1 billion in 2017 – from a projected $690 million in 2016. Fitch expects J. C. Penney to sustain comps growth, including online growth, in the 2%–3% range in 2016/2017 and to improve gross margin modestly.

Fitch expects total liquidity (cash and revolver availability) to be over $2.5 billion at year-end 2015, which will enable the company to address total unsecured debt maturities of $600 million through 2018. J. C. Penney is currently evaluating its options to amend and extend its $2.2 billion real estate term loan due May 2018, which could include reducing some of the collateral and/or improving the terms on the loan.

Levi Strauss & Co. — Expected EBITDA Improvement

Fitch projects continued stabilization in constant currency sales growth, with 1%–2% annual organic revenue growth expected beginning in 2016. The strong U.S. dollar is expected to modestly reduce reported sales growth in 2016. Fitch believes EBITDA margins will continue to slowly expand over the near to medium term as cost savings from Levi’s global productivity initiative flow to the bottom line. FCF generation should consequently be approximately $200 million annually.

Fitch expects leverage to remain around 3.5x over the next 12 months due to EBITDA growth and minimal debt repayment, with modest improvement thereafter due to continued EBITDA growth. However, should management use FCF to reduce debt levels, leverage could improve to approximately 3.0x.

Burlington Stores, Inc. — Improved Merchandising Pays Off

Burlington’s comps have been on a positive trajectory since 2011, with comps approaching 5% in 2013 and 2014, and projected around 2% in 2015. EBITDA has grown at a CAGR of 6.4% over the last five years to an LTM level of $470 million on management’s merchandising initiatives, category extensions, strong inventory management and square-footage expansion.

Leveraged Finance


Fitch expects Burlington to sustain top-line growth in the midsingle-digit range on 2% comps growth and a 2%–3% contribution from new stores. Fixed-cost leverage resulting from sales growth should allow EBITDA margin to improve 30 bps–50 bps over the next 24–36 months. Leverage, which has steadily declined in recent years to an expected 4.5x in 2015, should trend toward 4.0x on EBITDA growth, assuming no change to debt.

Kate Spade & Company — Strong Growth

Fitch projects strong top-line growth of 10%–12% at Kate Spade, driven by both positive comps and product category and geographic expansion beginning in 2016. Comps are expected to remain strong in 2015 at around 11%, but could moderate to the 5%–6% range in 2016, as the recent slowdown in luxury spending may spill over into aspirational spending. Fitch believes the product category and geographic expansion, as well as a maturing international business will also contribute to EBITDA margin growth to the 15%–16% range over the next couple years.

As a result of EBITDA growth, a reduction in leverage to approximately 3.5x is expected over the next 12–24 months, assuming no change in debt. FCF excluding discontinued operations is expected to turn positive in 2015 to approximately $80 million and sustainably remain at that level for the next several years.

Leveraged Finance

High-Yield Retail Checkout 11 January xx, 2016

U.S. Retail Sector High-Yield Ratings Companies Long-Term IDR Outlook J. C. Penney Company, Inc. B– Stable L Brands, Inc. BB+ Stable Levi Strauss & Co. BB Positive Sears Holdings Corporation CC — SUPERVALU Inc. B Stable Toys ‘R’ Us, Inc. CCC —

IDR – Issuer Default Rating. Note: See table below for additional nonrating coverage. Source: Fitch Ratings.

U.S. Retail Sector — Additional Coverage Companies Credit Opinion Outlook

99 Cents Only Stores LLC ccc* — Fitch maintains Credit Opinions (COs) for a number of entities in this sector, primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are identified in written documents with a lowercase symbol and an asterisk (e.g. b+*) to signify they are subject to a limited process, and to avoid confusion with ratings.

Ascena Retail Group, Inc. bb–* Stable The Bon-Ton Stores, Inc. ccc* — Burlington Stores, Inc. bb–* Positive Claire’s Stores, Inc. cc* — Dollar Tree, Inc. bb–* Stable GNC Holdings, Inc. bb–* Stable The Gymboree Corporation ccc* — Hanesbrands Inc. bb+* Positive J.Crew Group, Inc. b–* Negative Kate Spade & Company bb* Stable The Men’s Wearhouse, Inc. b* Stable The Michaels Companies, Inc. b+* Stable NBTY, Inc. b* Stable Neiman Marcus Group LTD LLC b* Stable PVH Corporation bb* Stable Sally Beauty Holdings, Inc. bb* Stable

Limitations of COs in this Report COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify them.

COs are not subject to the same continuous level of surveillance as ratings, and may be “point-in-time” in nature or subject to less frequent review. A “point-in-time” view refers to the surveillance level of the rating, and not to the time horizon of the analytical judgment. Thus, a view described as “point in time” reflects, as of a given point in time, the same view of an issuer’s future condition that would be reflected, were such an issuer or related transaction to be monitored. Only COs assigned or updated in the last 12 months are presented in this report. COs may not be updated individually in response to corporate events or the news cycle, but instead based upon scheduling relevant to their use in a pooled context.

Although informed by our sector expertise, individual COs are based on public information from the issuer’s regulatory disclosures. As our COs are forward-looking, they are based upon Fitch-constructed financial forecasts. COs typically will not involve discussions with borrower management.

COs are determined by a panel of analysts that is typically fewer in number than for a credit rating, and a less extensive presentation. COs may be re-reviewed by the analytical panel based on the provision of information to Fitch by any party that Fitch deems relevant and material to the CO level assigned.

For more information, please consult our published list of loan credit opinions, U.S. Corporate Loan Credit Opinions and our Rating Definitions.

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=814349

https://www.fitchratings.com/creditdesk/public/ratings_defintions/index.cfm

Leveraged Finance


High-Yield Retailers: LTM Summary Data

Company Name IDRa Outlook/ Watch

Revenues ($ Mil.)

EBITDA ($ Mil.)

Margin (%)

Total Adj. Debt

($ Mil.)

Cash and ST Inv. ($ Mil.)

FCF ($ Mil.)

FCF Margin

(%)

Interest Coverage

(x) Leverage

(x)

Total Liquidity

($ Mil.) 99 Cents Only Stores LLC ccc* — 1,998.7 55.2 2.8 1,642.1 2.6 (77.1) (3.9) 0.9 11.1 109.4 Ascena Retail Group, Inc. bb–* Stable 5,280.7 492.8 9.3 6,772.6 323.6 52.5 1.0 1.8 6.4 805.8 The Bon-Ton Stores, Inc. ccc* — 2,802.6 120.1 4.3 1,846.0 21.7 (89.1) (3.2) 1.4 8.9 268.9 Burlington Stores, Inc. bb–* Positive 5,077.7 470.2 9.3 3,410.2 28.8 107.4 2.1 2.3 4.6 307.0 Claire’s Stores, Inc. cc* — 1,412.7 216.8 15.3 4,450.5 23.9 (48.9) (3.5) 1.0 9.7 24.0 Dollar Tree, Inc. bb–* Stable 12,608.7 1,419.1 11.3 12,649.9 1,110.9 79.7 0.6 1.8 6.5 2,297.7 GNC Holdings, Inc. bb–* Stable 2,625.3 484.9 18.5 3,748.4 164.1 234.8 8.9 2.3 4.9 293.0 The Gymboree Corporation ccc* — 1,230.6 79.3 6.4 2,472.0 24.3 (21.9) (1.8) 1.0 10.2 166.6 Hanesbrands Inc. bb+* Positive 5,844.6 982.3 16.8 3,495.9 284.6 (37.6) (0.6) 5.2 3.3 1,114.9 J.Crew Group, Inc. b–* Negative 2,500.2 188.7 7.5 3,458.8 47.5 (30.8) (1.2) 1.5 9.2 359.2 J. C. Penney Company, Inc. B– Stable 12,522.0 678.0 5.4 7,645.0 638.0 (7.0) (0.1) 1.4 7.9 2,509.0 Kate Spade & Company bb* Stable 1,107.9 194.4 17.5 1,097.6 219.7 31.0 2.8 2.7 3.9 409.0 L Brands, Inc.b BB+ Stable 11,827.7 2,572.1 21.7 10,942.0 1,311.0 506.6 (1.5) 3.3 3.4 2,292.0 Levi Strauss & Co. BB Positive 4,597.3 551.0 12.0 2,753.3 272.6 122.6 2.7 2.6 3.7 821.9 The Men’s Wearhouse, Inc. b* Stable 3,599.0 406.8 11.3 3,537.0 53.7 2.6 0.1 1.9 5.5 490.2 The Michaels Companies, Inc. b+* Stable 4,838.3 818.3 16.9 5,965.7 114.7 287.3 5.9 2.3 5.0 701.4 NBTY, Inc. b* Stable 3,226.1 503.8 15.6 4,395.1 303.4 96.7 3.0 2.3 6.7 472.3 Neiman Marcus Group LTD LLC b* Stable 5,073.5 660.7 13.0 5,850.2 58.6 (103.5) (2.0) 1.9 7.5 528.6 PVH Corporation bb* Stable 7,976.6 1,057.3 13.3 8,113.6 369.9 592.5 7.4 2.3 4.9 1,088.8 Sally Beauty Holdings bb* Stable 3,834.3 612.4 16.0 3,573.2 140.0 194.3 5.1 2.5 4.3 616.9 Sears Holdings Corporation CC — 25,942.0 (575.0) NM 8,657.0 294.0 (1,719.0) (6.6) NM NM 1,257.0 SUPERVALU Inc. B Stable 18,037.0 832.0 4.6 3,945.0 247.0 269.0 1.5 2.8 4.0 1,124.0 Toys ‘“R’” Us, Inc. CCC — 11,932.0 714.0 6.0 10,592.0 396.0 149.0 1.2 1.3 7.9 1,409.0 aPlease refer to the disclaimer on the previous page with regard to credit opinions. bFCF for L Brands, Inc. is before special dividends. IDR − Issuer Default Rating. EBITDA − Earnings before interest, taxes, depreciation and amortization. Fitch also excludes stock-based compensation from its calculation of EBITDA. NM – Not Meaningful. ST − Short-term. Note: Total adjusted debt is defined as the sum of long-term debt, short-term debt and 8x rental expense. Total liquidity here and throughout this report is defined as the sum of cash and cash equivalents, short-term investments and availability under committed revolving credit facilities. Leverage is defined as total adjusted debt/EBITDAR. Interest coverage is defined as EBITDAR/(interest + rents). Source: Company filings, Fitch Ratings.

High-Yield Retailers: Liquidity Summary ($ Mil.) Fiscal Year LTM Cash and Credit Facilities Total Debt Maturities Company Name Ending FCF ST Inv. Committed Available Maturity Liquidity CP 2016 2017 2018 99 Cents Only Stores LLC January (77.1) 2.6 185.0 106.8 January 2017 109.4 — 6.1 81.8 6.1 Ascena Retail Group, Inc. July 52.5 323.6 600.0 482.2 August 2020 805.8 — 9.0 54.0 90.0 The Bon-Ton Stores, Inc.a January (89.1) 21.7 830.0 247.2 December 2018 268.9 — 103.0 57.3 — Burlington Stores, Inc. January 107.4 28.8 600.0 278.2 August 2019 307.0 — 11.1 11.1 11.1 Claire’s Stores, Inc. January (48.9) 23.9 115.0 0.1 September 2017 24.0 — — 260.0 — Dollar Tree, Inc. January 79.7 1,110.9 1,250.0 1,186.8 July 2020 2,297.7 — 89.5 139.5 189.5 GNC Holdings, Inc. December 234.8 164.1 130.0 128.9 March 2017 293.0 — 4.6 4.6 4.6 The Gymboree Corporation January (21.9) 24.3 225.0 142.3 September 2020 166.6 — — 8.2 1,160.1 Hanesbrands Inc. December (37.6) 284.6 1,000.0 830.3 April 2020 1,114.9 — 11.0 273.7 15.4 J.Crew Group. Inc.b January (30.8) 47.5 350.0 311.7 December 2019 359.2 — 15.7 15.7 15.7 J. C. Penney Company, Inc.c January (7.0) 638.0 2,350.0 1,871.0 June 2019 2,509.0 — 105.5 247.5 2,453.4 Kate Spade & Company January 31.0 219.7 200.0 189.3 May 2019 409.0 — 4.0 4.0 4.0 L Brands, Inc.d January 506.6 1,311.0 1,000.0 981.0 July 2019 2,292.0 — — 700.0 — Levi Strauss & Co. November 122.6 272.6 850.0 549.3 March 2019 821.9 — 33.1 — — The Men’s Wearhouse, Inc. January 2.6 53.7 500.0 436.5 June 2019 490.2 — 11.0 11.0 11.0 The Michaels Companies, Inc. January 287.3 114.7 650.0 586.7 September 2017 701.4 — 24.6 24.6 24.6 NBTY, Inc. September 96.7 303.4 175.0 168.9 September 2017 472.3 — — 2,507.5 650.0 Neiman Marcus Group LTD LLC July (103.5) 58.6 900.0 470.0 October 2018 528.6 — 29.5 29.5 29.5 PVH Corporation January 592.5 369.9 750.0 718.9 February 2019 1,088.8 — 136.6 186.2 198.6 Sally Beauty Holdings September 194.3 140.0 500.0 476.9 July 2018 616.9 — — — — Sears Holdings Corporation January (1,719.0) 294.0 3,275.0 963.0 Various 1,257.0 9.0 10.0 53.0 1,247.5 SUPERVALU Inc. February 269.0 247.0 1,000.0 877.0 September 2019 1,124.0 — 341 — — Toys ‘R’ Us, Inc. January 149.0 396.0 2,187.0 1,013.0 Various 1,409.0 — 13.9 1,189.0 648.0 aPro forma for the November 2015 upsizing of the facility to $830 Mil. from $750 Mil. previously. bPro forma for the December 2015 upsizing of the facility to $350 Mil. from $300 Mil. previously. cPro forma for the December 2015 upsizing of the facility to $2.35 Bil. from $1.85 Bil. previously. dFCF for L Brands, Inc. is before special dividends. ST − Short-term. CP − Commercial paper. Note: Credit Facility Availability represents available funds to borrow, including funds available to refinance any CP borrowings. Debt maturities exclude credit facility borrowings, finance obligations and capital leases. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

99 Cents Only Stores LLC Credit Profile

Credit Profile Summary Fixable Problems, Long Turnaround: Sales cannibalization by new stores following a period of rapid growth and execution issues related to inventory management and margin-losing promotions have negatively affected 99 Cents Only Stores LLC’s (99 Cents Only) same-store sales (SSS), margins and cash flow. Fitch Ratings views 99 Cents Only’s issues as fixable, but a turnaround as it relates to traffic and SSS trends could take time. The firm appointed a new CEO and CFO in late 2015, continuing a pace of significant turnover since 2013.

SSS, Gross Margin Declines: SSS have been negative for three straight quarters through Oct. 30, 2015 after being flat in 2014, and gross margin has declined 370 bps to 28.5% in the same period. Fitch projects SSS will decline 2.5% in 2015 and slowly recover through 2017 as the firm laps new store cannibalization, resolves inventory issues causing out of stocks, and improves the shopping experience.

Drastically Reduced EBITDA, Margins: 99 Cents Only’s EBITDA has declined at double-digit rates for three straight quarters and Fitch projects 2015 EBITDA of about $25 million, down from $130 million in 2014. Fitch projects $55 million in EBITDA in 2016 and $85 million in 2017, with adjusted debt/EBITDAR remaining near or above 10.0x.

EBITDA could gradually recover toward $100 million and EBITDA margin to 5% over several years if the company generates low single-digit SSS and improves gross margin to the low 30% range from 28% currently.

Liquidity Concerns Rise: Liquidity concerns have increased given three years of negative FCF. Fitch expects negative FCF of about $100 million in 2015, assuming neutral working capital with gradual improvement to modestly positive in two years if capex is reduced. Liquidity was $109 million at Oct. 30, 2015, down from $153 million at Oct. 31, 2014. Fitch projects liquidity of about $50 million at year end due to lower EBITDA.

Potential Need for Liquidity Injection: 99 Cent Only’s asset-based revolver (ABL) expires on Jan. 1, 2017, and will need to be refinanced in 2016 and possibly upsized given Fitch’s view that liquidity may worsen if results do not improve. Covenants were eased, the borrowing base’s inventory advance rate was raised, and the size was upsized by $10 million to $185 million in August 2015.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a restoration of positive low single-digit SSS growth, a recovery of EBITDA margins to above 5%, improved cash flow and liquidity, and a meaningful reduction in adjusted financial leverage.

Negative Drivers: Negative credit profile drivers include signs of challenges when refinancing the ABL, further weakening of SSS, and the lack of gross margin improvement. FCF that remains significantly negative in 2016, due to continued declines in operating cash flow and an unwillingness to meaningfully cut capex, would also be a negative driver.

Ratings Long-Term IDR n.r.

IDR – Issuer Default Rating. n.r. – Not publicly rated.

Credit Opinion 99 Cents Only Stores LLC carries a ‘ccc*’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data 99 Cents Only Stores LLC

($ Mil.) FYE

1/30/15 LTM

10/30/15 Total Revenue 1,926.9 1,998.7 EBITDA 130.4 55.2 EBITDA Margin (%) 6.8 2.8 FCF (73.1) (77.1) Total Adjusted Debt 1,616.6 1,642.1 Total Adjusted Debt/EBITDAR (x) 7.5 11.1 EBITDAR/ (Interest + Rent) (x) 1.5 0.9 Same-Store Sales (%)a 0.4 (2.5) Real Estate Owned (%) 19 N.A. No. of Stores 383 389 aSame-store sales for the LTM reflect the nine months ended Oct. 30, 2015. N.A. – Not available.

Analysts Carla Norfleet Taylor, CFA +1 312 368-3195 [email protected]



Leveraged Finance


Business Profile Assessment

Rapid Growth and Poor Execution Drive Sales and Margin Declines 99 Cents Only has expanded its footprint rapidly, adding over 35% to its store base over the last five years. The company opened 40 net new stores in 2014 after adding 27 net new stores in 2013. Fitch believes this rapid growth stressed the company’s operations with higher capex and growth in inventory associated with the new store growth, resulting in increased borrowings. Moreover, sales cannibalization by new stores, out of stocks on key merchandise resulting from the implementation of a new inventory replenishment system and poor in-store execution resulted in weak traffic and SSS declines. SSS growth slowed from the midsingle digits to 0.4% in 2014 and turned negative 2.5% for the first three quarters of 2015. Fitch believes 99 Cents Only’s problems are fixable, but expects SSS to remain negative over the course of 2016. SSS declines should ease as the company laps cannibalization from new stores, resolves inventory issues and improves the customer shopping experience.

Fitch Base Case Assumptions — 99 Cents Only Stores LLC ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 1,927 1,970 1,940 1,980 Approximates $2 Bil. revenue over forecast period. Revenue Growth (%) 26.0 3.0 (1.0) (1.5) Rationalization of stores and gradually improving

same-store sales. Same-Store Sales (%) 0.4 (2.5) (1.0) 0.0 Less new store cannibalization and easing traffic

declines. EBITDA 130 25 55 85 Gradual improvement as gross margin stabilizes in

2016. EBITDA Margin (%) 6.8 1.2 2.8 4.4 Productivity initiatives help operating margins. Working Capital Change (30) (5) — — Relatively neutral working capital. Cash Flow from Operations 38 (35) — 35 — Capex (111) (65) (25) (25) Significant reduction due mainly to fewer new stores. Dividends — — — — — FCF (73) (100) (25) 10 Modestly FCF positive within two years. Share Repurchases — — — — — Total Debt 933 1,000 1,020 1,000 Revolver balance increases in 2016. Total Adjusted Debta 1,617 1,720 1,740 1,700 Debt increases before starting to decline. Adjusted Debt/EBITDAR (x) 7.5 15.2 12.1 9.8 Leverage remains elevated through forecast period. aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Note: Fiscal years end the Friday closest to the end of January. Source: Fitch Ratings.

Sales and Store Trends (Fiscal Period Ending) 4/2/11 3/31/12 3/30/13 1/31/14a 1/30/15 10/30/15b Same-Store Sales (%) 0.7 7.3 4.3 3.7 0.4 (2.5)

Stores by Location California 211 219 232 245 277 281

Texas 35 37 39 46 49 49 Arizona 27 29 29 34 36 38 Nevada 12 13 16 18 21 21 Total 285 298 316 343 383 389

Net New Stores 10 13 18 27 40 6 Selling SF (Mil.) 4.8 4.9 5.2 5.6 6.2 N.A. % Change — 4.0 5.3 7.6 10.4 N.A. Sales/SF 291 309 321 330 328 N.A. a10 months. bThird-quarter YTD. SF – Square footage. N.A. – Not available. Source: Company filings, Fitch Ratings.

Leveraged Finance


99 Cents Only’s EBITDA margin has declined materially to just less than 3% for the LTM ended Oct. 30, 2015. This compares with just over 11% at Dollar Tree and Dollar General during the same period. 99 Cents Only’s gross margin has declined from over 38% in 2012 to 28.5% for the first three quarters ended Oct. 30, 2015. However, recent compression has been due to higher product costs, increased shrink and scrap, markdowns to clear excess seasonal inventory and higher freight costs. Shifts in product mix toward lower margin grocery items have also contributed to margin erosion of over time.

Fitch expects gross margins to decline over 370 bps to 28.4% in 2015, as the company continues to aggressive promotions such as buy one, get one free on all Halloween-themed items during the October quarter, and the nine for 99 cents holiday clearance for the current fourth quarter. Fitch’s assumption that EBITDA can approach $100 million is predicated on gross margin improving about 200 bps annually in 2016 and 2017 to about 33%, while selling, general, and administrative (SG&A) expenses remain flat.

99 Cent Only’s SG&A has remained elevated due to increased costs from recently opened stores and distribution centers, and from a $1/hour minimum wage hike in California. SG&A growth could slow or be flat in 2016 and 2017 as the company moderates new store growth and potentially closes stores (see Strategy to Turn Around Performance section). Fitch anticipates new cost-reduction initiatives could be implemented in 2016. However, reduction in total SG&A dollars could be limited near term given an expanded store footprint. Fitch therefore views gross margin improvement and improved SSS trends as the biggest opportunities to improve results.

(5)05

101520253035

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

Gross MarginEBITDA MarginSG&A Margin

Margin and Expense Trends —99 Cents Only

Note: Family Dollar was acquired by Dollar Tree in July 2015.Source: Company filings, Fitch Ratings.

(%)

02468

1012141618

2012 2013 2014 LTM October2015

99 Cents Only Dollar TreeDollar General Family Dollar

Dollar Store EBITDA Margins

Note: Family Dollar was acquired by Dollar Tree in July 2015.Source: Company filings, Fitch Ratings.

(%)

Leveraged Finance


Significant Management Turnover Significant management turnover has occurred in the wake of 99 Cent Only’s weak operating results. Geoffrey J. Covert was appointed CEO and elected to the board of directors in September 2015. Mr. Covert spent 20 years with The Kroger Co. (Kroger), most recently leading nine retail divisions, and 22 years with Proctor & Gamble Co. in a variety of leadership roles. Previous CEO Stephane Gonthier, who was appointed in September 2013, was replaced on an interim basis by Board Chairman Andrew Giancamilli in May 2015.

Felicia Thornton — who formerly held positions at DMS Inc.; New Albertsons, Inc.; and Kroger — replaced interim CFO and board member Michael Fung in November 2015, after 99 Cents Only’s previous CFO resigned after less than a year. Other new members of management include Jack L. Sinclair, who was named chief merchandising officer in July 2015 following the resignation of Michael Kvitko in January 2015.

Strategy to Turn Around Performance 99 Cents Only’s strategy was initially to expand its store count. However, the company’s new management has outlined immediate areas of emphasis, such as improving the shopping experience, reducing shrink and scrap, inventory management and reduction, and getting the right product to the right store at the right time. The company has also terminated margin-losing promotions; reverted to its legacy inventory systems, which continue to be tweaked; and is taking a more measured approach to store growth after originally targeting 30–40 new stores in 2015. YTD through the fiscal third quarter, 99 Cents Only opened six new stores and projected a total of 10 new stores for the year ending January 2015. The majority of new stores will be in California.

The company expects a significant reduction in capex in 2016, which Fitch believes would help preserve liquidity, after projecting capex of $63 million–$67 million in 2015. Roughly 70% of capex is related to new or existing stores and 30% is associated with IT and supply chain maintenance. Fitch estimates ongoing maintenance capex of about $25 million.

Differentiated Dollar Store Concept 99 Cents Only operates a chain of extreme value retail stores in the southwestern U.S. The company sells consumable products and other household and seasonal items, most of which are priced at $1 (officially 99.99 cents) or less. Approximately 60% of products are everyday items and 40% are closeout items, most of which are name brands and help create a treasure hunt aspect to the shopping experience.

The company operates a store concept that is differentiated from a typical dollar store in that it is larger, with 16,000 square feet of average selling square footage, and as shown in the Category Mix table below, offers a high proportion of grocery items. These grocery items, including fresh produce, deli, dairy, and frozen and refrigerated items, drive customer traffic and led to higher sales per square foot of $328 in 2014, compared with $223 for industry

Category Mix (%)

FYE 3/30/13

10M 1/15/14

FYE 1/30/15

Food and Grocery 55 56 57 Household and Housewares 14 14 13 Health and Beauty Care 9 9 9 Hardware 3 3 3 Stationery and Party 5 5 5 Seasonal 5 4 5 Other 9 9 8 Total 100 100 100 Source: Company filings, Fitch Ratings.

Leveraged Finance


leader Dollar General and $192 for Dollar Tree. Fitch believes the company’s high mix of food and grocery products has contributed to its lower relative gross margins.

Private Ownership Structure 99 Cents Only was acquired in January 2012 by Ares Management, the Canada Pension Plan Investment Board and the rollover investors (management and the Gold Revocable Trust). Total cash consideration was $1.6 billion, or roughly 12.0x EBITDA.

The company bought out the Gold/Schiffer family for $129.7 million in October 2013, financed by upsizing the term loan by $100 million, and with cash on hand at the company and the parent. This followed the January 2013 resignation of CEO Eric Schiffer, President and Chief Administrative Officer Jeff Gold, and EVP of Special Projects Howard Gold from the company, and represents a disengagement from the company by the founding family.

Liquidity and Debt Structure 99 Cents Only’s liquidity consists mainly of roughly $107 million available on its ABL revolver as of Oct. 30, 2015, after hitting a low of $66 million at the quarter ended July 31, 2015. The company amended the ABL facility in August 2015 to increase commitments available under the facility by $10 million, bringing the aggregate size of the revolver to $185 million.

The borrowing rate was unchanged at LIBOR plus 2% as of Oct. 30, 2015. The company also eased restrictive covenants by lowering the excess availability threshold for a Covenant Trigger Event and by temporarily increasing the inventory advance rate in the borrowing base calculation to 92.5% from 90.0%. 99 Cents Only’s cash balances have declined significantly over the past eight quarters due to EBITDA declines and increased borrowings to finance inventory. Fitch views the company’s revolver as a primary source of liquidity over the next year. The borrowing base is dependent on eligible credit card receivables, eligible inventory and corresponding advance rates for both, less certain reserves. Moreover, Fitch projects liquidity could decline meaningfully below $100 million to about $50 million by fiscal fourth quarter end, due to significantly lower EBITDA, assuming neutral working capital.

The company’s debt structure is 70% secured and 30% unsecured. Debt inclusive of capital leases and financing obligations totaled $958 million at Oct. 30, 2015. The company had approximately $76 million drawn on the $185 million ABL revolver maturing in January 2017, $597 million outstanding (net of $4.6 million of unamortized original issue discount) on the secured term loan B maturing in January 2019 and $250 million of 11% senior unsecured notes maturing in December 2019.

Liquidity Analysis — 99 Cents Only Stores LLC ($ Mil.) LTM Closest Calendar Quarter Cash

Facility Size

Borrowing Base Borrowings LOC

Revolver Availability

Total Liquidity EBITDA CFO Capex

FCF Before Dividends

4Q13 34.8 175.0 136.9 0.0 1.0 135.9 170.7 73.0 80.9 (62.1) 18.8 1Q14 34.1 175.0 151.3 0.0 1.0 150.3 184.4 80.6 57.3 (64.9) (7.6) 2Q14 15.6 175.0 168.2 0.0 2.5 165.7 181.3 81.5 39.9 (73.6) (33.7) 3Q14 16.2 175.0 — 36.0 2.5 136.5 152.7 106.4 29.1 (86.2) (57.1) 4Q14 12.5 175.0 — 57.0 2.5 115.5 128.0 130.3 38.2 (111.4) (73.2) 1Q15 2.4 175.0 — 52.9 2.5 119.6 122.0 109.0 38.1 (117.6) (79.5) 2Q15 2.3 175.0 — 106.6 2.5 65.9 68.2 75.9 (11.9) (111.1) (123.0) 3Q15 2.6 185.0 — 75.7 2.5 106.8 109.4 55.1 12.9 (90.1) (77.2) 4Q15F 2.0 185.0 — 130.0 2.5 52.5 54.5 25.0 (35.0) (65.0) (100.0)

F – Forecast. Note: Fiscal year ends January. Source: Company filings, Fitch Ratings.

Leveraged Finance


The ABL facility is guaranteed by the parent and subsidiary guarantors, and is secured by a first lien on current assets, a second lien on capital stock, and a second lien on intellectual property and certain owned real property. The term loan B is also guaranteed by the parent and subsidiary guarantors, and is secured by a first lien on the company’s equity interests and those of the guarantors, a first lien on intellectual property and certain owned real property, and a second lien on current assets. The original $525 million term loan facility was repriced and upsized by $100 million in October 2013, bringing the facility size to $614 million at that time.

Liquidity ($ Mil., At Oct. 30, 2015) Amount Cash 2.6 Revolver Availability 106.8 Total 109.4

Note: Revolver availability is net of borrowings and outstanding letters of credit. Source: Company filings, Fitch Ratings.

Capital Structure ($ Mil., At Oct. 30, 2015) Description Amount (%) Secured Debt

$185 Mil. Asset Based Revolver due January 2017 75.7 7.9 Secured Term Loan due January 2019a 596.9 62.3 Total Secured Debt 672.6 70.2

Unsecured Debt 11% Senior Unsecured Notes due December 2019 250.0 26.1

Total Unsecured Debt 250.0 26.1 Other Including Capital Leases and Financing Leases 35.5 3.7 Total Debt 958.1 100.0 aNet of $4.6 Mil. of original issuance discount. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Oct. 30, 2015) Amount 2016 6.1 2017 81.8 2018 6.1 2019 828.6 2020 — Thereafter —

Note: Excludes capital leases and financial lease obligations. Source: Company filings, Fitch Ratings.

020406080

100120140160180

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

ABL Revolver Availability(Closest Calendar Quarter)

ABL – Asset-based loan. Note: Fiscal year ends January.Source: Company filings.

($ Mil.)

Leveraged Finance


Recovery Analysis In accordance with Fitch’s Recovery Rating (rr*) methodology, issue ratings are derived from the Issuer Default Rating and the relevant rr*. Fitch’s recovery analysis assumes a going concern enterprise value (EV) after administrative claims of approximately $535 million. The EV assumes $1.8 billion of annualized revenue and a post-default EBITDA margin of 6% as the company takes corrective actions to restructure its operations. Applying this value across the capital structure leads to outstanding recovery prospects (91%−100%) for the ABL revolving credit facility, good recovery prospects (51%–70%) for the secured term loan and poor recovery prospects (0%–10%) for the senior unsecured notes.

Recovery Analysis — 99 Cents Only Stores LLC ($ Mil., Except Where Noted; Credit Opinion: ccc*)

Distressed Enterprise Value (EV) as a Going Concern (GC)

Liquidation Value (LV) Book Value

Advance Rate (%)

Avail. to Creditors

Going Concern EBITDA 108.0

Cash 2.6 0 — GC EV Multiple (x) 5.5

A/R 1.8 80 1.4

EV on GC Basis 594.0

Inventory 266.2 70 186.3

Net PPE 555.4 20 111.1

Total LV 298.9

Value Available for Claims Distribution

Greater of GC or LV 594

Less: Administrative Claims (10%)

59

Adjusted EV Available for Claims 535

Distribution of Value

Secured Priority Amount Value

Recovered Recovery

(%) Recovery Rating Notching

Credit Opinion

Sr. Secured Revolvera 129.5 129.5 100 rr1* +3 b* Sr. Secured Term Loan 596.9 405.0 68 rr3* +1 ccc+* Sr. Secured (Second Lien) — — — — — —

Concession Payment Availability Table Amount Adjusted EV Available for Claims 534.6 Less Secured Debt Recovery 534.6 Remaining Recovery for Unsecured Claims — Concession Allocation (5%) — Value to be Distributed to Senior Unsecured Claims —

Unsecured Priority Amount

Value Recovered

Recovery (%)

Recovery Rating Notching

Credit Opinion

Sr. Unsecuredb 278.5 — 0 rr6* –2 cc* Unsecured 0.0 — 0 — — — Sr. Subordinated 0.0 — 0 — — — Subordinated 0.0 — 0 — — — Sr. Equity 0.0 — 0 — — — aThe revolver is assumed to be 70% drawn. bRepresents senior unsecured notes and lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Fitch Ratings.

Leveraged Finance


Disclaimers The covenant summaries reflect Fitch’s interpretation and synopsis of information contained in publicly available documents identified in the Document Date and Location section of each covenant summary table. Fitch cannot ensure that the information contained in such documents is either accurate or complete, or that the covenant summaries, or any particular covenant summary, accurately or completely reflect the key terms of any such document. The information presented in the covenant summaries is provided “as is” without any representation or warranty, and is not a substitute for information provided to investors by an issuer and its agents in connection with a sale of securities.

Leveraged Finance


Appendix A

Organizational Structure — 99 Cents Only Stores LLC ($ Mil., As of Oct. 30, 2015)

99 Cents Only Stores LLCCO — ccc*

Debt Issue$185 Mil. ABL Revolver due 1/13/17Secured Term Loan B due 1/13/19b

11.000% Senior Unsecured Notes due 12/15/19Other Total

aGuarantees credit facilities but not notes. bNet of $4.6 Mil. original issuance discount. cGuarantee both the credit facilities and the notes. CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions. Source: Company filings.

Amount75.7

596.9250.035.5

958.1

Ares Management LLC

62%

Canada Pension Plan Investment Board Management

Number Holdings, Inc.a

Subsidiary Guarantorsc

37% 1%

COb*/rr1*ccc+*/rr3*cc*/rr6*

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary 99 Cents Only Stores LLC Overview Borrower 99 Cents Only Stores LLC Document Date and Location ABL facility dated Jan. 13, 2012, Exhibit 10.1 to 8-K filed Jan. 13, 2012

Amendment No. 2 dated Oct. 8, 2013, Exhibit 10.5 to 10-Q dated Nov. 8, 2013 Amendment No. 3 dated Aug. 24, 2015, Exhibit 10.1 to 8-K filed Aug. 25, 2015

Maturity Date Jan. 13, 2017 Description of Debt ABL Revolver

Amount $185 Mil. Ranking Senior secured. Security The facility is secured by a first lien on personal property, a second lien on capital stock, and a second lien on intellectual property

and certain owned real property. Guarantee The facility is unconditionally guaranteed by Number Holdings, Inc. (Parent), and each of the company’s direct and indirect 100%

owned subsidiaries except for immaterial subsidiaries. Debt Restrictions Debt Incurrence

Ratio Debt: Additional debt, including any incremental facilities, is permitted so long as the Total Leverage ratio does not exceed 4.5x. Notable Permitted Debt:

1) Capital leases and purchase money debt up to the greater of $50 Mil. or 2.75% of Total Assets; 2) Assumed acquisition debt not more than $35 Mil.; 3) Debt of a Non-Loan Party up to $25 Mil.; and 4) All-purpose additional debt up to the greater of $75 Mil. or 4.0% of Total Assets.

Limitation on Liens Permitted liens include a general carveout of $25 Mil. Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures

Change of Control (CoC) If, prior to a Qualifying IPO, anyone acquires more than 50% voting power and, after a Qualifying IPO, anyone acquires more than 35% voting power, it is an event of default.

M&A, Investments Restriction Pro forma for an acquisition, the Total Leverage Ratio may not exceed 4.5x. Acquisitions of subsidiaries that do not become guarantors are limited to the greater of $50 Mil. and 2.75% of Total Assets.

Sale of Assets Restriction At least 75% of consideration must be in cash, and the noncash consideration is limited to the greater of $25 Mil. and 1.5% of Total Assets.

Restricted Payments

Restricted Payments (RP) RPs are permitted so long as the Payment Conditions are met. These include no event of default exists and the Fixed-Charge Coverage Ratio is at least 2.0x. Other Notable Permitted Restricted Payments:

1) Repurchase of employee equity interests up to $10 Mil. a year, which can be carried over for two years to a maximum of $30 Mil.;

2) Additional restricted payments not to exceed the greater of $40 Mil. or 2.0% of Total Assets. Other Cross-Default Yes, exceeding $25 Mil. Cross Acceleration N.A. MAC Clause A MAC clause is in effect through the term of the agreement. Equity Cure There is a right to cure in up to two quarters out of each period of four fiscal quarters, and up to five times during the term of the

agreement. Financial Covenants Coverage (Minimum) If a Covenant Trigger Event shall be in effect, Consolidated Fixed-Charge Coverage shall not be less than 1.0x. Covenant Trigger

Event means Excess Availability is less than the greater of $15 Mil. and 10% of the lesser of the commitment or borrowing base; The Covenant Trigger shall be deemed continuing until Excess Availability is greater than or equal to the Excess Availability Requirement for 30 days.

Covenant Suspension No. Required Lenders/Voting Rights Lenders holding more than 50% of all loans outstanding and unused revolving commitments.

ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/1011290/000114036112002496/ex10_1.htm

http://www.sec.gov/Archives/edgar/data/1011290/000110465913082867/a13-19864_1ex10d5.htm


Leveraged Finance


Bank Agreement Covenant Summary 99 Cents Only Stores LLC (Continued) Financial Covenants Leverage (Maximum) None. Fixed-Charge Coverage (Minimum) There is a 1.0x minimum fixed-charge coverage during Covenant Trigger Events (when Excess Availability is less than

the greater of 10% of the Line Cap or $15 Mil.). Current Ratio (Minimum) — Net Worth (Minimum) — Principal Repayments

Mandatory/Tax Prepayment N.A. Amortization Schedule N.A.

Callability/Optional Prepayment Optional prepayment without prepayment penalty. Pricing

Coupon Type/Index Floating based off LIBOR Pricing Grid Average Historical Excess Availability Applicable Rate > $100 Mil. LIBOR + 175 bps >= $45 Mil. but <= $100 Mil. LIBOR + 200 bps < $45 Mil. LIBOR + 225 bps

ABL – Asset-based loan. N.A. – Not applicable. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix C

Term Loan Agreement Covenant Summary 99 Cents Only Stores LLC Overview Borrower 99 Cents Only Stores LLC Document Date and Location Term Loan dated Jan. 13, 2012, located in Exhibit 10.2 of 8-K dated Jan. 13, 2012

Second Amendment to Term Loan dated Oct. 8, 2013, located in Exhibit 10.6 of 10-Q dated Nov. 8, 2013 Maturity Date Jan. 13, 2019

Description of Debt Senior secured term loan B Amount $614 Mil.

Ranking Senior secured Security

The facility is secured by a first lien on capital stock held by the immediate parent and by the company, a first lien on intellectual property and certain owned real property, and a second lien on Current Asset Collateral.

Guarantee The facility is unconditionally guaranteed by Number Holdings, Inc. (Parent), and each of the company’s direct and indirect 100% owned subsidiaries except for immaterial subsidiaries.

Debt Restrictions Debt Incurrence

Ratio Debt: Additional debt, including any incremental facilities, is permitted so long as the Total Leverage ratio does not exceed 4.5x. Notable Permitted Debt:

1) Capital leases and purchase money debt up to the greater of $50 Mil. or 2.75% of Total Assets; 2) Assumed acquisition debt not more than 35 Mil.; 3) Debt of a Non-Loan Party up to $25 Mil.; and 4) All-purpose additional debt up to the greater of $75 Mil. or 4.0% of Total Assets.

Limitation on Liens Permitted liens include a general carveout of $25 Mil. Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures

Change of Control (CoC) If, prior to a Qualifying IPO, anyone acquires more than 50% voting power and, after a Qualifying IPO, anyone acquires more than 35% voting power, it is an event of default.

M&A, Investments Restriction Pro forma for an acquisition, the Total Leverage Ratio may not exceed 4.5x. Acquisitions of subsidiaries that do not become guarantors are limited to the greater of $50 Mil. and 2.75% of Total Assets.

Sale of Assets Restriction At least 75% of consideration must be in cash, and the noncash consideration is limited to the greater of $25 Mil. and 1.5% of Total Assets.

Restricted Payments Restricted Payments (RP) RP Basket: $20 Mil. plus 50% of cumulative net income, and minus 100% of net losses, from March 31, 2013. Payment Conditions

include no event of default exists and the Fixed-Charge Coverage Ratio is at least 2.0x. Other Notable Permitted Restricted Payments:

1) Repurchase of employee equity interests up to $10 Mil. a year, which can be carried over for two years to a maximum of $30 Mil.;

2) Additional restricted payments not to exceed the greater of $40 Mil. or 2.0% of Total Assets. Other Cross-Default Yes, exceeding $25 Mil. Cross Acceleration N.A. MAC Clause A MAC clause is in effect through the term of the agreement. Equity Cure No. Covenant Suspension No. Required Lenders/Voting Rights Lenders holding more than 50% of the aggregate commitments. Financial Covenants Leverage (Maximum) — Coverage (Minimum) — Current Ratio (Minimum) — Net Worth (Minimum) — Principal Repayments Mandatory/Tax Prepayment Mandatory Prepayment with x% of proceeds from:

• Excess Cash: x = 0%–50%, based on leverage test. • Asset Sale: x = 100% of net proceeds, unless reinvested. New Debt: x= 100% of net proceeds.

Amortization Schedule 0.25% of the aggregate principal amount is payable quarterly until maturity. Callability/Optional Prepayment Optional prepayment without prepayment penalty. Pricing Coupon Type/Index Floating based off LIBOR (minimum floor of 1.00%) + 3.5% or Base Rate + 2.5%.

N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.



Leveraged Finance


Appendix D

Bond Covenant Summary 99 Cents Only Stores LLC Overview Issuer 99 Cents Only Stores LLC Document Date and Location Indenture dated Dec. 29, 2011 (Exhibit 4.1 to 8-K filed on Jan. 13, 2012)

Maturity Date Dec. 15, 2019 Description of Debt Senior unsecured notes. Amount $250 Mil. Ranking Senior Security None. Guarantee The notes are unconditionally guaranteed on a senior unsecured basis by each of the company’s existing and future

restricted subsidiaries. Debt Restrictions Debt Incurrence Ratio Debt: Additional debt is permitted so long as the fixed-charge coverage ratio is at least 2.0x.

Notable Permitted Debt: 1) Purchase money debt up to the greater of $50 Mil. and 2.75% of Total Assets; 2) debt of restricted subs, incurred to finance or assumed in connection with an acquisition, of up to $20 Mil.; and 3) debt of nonguarantor restricted subs of up to the greater of $25 Mil. and 1.5% of Total Assets.

Limitation on Liens Allowed for permitted debt as long as the Secured Indebtedness Leverage Ratio would not exceed 3.5x. There is a general carveout of $25 Mil.

Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as the acquisition of more than 50% of voting stock, unless the Management Group continues to hold at least

65% of the total voting power. In the event of a CoC, there is a required put at 101. M&A, Investments Restriction Permitted only if the company becomes a corporation, partnership or LLC, and assumes the obligations of the notes, and provided

the fixed-charge coverage ratio of the surviving entity is better than the issuer. Sale of Assets Restriction At least 75% of consideration consists of cash or cash equivalents. Proceeds may be used to repay debt or invest in a Permitted

Business within 450 days. Restricted Payments Restricted Payments (RP) Limited to 50% of consolidated net income accrued on a cumulative basis from the issue date to the last day of the most recent

completed quarter, plus repurchases of equity of up to $10 Mil. annually, which can be carried over for up to two years for a maximum of $30 Mil., plus other restricted payments not to exceed $40 Mil. or 2% of Total Assets.

Other

Cross Default No. Cross Acceleration Yes, exceeding $25 Mil. MAC Clause No. Equity Clawback Maximum 35% with proceeds of equity offer at 111% until Dec. 15, 2014. Covenant Suspension Provided notes have investment-grade ratings and no event of default exists, certain covenants are suspended.

MAC – Material adverse change. Source: Company filings, Fitch Ratings.


Leveraged Finance


Appendix E

Financial Summary — 99 Cents Only Stores LLC

12 Months Three Months



LTM Ended

($ Mil.) 3/30/13 9/28/13 12/28/13 1/31/14 1/31/14 5/2/14 8/1/14 10/31/14 1/31/15 1/31/15 5/1/15 7/31/15 10/30/15 10/30/15 Profitability

Operating EBITDAa 136 32 (1) 5 73 45 33 24 29 130 23 (1) 4 55 Operating EBITDA Margin (%) 8.1 7.1 (0.1) 3.0 4.8 9.3 7.1 5.1 5.6 6.8 4.6 (0.1) 0.7 2.8 FFO Return on Adjusted Capital (%)b 10.0 — — — 8.9 — — 8.4 9.1 10.2 9.6 8.8 8.6 8.6 FCF Margin (%) 1.1 2.0 (21.6) (4.4) (5.0) 0.2 (3.8) (7.0) (4.5) (3.8) (1.1) (12.4) 2.5 (3.9) Coverages (x) FFO Interest Coverage 2.1 1.5 2.5 1.3 2.0 2.7 1.9 1.7 2.0 2.1 1.6 0.6 0.3 1.1 Operating EBITDA/ Gross Interest Expense 2.2 2.1 (0.0) 0.9 1.4 2.9 2.1 1.6 1.8 2.1 1.4 (0.0) 0.2 0.8 FFO Fixed-Charge Coverage 1.5 1.2 1.7 1.1 1.5 1.8 1.4 1.3 1.4 1.5 1.3 0.8 0.7 1.1 FCF Debt Service Coverage(LTM)b 1.2 — — — (0.5) — — (0.1) (0.2) (0.2) (0.2) (0.8) (0.2) (0.2) Cash Flow from Operations/ Capex (x) 1.3 1.6 0.5 0.2 1.3 1.0 0.3 (0.0) 0.3 0.3 0.8 (2.4) 2.0 0.2 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA 3.7 — — — 8.2 — — 5.6 5.0 5.0 5.9 9.2 12.1 12.1 Long-Term Secured Debt/FFO 7.6 — — — 11.5 — — 11.2 9.6 9.6 12.6 23.8 90.8 90.8 Total Debt with Equity Credit/Operating EBITDA 5.6 — — — 11.7 — — 8.3 7.2 7.2 8.5 13.0 17.4 17.4 FFO-Adjusted Leverage 6.7 — — — 8.2 — — 8.9 8.6 7.5 7.9 9.0 9.9 9.9 Total Adjusted Debt/ Operating EBITDAR 6.4 — — — 10.0 — — 8.9 8.7 7.5 8.1 10.0 11.1 11.1 FCF/Total Adjusted Debt (%) 1.5 — — — (5.7) — — (3.8) (3.9) (4.5) (4.9) (7.3) (4.7) (4.7) Balance Sheet Short-Term Debt 9 3 6 6 6 6 6 42 7 7 7 7 7 7 Long-Term Senior Secured Debt 500 501 601 599 599 598 597 596 651 651 646 699 667 667 Long-Term Senior Unsecured Debt 250 250 250 250 250 250 250 250 275 275 275 284 285 285 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 759 755 857 856 856 854 853 888 933 933 928 990 958 958 Off-Balance Sheet Debtc 504 579 608 59 486 573 605 621 938 684 684 684 684 684 Total Adjusted Debt with Equity Credit 1,263 1,334 1,465 915 1,342 1,427 1,458 1,509 1,870 1,617 1,612 1,674 1,642 1,642 Cash Flow Funds From Operations 66 8 22 1 52 27 15 10 16 68 10 (7) (12) 7 Change in Working Capital 15 17 (12) 1 29 (7) (7) (11) (5) (30) 10 (36) 36 6 Cash Flow from Operations 81 25 10 2 81 20 7 (0) 11 38 20 (43) 24 13 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (63) (16) (20) (9) (62) (19) (25) (33) (35) (111) (26) (18) (12) (90) Dividends — — (96) — (96) — — — — — — — — — FCF 19 9 (106) (7) (77) 1 (17) (33) (23) (73) (6) (61) 12 (77) Net Acquisitions and Divestitures 12 1 1 — 2 — — — — — 1 — 21 22 Net Debt Proceeds (5) (3) 100 (2) 94 (2) (1) 34 19 51 (6) 52 (33) 33 Net Equity Proceeds — — — — — — (0) — 0 — (0) — — (0) Other (Investing and Financing) (8) — (29) — (29) — — — (0) (0) — 9 (1) 8 Total Change in Cash 18 6 (34) (9) (11) (1) (19) 1 (4) (22) (10) (0) 0 (14) Ending Cash and Securities Balance 46 77 44 35 35 34 16 16 13 13 2 2 3 3 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — 99 Cents Only Stores LLC (Continued)




LTM Ended

($ Mil.) 3/30/13 9/28/13 12/28/13 1/31/14 1/31/14 5/2/14 8/1/14 10/31/14 1/31/15 1/31/15 5/1/15 7/31/15 10/30/15 10/30/15 Income Statement Revenue 1,669 444 488 163 1,529 478 458 478 513 1,927 506 489 492 1,999 Revenue Growth (%) 8.9 12.9 11.0 — — — — — 214.4 26.0 5.9 6.6 2.8 26.7 Operating EBIT 77 16 (17) (1) 19 32 19 10 13 75 7 (18) (13) (11) Gross Interest Expense 61 15 15 6 51 15 16 16 16 63 16 17 17 65 Sector-Specific Data Same-Store Sales (%)d 4.3 5.9 3.0 — 3.7 (0.5) 0.1 (0.7) 2.8 0.4 (1.7) (1.9) (3.9) (2.5) No. of Stores 316 333 343 343 343 348 354 368 383 383 386 389 389 389 Gross Margin (%) 38.4 37.6 38.2 38.1 38.1 32.9 32.2 31.4 31.8 32.1 30.9 27.8 26.8 29.4 SG&A/Revenues (%) 33.6 34.0 41.6 38.4 36.8 26.2 28.0 29.2 29.3 28.2 29.5 31.5 29.5 29.9 Operating EBIT Margin (%) 4.6 3.5 (3.5) (0.4) 1.2 6.7 4.2 2.2 2.5 3.9 1.4 (3.7) (2.7) (0.6) Operating EBITDAR 199 50 19 12 134 63 51 44 58 216 45 21 25 149 Operating EBITDAR Margin (%) 11.9 11.2 3.8 7.5 8.7 13.1 11.2 9.2 11.3 11.2 8.8 4.3 5.1 7.4 Operating EBITDAR/ (Interest + Rent) (x)b 1.6 1.5 0.5 0.9 1.2 1.9 1.5 1.2 1.3 1.5 1.2 0.5 0.7 0.9 Inventory Turnover (x)b 5.1 — — — — — — — 5.2 5.2 5.1 5.2 5.2 5.2 Accounts Payable Turnover (x)b 22.5 — — — 26.6 — — 19.2 12.4 12.4 12.0 14.4 13.5 13.5 Return on Invested Capital (%)b 7.4 — — — 4.3 — — 6.2 6.7 7.5 6.5 4.9 4.3 4.3 Return on Assets (%)b (0.5) — — — (0.7) — — 0.3 0.3 0.3 (0.2) (4.4) (13.5) (13.5) Capex/Depreciation (%)b 110.0 100.4 126.7 174.7 118.3 158.9 193.5 242.9 223.0 206.6 162.3 107.0 72.8 72.8 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

Ascena Retail Group, Inc. Credit Profile

Credit Profile Summary Unique Business Model: Ascena Retail Group, Inc. (Ascena) has taken a private equity-like approach to women’s and tween girls’ apparel retail, creating a scalable operating platform to onboard new brands. The 2015 transformative ANN, Inc. (Ann) acquisition added three new brands and $2.5 billion to Ascena’s sales base of $4.8 billion. If successful, the acquisition will demonstrate the company’s ability to purchase new brands and leverage its sourcing and back-office infrastructure while driving revenue growth.

Exposure to Challenged Sector: Ascena primarily competes in the mid-tier women’s apparel sector, with its Justice brand (17% of pro forma revenue) selling to tween girls. Mid-tier women’s apparel retailers have been struggling to grow revenue, facing increased competition from low-priced players (i.e. the fast fashion and off-price sectors) and online retailers, exacerbated by mall traffic declines and the absence of a strong fashion cycle. Industry challenges have inflated inventory levels, pressuring margins through increased promotions.

Solid Portfolio: Ascena operates several well-known brands, including LOFT (22% of sales), Justice, Lane Bryant, Ann Taylor, maurices and dressbarn (each around 15% of sales). Ascena’s lack of EBITDA reliance on one brand limits the impact on corporate from operational weakness at one, such as Justice currently. Several of Ascena’s brands target the plus-size customer, a less-competitive sector than women’s apparel, while 55% of Ascena’s stores are located in strip or lifestyle centers, somewhat protecting the portfolio from mall traffic declines.

Operating Margin Opportunities Abound: Ascena has targeted EBITDA of $1 billion in fiscal 2018 (ends July 2018), versus $624 million in fiscal 2015, pro forma including Ann. The largest EBITDA drivers are low single-digit sales growth ($220 million), Ann integration synergies ($150 million), gross margin rate recovery ($170 million across brands) and the Ann sourcing initiative ($50 million), with $267 million of headwinds from inflation and reinvestment. Fitch Ratings projects fiscal 2018 EBITDA of approximately $900 million, primarily due to a slower revenue ramp than management’s expectations.

Leverage to Decline Post Acquisition: Ascena financed the $2.0 billion Ann acquisition with equity and a $1.8 billion term loan, yielding pro forma adjusted leverage close to 6.0x. The company plans $475 million in debt paydown by fiscal 2018, yielding leverage of around 4.8x. With annual FCF projected at $275 million–$325 million over the medium term, Fitch believes Ascena can comfortably meet its debt guidance while executing its recently announced $200 million share buyback authorization.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers are centered on progress toward achieving management’s $1 billion fiscal 2018 EBITDA guidance and driving down adjusted leverage below 4.5x based on Fitch’s calculation.

Negative Drivers: Negative credit profile drivers would include negative sales growth, under-achievement of expense initiative targets and opportunistic acquisitions driving leverage above 5.0x on a sustained basis.



Credit Opinion Ascena Retail Group, Inc. carries a ‘bb–*/ Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Dataa Ascena Retail Group, Inc.

($ Mil.) FYE

7/26/14 FYE

7/26/15 Total Revenue 4,790.6 4,802.9 EBITDA 486.2 403.1 EBITDA Margin (%) 10.1 8.4 FCF (102.8) 118.8 Total Adjusted Debt 4,838.1 4,905.4 Total Adjusted Debt/EBITDAR (x) 4.7 5.0 EBITDAR/(Interest + Rent) (x) 1.9 1.7 Comparable Store Sales (%) (2.0) (3.0) Comparable Store Sales with E-Commerce (%) 0.0 (1.0) No. of Stores 3,896 3,895 aTable reflects results prior to the ANN, Inc. acquisition. See page 2 for Fitch’s projections including ANN, Inc.

Analysts David Silverman, CFA +1 212 908-0840 [email protected]






Leveraged Finance


Business Profile Assessment Ascena is a $7 billion national specialty apparel retailer, focused primarily on midpriced women’s apparel, with operating presence in traditional malls, off-mall locations and online. Though its end-market focus is ultimately narrow, Ascena is a diverse retailer. The company operates eight brands, six of which generate over $900 million in sales, and no brand contributes more than 22% of sales. Several brands cater to niche markets within customer age and sizing. Ascena’s real estate is diverse, with only 31% of stores operating in traditional enclosed malls. The majority (55%) of locations are located in strip and lifestyle centers, while the remaining 14% are in outlet malls.

Ascena’s top-line initiatives generally include developing product leadership in key categories, building omnichannel capabilities and growing e-commerce penetration, and sharpening its marketing message using social media and customer databases. Ascena also aims to speed its inventory and replenishment cycle, allowing it to purchase less initial inventory and reorder successful styles. Increased direct sourcing penetration enables a more nimble supply chain while reducing merchandise costs. Real estate expansion is not expected to drive material revenue growth across the portfolio.

LOFT LOFT, part of the 2015 Ann acquisition, is Ascena’s largest brand by revenue, at $1.6 billion in fiscal 2014 (ended January 2015). Loft is a moderately priced brand focused on versatile outfits and pieces that customers can wear from work to weekend. Loft operated 676 stores as of July 25, 2015, of which 228 were in traditional malls and 318 were in strip or other center types, with an additional 130 outlet center locations. The store count includes eight Lou & Grey stores, which is Ascena’s smallest brand and grew out of LOFT’s loungewear collection.

LOFT’s comparable store sales (comps) were in the positive midsingle-digit range until 2014, when comps turned modestly negative due to broad challenges in women’s apparel. However, Fitch projects modestly positive comps over the next 24–36 months, with little incremental square footage added, given LOFT’s lower price focus and merchandising/marketing opportunities presented from the Ascena acquisition.

Fitch Base Case Assumptions — Ascena Retail Group, Inc. ($ Mil., Year Ended July) 2015A 2016F 2017F 2018F Comments Revenue 4,803 7,310 7,411 7,558 Fiscal 2016 revenue growth reflects Ann

acquisition and modest pro forma growth. Revenue Growth (%)a 0.3 52.2 1.4 2.0 — EBITDA 403 794 835 896 — EBITDA Margin (%) 8.4 10.9 11.3 11.9 EBITDA margins to improve on Ann synergies

and structurally higher margins at Ann. Working Capital Change 118 45 2 2 — Cash Flow from Operations 431 669 618 665 — Capex (313) (390) (350) (350) Higher in fiscal 2016 due to Ann integration. Dividends — — — — — FCF 119 279 268 315 — Share Repurchases — (100) (100) (100) Assume two-year execution of existing

$200 Mil. authorization. Total Debt 357 2,053 1,853 1,653 Fiscal 2016 reflects debt issued for Ann

purchase; $200 Mil. annual paydown expected thereafter.

Total Adjusted Debtb 4,905 8,396 8,259 8,123 — Adjusted Debt/EBITDAR (x) 5.0 5.3 5.0 4.8 — aGiven lack of square footage growth, comparable store sales growth approximates revenue growth. bTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


Justice Justice is Ascena’s second largest brand, producing $1.3 billion in sales during the fiscal year ended July 25, 2015. As of that date, the company operated 978 Justice locations, of which 547 were in traditional malls, 319 were in strip or other center types, and 112 were in outlet center locations. Justice, which sells to tween girls, is Ascena’s only brand not focused on adult women’s clothing. The brand’s narrow age focus yields a short customer life cycle, which can be a brand negative (continuous age-outs of the customer base) and a brand positive (continuous customer age-ins).

Justice’s comps were positive until fiscal 2014, and management has executed a plan to combat recently negative comps by broadening its assortment and eliminating pricing confusion by reducing promotional activity and initial markup. This pricing strategy has caused an expected near-term comps dislocation, with comps in the negative midteens since late in fiscal 2015. Fitch expects comps to remain in the negative midteens through fiscal 2016 (ends July 2016), improving to low single-digit negative in fiscal 2017.

Lane Bryant Lane Bryant produced $1.1 billion of sales in fiscal 2015 and its 765 stores were composed of 194 traditional mall locations, 460 strip or other center types, and 111 outlet stores. The midpriced, plus-size fashion retailer was purchased by Ascena in fiscal 2012, averaging 1.5% in annual comps since the acquisition. The brand is currently focused on improving gross margin by reducing promotional cadence and couponing. Fitch expects medium-term growth for the brand to be slightly positive on increased competition.

maurices Maurices generated $1.1 billion in fiscal 2015 sales and ended the year with 951 stores, of which 345 were traditional mall locations, 557 were strip or other center types, and 49 were outlet stores. The brand targets women in their 20s and 30s in less-populated regions, selling moderately priced fashion apparel across categories. Sales growth has averaged in the high single-digit positives over the last five years due to unit growth and positive comps. The company plans to continue growing units 2%–3% annually toward its 1,200-store target. Fitch believes maurices’ focus on less-populated areas restricts competitive incursion, allowing the brand to generate low single-digit positive comps over the next 24–36 months.

dressbarn As of the end of fiscal 2015, dressbarn operated 824 stores, including 54 traditional mall locations, 605 strip center units and 165 outlets. Dressbarn generated $1.0 billion in revenue during the year, selling moderately priced apparel styled and sized to target women in their 40s. Comps turned modestly negative beginning in fiscal 2013, due largely to a competitive market. Management has responded to competitive challenges by refining its merchandise assortment to focus on core categories, and reinventing the brand through new marketing. Fitch expects dressbarn comps to remain in the negative low- to midsingle digits in fiscal 2016, improving to flattish over the following 24 months as the initiatives gain traction in the market.

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Ann Taylor Ann Taylor generated $950 million in sales in fiscal 2014 (ended January 2015), and operated 359 stores as of July 25, 2015, including 138 traditional mall locations, 103 strip and lifestyle units, and 118 outlet locations. Ann Taylor focuses on midpriced wear-to-work styles, and generated positive comps the past several years until having negative low single-digit results in 2014. Fitch anticipates low single-digit positive comps over the next 24–36 months as Ascena leverages new merchandising and marketing concepts post acquisition.

Catherines Ascena’s smallest stand-alone brand generated fiscal 2015 revenue of $350 million and operated 377 stores at the end of the year, all but 10 of which were in strip and lifestyle centers. Catherines sells moderately priced, plus-size apparel targeted to women over 45 years old, and the brand

Segment Sales Trends 2010a 2011 2012b 2013 2014 2015 Net Sales ($ Mil.) Ascena Justice 711.9 1,150.0 1,306.7 1,407.4 1,384.3 1,276.8 Lane Bryant — — 119.7 1,050.1 1,080.0 1,095.9 maurices 680.7 776.5 852.9 917.6 971.4 1,060.6 dressbarn 982.0 987.5 1,037.6 1,020.7 1,022.5 1,023.6 Catherines — — 36.4 319.1 332.4 346.0 Total 2,374.6 2,914.0 3,353.3 4,714.9 4,790.6 4,802.9 Ann Ann Taylor 595.7 618.4 644.5 668.0 658.7 — Ann Taylor Factory 268.0 289.4 300.7 291.8 294.1 — LOFT 1,040.2 1,114.9 1,202.2 1,272.9 1,276.4 — LOFT Outlet 76.3 189.7 228.0 260.8 304.2 — Total 1,980.2 2,212.5 2,375.5 2,493.5 2,533.5 — Net Sales Growth (%) Ascena Justice — 61.5 13.6 7.7 (1.6) (7.8) Lane Bryant — — — 777.3 2.8 1.5 maurices — 14.1 9.8 7.6 5.9 9.2 dressbarn — 0.6 5.1 (1.6) 0.2 0.1 Catherines — — — 776.6 4.2 4.1 Total — 22.7 15.1 40.6 1.6 0.3 Ann Ann Taylor — 3.8 4.2 3.6 (1.4) — Ann Taylor Factory — 8.0 3.9 (3.0) 0.8 — LOFT — 7.2 7.8 5.9 0.3 — LOFT Outlet — 148.8 20.2 14.4 16.6 — Total — 11.7 7.4 5.0 1.6 — Net Sales Contribution (%) Ascena Justice 30.0 39.5 39.0 29.9 28.9 26.6 Lane Bryant — — 3.6 22.3 22.5 22.8 maurices 28.7 26.6 25.4 19.5 20.3 22.1 dressbarn 41.4 33.9 30.9 21.6 21.3 21.3 Catherines — — 1.1 6.8 6.9 7.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 Ann Ann Taylor 30.1 28.0 27.1 26.8 26.0 — Ann Taylor Factory 13.5 13.1 12.7 11.7 11.6 — LOFT 52.5 50.4 50.6 51.0 50.4 — LOFT Outlet 3.9 8.6 9.6 10.5 12.0 — Total 100.0 100.0 100.0 100.0 100.0 — aThe acquisition of Justice was consummated in November 2009. bThe Charming Shoppes acquisition affecting Lane Bryant and Catherines was consummated in June 2012. Note: Fiscal year end for Ascena is July. Fiscal year end for Ann Inc. is January. Source: Company filings, Fitch Ratings.

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has produced 5%–11% annual comps since its purchase by Ascena in fiscal 2012. Fitch expects sales growth at Catherines to remain in the midsingle-digit positives over the next 24–36 months.

Ascena’s brands are supported by a shared services platform, including the company’s entire supply chain and omnichannel infrastructure. The company leverages its scale on a fixed back-office operation and distribution systems. Ascena also uses its size to generate procurement savings across merchandise and nonmerchandise purchases. This platform allowed Ascena to acquire and integrate the Lane Bryant and Catherines brands in 2012, and will enable a successful integration of the LOFT and Ann Taylor brands beginning in fiscal 2016. Fitch believes Ascena’s portfolio approach to apparel retail is unique in the industry and expects the company to continue adding brands to its platform over the long term.

Path to $1 Billion of EBITDA in Fiscal 2018 Following the August 2015 completion of the Ann acquisition, Ascena outlined a path to achieve $1 billion in EBITDA in fiscal 2018 (ends July 2018), versus $620 million pro forma in fiscal 2015 ($374 million legacy Ascena and $246 legacy Ann Taylor). The plan includes revenue growth, gross margin recovery from a less promotional posture, integration synergies and expense management. The company targets a total of $650 million in EBITDA opportunity from the various initiatives. These opportunities are projected to be mitigated by $269 million in cost inflation and investment in key strategic focus areas, such as omnichannel and marketing. The various elements of the plan are enumerated below in decreasing order of size.

Historical Comps and Store Growth 2010a 2011 2012b 2013 2014 2015 Comparable Store Sales (%) Ascena Justice — 8.0 8.0 2.0 (4.0) (10.0) Lane Bryant — — 3.0 (2.0) 3.0 2.0 maurices — 10.0 2.0 0.0 1.0 5.0 dressbarn — 2.0 3.0 (4.0) (1.0) (1.0) Catherines — — 11.0 8.0 8.0 5.0 Total — 6.0 5.0 2.0 0.0 (1.0) Ann Ann Taylor 23.5 4.9 1.8 4.9 (7.0) — Ann Taylor Factory 9.3 5.7 (5.0) (6.6) (5.2) — Ann Total 18.7 5.2 1.1 1.1 (2.2) — LOFT 4.2 7.5 5.8 4.2 (2.4) — LOFT Outlet 21.2 14.2 (1.5) (3.0) 1.3 — LOFT Total 5.0 8.0 4.8 3.0 (1.7) — Total 10.7 6.8 3.3 2.3 (1.9) — Store Count Ascena Justice 887.0 902.0 942.0 971.0 997.0 978.0 Lane Bryant — — 805.0 788.0 771.0 765.0 maurices 757.0 784.0 832.0 877.0 922.0 951.0 dressbarn 833.0 830.0 827.0 826.0 820.0 824.0 Catherines — — 422.0 397.0 386.0 377.0 Total 2,477.0 2,516.0 3,828.0 3,859.0 3,896.0 3,895.0 Ann Ann Taylor 266.0 280.0 275.0 268.0 245.0 241.0 Ann Taylor Factory 92.0 99.0 101.0 108.0 116.0 118.0 LOFT 502.0 500.0 512.0 539.0 542.0 546.0 LOFT Outlet 36.0 74.0 96.0 110.0 127.0 130.0 Total 896.0 953.0 984.0 1,025.0 1,030.0 1,035.0 aThe acquisition of Justice was consummated in November 2009. bThe Charming Shoppes acquisition affecting Lane Bryant and Catherines was consummated in June 2012. Comps – Comparable store sales. Note: Fiscal year end for Ascena is July. Fiscal year end for Ann Inc. is January. Source: Company filings, Fitch Ratings.

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Legacy Ascena Top-Line Growth ($150 Million)

Ascena projects 2%–5% annualized top-line growth for its legacy, non-Ann portfolio, with 0%–1% square footage growth. The EBITDA target assumes approximately 30% flow-through on incremental revenue, should sales growth land in the midpoint of the projected range. Fitch assumes 0%–1% average annual sales growth, yielding an approximately $100 million shortfall to this EBITDA projection. Fitch believes near-term challenges at Justice will yield slightly negative company revenue growth in fiscal 2016, while competitive incursion in the mid-tier women’s apparel sector will restrain growth longer term.

ANN Inc. Integration Synergies ($150 Million)

Ascena’s purchase of Ann was largely predicated on the ability to leverage shared infrastructure. The company plans to generate cost savings through reducing duplicative expenses in transportation/logistics ($45 million), distribution ($25 million), back-office functions ($20 million) and sourcing ($5 million), as well as leveraging Ascena’s purchasing base to reduce nonmerchandise procurement rates ($55 million).

ANN Inc. Top-Line Growth ($70 Million)

LOFT and Ann Taylor are projected to grow annual revenue 0%–3% on slightly negative square-footage growth. Fitch projects sales growth near the midpoint of the range as new merchandising and marketing concepts improve trend.

Justice Gross Margin Rate Recovery ($50 Million)

Ascena plans to improve Justice’s gross margins from the current 52% to 58%–60%, similar to the fiscal 2013 reported gross margin of 58%, through reduced promotional activity.

ANN Inc. Sourcing Initiative ($50 Million)

Ascena estimates upside to Ann’s margin structure via leveraging Ascena’s direct-sourcing platform to reduce merchandise cost.

Internal Sourcing Penetration ($40 Million)

Ascena plans to increase its penetration of internally sourced merchandise, particularly at maurices (recently 32%) and dressbarn (4%), toward the 70%–90% penetration rates of other portfolio brands.

ANN Inc. SG&A Optimization ($35 Million)

Ascena has undertaken an initiative to reduce selling, general and administrative (SG&A), primarily related to back-of-house store payroll efficiencies.

Lane Bryant Gross Margin Initiatives ($30 Million)

Lane Bryant is forecast to improve its gross margin from 56% to 58%–59% on higher direct-sourcing penetration and reduced promotional activity.

Distributed Order Management ($25 Million)

Ascena will introduce the capability to ship an online order from a store in fiscal 2016. This capability can reduce shipping expense while presenting stores with an inventory-reduction tool, limiting the risk of in-store markdowns to clear product.

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ANN Inc. Gross Margin Recovery ($25 Million)

Ascena targets an improvement of approximately 100 bps to the current gross margin rate of 51%, still well below gross margin of 55%–56% in fiscal 2010–2012.

Fiscal 2016 Annualized Synergies from Lane Bryant/Catherines ($25 Million)

The company will annualize the final round of synergies realized with the 2012 purchase of the Lane Bryant and Catherines brands in fiscal 2016.

2016 Outlook In fiscal 2016 (ending July 2016), Fitch expects Ascena’s revenues to grow 52% to $7.3 billion, as the Ann acquisition was consummated early in the fiscal year. Revenue at legacy Ascena brands is projected to decline 1%–2%, due to weakness at Justice, which is expected to produce comps in the negative midteens for the year. The remainder of the legacy Ascena portfolio is expected to grow revenue 3%–4%, with maurices being the biggest contributor. Ann revenue growth is forecast to be slightly positive. Fitch projects 1%–2% annual revenue growth for the combined enterprise beginning in fiscal 2017.

EBITDA in fiscal 2016 is forecast to be around $800 million, after adding back a $104 million purchase accounting adjustment, versus $620 million pro forma EBITDA for the combined enterprise in fiscal 2015, on realization of synergies from the Ann integration and partial achievement of the company’s other initiatives. Fitch expects EBITDA to reach approximately $900 million in fiscal 2018, lower than management guidance of $1 billion due to lower projected revenue growth rates.

Annual FCF is expected to be $270 million–$290 million over the next two years, increasing to around $315 million by fiscal 2018. Fitch projects Ascena will pay down $100 million of debt in fiscal 2016 and $200 million annually in fiscal 2017–2018, in line with management’s targeted 2018 debt level. Ascena authorized a $200 million share repurchase program in December 2015, which Fitch expects to be executed through the end of fiscal 2017. Fitch anticipates Ascena will use internally generated cash for both debt paydown and share repurchase.

Enumerated EBITDA Opportunitiesa Opportunity ($ Mil.) Legacy Ascena Top-Line Growth (2%–5%) 150 ANN Inc. Integration Synergies 150 ANN Inc. Top-Line Growth (0%–3%) 70 Justice Gross Margin Rate Recovery 50 ANN Inc. Sourcing Initiative 50 Internal Sourcing Penetration 40 ANN Inc. SG&A Optimization 35 Lane Bryant Gross Margin Rate Initiatives 30 Distributed Order Management 25 ANN Inc. Gross Margin Rate Recovery 25 Fiscal 2016 Annualized Synergies from Lane Bryant/Catherines 25 ANN Inc. Inflation/Reinvestment (80) Legacy Ascena Inflation/Reinvestment (189)

Total 381

Fiscal 2015 EBITDA (Pro Forma) 620 Fiscal 2018 EBITDA Plan 1,001 aFiscal 2018 versus fiscal 2015, pro forma. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Lease-adjusted leverage increased to 5.0x at the end of fiscal 2015 from the mid-4.0x range achieved in the prior two years on an EBITDA decline related to sales weakness at Justice. Leverage should peak during fiscal 2016 to approximately 5.3x, declining to the high-4.0x range by fiscal 2018. Should the company meet its $1 billion EBITDA goal in fiscal 2018, leverage would be in the mid-4.0x range. Conversely, Fitch projects fiscal 2018 EBITDA would be approximately $775 million if the company’s sales growth remains flattish, yielding leverage in the low-5.0x range.

Liquidity and Debt Structure Ascena had $323 million of cash and $482 million of availability on its $600 million revolver as of Oct. 24, 2015. The $600 million revolving credit facility has a first lien on current assets and a second lien on all other assets.

The company issued a $1.8 billion seven-year term loan in August 2015, in connection with the Ann acquisition. The remainder of the $2.0 billion purchase was financed through equity issuance to existing Ann shareholders. The term loan is secured by a second lien on current assets and a first lien on all other assets. The loan requires amortization payments of $4.5 million per quarter up to October 2016, and $22.5 million per quarter thereafter.

There are no maintenance financial covenants under the term loan agreement. The restricted payments covenants allow for dividends if debt/EBITDA is less than 2.5x. Debt/EBITDA is expected to be around 2.6x at the end of fiscal 2016.

Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb–*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes.

Fitch has assigned a ‘bb+*/rr1*’ to the senior secured revolver and term loan, indicating outstanding recovery prospects (91%–100%) in the event of default.

Liquidity ($ Mil., At Oct. 24, 2015) Cash 322.9 Revolver Availability 482.2 Total 805.1

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Oct. 24, 2015) Fiscal 2016 9.0 Fiscal 2017 54.0 Fiscal 2018 90.0 Fiscal 2019 90.0 Fiscal 2020 90.0 Thereafter 1,554.5

Source: Company filings, Fitch Ratings.

Capital Structure ($ Mil., At Oct. 24, 2015) Description Amount (%) Secured Debt $600 Mil. ABL Revolver due August 2020 87.5 4.6 $1.8 Bil. Term Loan B due August 2022 1,800.0 95.4 Total Secured Debt 1,887.5 100.0 Total Debt 1,887.5 100.0

ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Leveraged Finance



Leveraged Finance


Appendix A

Organizational Structure — Ascena Retail Group, Inc.($ Mil., As of Oct. 24, 2015)

aParent borrower under the revolver and term loan. bSubsidiary guarantors of the ABL revolver include, among others, The Dress Barn Inc., Tween Brands Inc., Maurices Incorporated and DBX, Inc. cBorrowing subsidiaries are borrowers under the ABL revolver and are wholly owned domestic subsidiaries of Ascena Retail Group, Inc. dAnnTaylor Retail Inc. is a subsidiary borrower of the Term Loan. CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions.Source: Company filings, Fitch Ratings.

Public

Ascena Retail Group, Inc.a(Parent Company)CO — bb–*/Stable

Debt Issue$600 Mil. ABL Revolver due 8/21/20$1.8 Bil. Term Loan B due 8/21/22Total

Amount 87.5

1,800.01,887.5

Subsidiary Guarantorsb Nonguarantor Subsidiaries

CO bb+*/rr1*bb+*/rr1*

Borrowing Subsidiariesc AnnTaylor Retail Inc.d(Subsidiary Borrower)

Management7.8%92.2%

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — Ascena Retail Group, Inc. Covenant Borrower Ascena Retail Group Document Date and Location Amended and Restated Credit Agreement dated 1/3/11 (Exhibit 99.1 to 8-K filed 1/5/11)

Amendment and Restatement Agreement dated 6/14/12 (Exhibit 10.1 to 8-K filed 6/15/12) Amendment and Restatement Agreement dated 3/13/13 (Exhibit 10.1 to 8-K dated 3/14/13) Fourth Amendment and Restatement dated 7/24/15 (Exhibit 10.1 to 8-K filed 8/27/15)

Maturity Date Aug. 21, 2020 Description of Debt ABL facility Amount $500 Mil. Ranking Senior secured. Security First lien on all current assets and second lien on other assets. Guarantee By all the restricted subsidiaries. Debt Restrictions Debt Incurrence

Ratio Debt: For secured debt: $2 Bil. term loan plus an unlimited amount, as long as the secured debt ratio is less than 2.0x; for unsecured debt as long as the interest coverage ratio is more than 2.0x. Notable Permitted Debt: 1) Acquisition debt up to the greater of $75 Mil. and 1.5% of total assets; 2) all-purpose debt up to the grater of 150 Mil. and 3% of total assets.

Limitation on Liens Additional liens (first and second) on the same collateral is allowed up to the greater of $150 Mil. and 3% of total assets. Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as 35% voting control or the board of directors ceases to consist of a majority of existing directors, and constitutes

an event of default. M&A, Investments Restriction Investments in subsidiaries up to the greater of $200 Mil. and 3.5% of total assets. Sale of Assets Restriction Sale lease-back transactions with respect to one distribution center property per fiscal year with net proceeds limited to $75 Mil.;

asset sales at fair market value with at least 75% of proceeds in cash and any noncash consideration received cannot exceed the greater of $300 Mil. and 2% of consolidated total assets. Proceeds are subject to prepayment requirements.

Restricted Payments Restricted Payments (RP) RP Basket: $150 Mil. plus 50% of net income starting in February 2015 and conditioned upon total net leverage ratio being less

than 4.5x. Notable Permitted Payments: Additional all-purpose payments up the greater of $500 Mil. and 3.5% of consolidated total assets. Special Situation: No restriction on payments as long as total leverage ratio is less than 3.5x.

Other Cross-Default Yes, for any amount $75 Mil. or greater. Cross Acceleration N.A. MAC Clause MAC clause is only a condition for executing the agreement. Equity Cure N.A. Covenant Suspension No Required Lenders/Voting Rights Lenders holding more than 50% of the aggregate commitments. Financial Covenants (Maintenance) Fixed-Charge Coverage Ratio (Minimum) 1.0x if availability is less than 10%. Coverage (Minimum) — Current Ratio (Minimum) — Excess Availability (Minimum) — Net Worth (Minimum) — Principal Repayments Mandatory/Tax Prepayment — Amortization Schedule — Callability/Optional Prepayment — Pricing Coupon Type/Index Availability > 50%, ABR spread is 0.25%; availability < 50%, ABR spread is 0.5%.

ABL – Asset-backed loan. MAC – Material adverse change. N.A. – Not applicable. Source: Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/1498301/000093041311000093/c63797_ex99-1.htm

http://www.sec.gov/Archives/edgar/data/1498301/000119312512272229/d367159dex101.htm

http://www.sec.gov/Archives/edgar/data/1498301/000114420413015012/v338158_ex10-1.htm


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Appendix C

Term Loan Covenant Summary — Ascena Retail Group, Inc. Covenant Borrower Ascena Retail Group Document Date and Location Term Credit Agreement dated 8/21/15 (Exhibit 10.2 to 8-K filed 8/27/15) Maturity Date Aug. 21, 2022 Description of Debt Secured Term Loan B Amount ($ Mil.) 1.8 Bil. Ranking Senior secured. Security Second lien on current assets and first lien on all other assets. Guarantee By all the restricted subsidiaries. Debt Restrictions Debt Incurrence

Ratio Debt: Unsecured debt allowed as long as interest coverage ratio is > 2.0x. Notable Permitted Debt: 1) All-purpose debt up to the grater of 150 Mil. and 3% of total assets.

Limitation on Liens Additional liens (first and second) on the same collateral is allowed up to the greater of $150 Mil. and 3% of total assets. Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as 35% voting control or the board of directors ceases to consist of a majority of existing directors, and constitutes

an event of default. M&A, Investments Restriction Investments in subsidiaries up to the greater of $200 Mil. and 3.5% of total assets. Sale of Assets Restriction Sale lease-back transactions with respect to one distribution center property per fiscal year with net proceeds limited to $75 Mil.;

asset sales at fair market value with at least 75% of proceeds in cash and any noncash consideration received cannot exceed the greater of $300 Mil. and 2% of consolidated total assets. Proceeds are subject to prepayment requirements.

Restricted Payments Restricted Payments (RP) RP Basket: $75 Mil. plus excess cash flow starting in August 2016, subject to Total Leverage Ratio < 2.5x for dividends, and

subject to total Leverage Ratio < 3.25x for junior debt repayment. Notable Permitted Payments: Additional all-purpose payments up the greater of $100 Mil. and 1.75% of consolidated total assets.

Other Cross-Default Yes, for any amount $75 Mil. or greater. Cross Acceleration N.A. MAC Clause MAC clause is only a condition for executing the agreement. Equity Cure N.A. Covenant Suspension No Required Lenders/Voting Rights Lenders holding more than 50% of the aggregate commitments. Financial Covenants Leverage Covenant (Maximum) — Coverage (Minimum) — Current Ratio (Minimum) — Excess Availability (Minimum) — Net Worth (Minimum) — Principal Repayments Mandatory/Tax Prepayment — Amortization Schedule Up to October 2016, $4.5 Mil. every quarter. Then $22.5 Mil. every quarter until maturity. Callability/Optional Prepayment Optional prepayment in whole or in part without premium or penalty. Pricing Coupon Type/Index LIBOR + 3.5% for ABR Term B, LIBOR + 4.5% for Eurodollar Tranche B Term loans.

ABR – Alternate base rate. MAC – Material adverse change. N.A. – Not applicable. Source: Company filings, Fitch Ratings.


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Appendix D

Financial Summary — Ascena Retail Group, Inc. 12 Months Three Months


12 Months

Three Months

LTM Ended

($ Mil.) 7/28/12 7/27/13 10/26/13 1/25/14 4/26/14 7/26/14 7/26/14 10/25/14 1/24/15 4/25/15 7/25/15 7/25/15 10/24/15 10/24/15 Profitability Operating EBITDAa 456.0 510.0 152.5 109.5 119.4 104.8 486.2 134.2 79.7 105.7 83.5 403.1 223.9 492.8 Operating EBITDA Margin (%) 13.6 10.8 12.7 8.6 10.4 8.9 10.1 11.2 6.2 9.2 7.1 8.4 13.4 9.3 FFO Return on Adjusted Capital (%)b 14.1 15.0 15.2 14.2 14.6 14.2 14.2 13.5 14.1 14.2 13.8 13.8 11.3 11.3 FCF Margin (%) 6.3 3.4 (7.4) 1.4 (4.7) 1.9 (2.1) (6.1) 10.2 (0.9) 6.0 2.5 (8.3) 1.0 Coverages FFO Interest Coverage (x) 73.3 28.9 68.1 51.2 38.6 61.0 52.3 51.4 81.9 66.3 0.8 53.2 8.7 16.5 Operating EBITDA/ Gross Interest Expense (x) 106.1 37.0 101.7 52.1 49.8 80.6 66.6 78.9 49.8 70.5 69.6 67.2 10.9 19.9 FFO Fixed-Charge Coverage (x) 1.8 1.7 1.7 1.8 1.6 1.6 1.7 1.6 1.9 1.7 1.0 1.6 2.0 1.7 FCF Debt Service Coverage (x) (LTM)b 25.3 12.0 9.9 (9.6) (15.3) (13.1) (13.1) (10.6) 4.9 12.7 20.8 20.8 2.0 2.0 Cash Flow from Operations/Capex (x) 2.2 1.5 0.4 1.2 0.6 1.2 0.8 0.3 3.3 0.9 1.9 1.4 (0.5) 1.2 Leverage (LTM)b Long-Term Secured Debt/ Operating EBITDA (x) 0.7 0.3 0.4 0.3 0.4 0.4 0.4 0.5 0.3 0.4 0.3 0.3 3.6 3.6 Long-Term Secured Debt/FFO (x) 1.0 0.4 0.4 0.4 0.6 0.5 0.5 0.7 0.3 0.4 0.4 0.4 4.6 4.6 Total Debt with Equity Credit/ Operating EBITDA (x) 1.2 0.7 0.8 0.7 0.9 0.9 0.9 1.0 0.8 0.9 0.9 0.9 4.5 4.5 FFO-Adjusted Leverage (x) 5.2 5.0 4.9 5.2 5.1 5.2 5.2 5.5 5.2 5.1 5.5 5.5 6.9 6.9 Total Adjusted Debt/ Operating EBITDAR (x) 4.3 4.5 4.5 4.5 4.6 4.7 4.7 4.9 4.9 5.0 5.1 5.1 6.4 6.4 FCF/Total Adjusted Debt (%) 6.0 3.4 2.0 (1.9) (2.6) (2.1) (2.1) (1.7) 0.6 1.4 2.4 2.4 0.8 0.8 Balance Sheet Short-Term Debt 4.2 0.6 0.6 0.6 0.6 — — — — — — — 13.5 13.5 Long-Term Senior Secured Debt 322.4 135.0 188.0 131.0 224.4 172.0 172.0 236.0 127.0 155.0 116.0 116.0 1,793.0 1,793.0 Long-Term Senior Unsecured Debt 240.5 242.9 244.1 242.5 243.8 248.5 248.5 247.8 242.5 243.4 241.4 241.4 418.1 418.1 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 567.1 378.5 432.7 374.1 468.8 420.5 420.5 483.8 369.5 398.4 357.4 357.4 2,224.6 2,224.6 Off-Balance Sheet Debtc 2,962.4 4,329.6 4,417.6 4,417.6 4,417.6 4,417.6 4,417.6 4,548.0 4,548.0 4,548.0 4,548.0 4,548.0 4,548.0 4,548.0 Total Adjusted Debt with Equity Credit 3,529.5 4,708.1 4,850.3 4,791.7 4,886.4 4,838.1 4,838.1 5,031.8 4,917.5 4,946.4 4,905.4 4,905.4 6,772.6 6,772.6 Cash Flow Funds From Operations 315.5 384.9 100.7 105.5 90.2 78.0 374.4 85.8 129.4 98.1 (0.1) 313.2 158.7 386.1 Change in Working Capital 8.2 57.5 (43.1) 31.8 (22.2) 54.0 20.5 (62.4) 59.9 (27.5) 148.1 118.1 (205.1) (24.6) Cash Flow from Operations 323.7 442.4 57.6 137.3 68.0 132.0 394.9 23.4 189.3 70.6 148.0 431.3 (46.4) 361.5 Total Non-Operating/ Nonrecurring Cash Flow 37.8 7.6 (16.6) (3.1) 0.3 (0.8) (20.2) — — — — — — — Capex (150.4) (290.9) (130.0) (117.1) (121.8) (108.6) (477.5) (96.5) (57.9) (80.5) (77.6) (312.5) (93.0) (309.0) Dividends — — — — — — — — — — — — — — FCF 211.1 159.1 (89.0) 17.1 (53.5) 22.6 (102.8) (73.1) 131.4 (9.9) 70.4 118.8 (139.4) 52.5 Net Acquisitions and Divestitures (645.7) 15.9 42.2 — — — 42.2 — 8.9 — — 8.9 (1,494.6) (1,485.7) Net Debt Proceeds 177.8 (194.7) 53.0 (57.0) 93.4 (53.0) 36.4 64.0 (109.0) 28.0 (39.0) (56.0) 1,735.5 1,615.5 Net Equity Proceeds (20.5) 28.7 8.6 5.6 2.7 1.0 17.9 2.3 1.6 2.0 2.8 8.7 8.4 14.8 Other (Investing and Financing) 198.1 13.1 0.8 2.4 0.5 (26.9) (23.2) 14.0 0.8 (9.0) (2.5) 3.3 (27.6) (38.3) Total Change in Cash (79.2) 22.1 15.6 (31.9) 43.1 (56.3) (29.5) 7.2 33.7 11.1 31.7 83.7 82.3 158.8 Ending Cash and Securities Balance 164.3 186.4 202.0 170.1 213.2 156.9 156.9 164.1 197.8 208.9 240.6 240.6 322.9 322.9 Short-Term Marketable Securities 1.4 3.0 3.7 3.6 3.6 30.4 30.4 5.0 4.3 13.1 13.4 13.4 0.7 0.7 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest first-quarter performance only. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — Ascena Retail Group, Inc. (Continued) 12 Months Three Months


12 Months

Three Months

LTM Ended

($ Mil.) 7/28/12 7/27/13 10/26/13 1/25/14 4/26/14 7/26/14 7/26/14 10/25/14 1/24/15 4/25/15 7/25/15 7/25/15 10/24/15 10/24/15 Income Statement Revenue 3,353.3 4,714.9 1,196.6 1,266.5 1,145.1 1,182.4 4,790.6 1,194.2 1,288.6 1,150.3 1,169.8 4,802.9 1,672.0 5,280.7 Revenue Growth (%) 15.1 40.6 5.2 2.3 0.3 (1.3) 1.6 (0.2) 1.7 0.5 (1.1) 0.3 40.0 10.3 Operating EBIT 348.6 334.0 105.9 63.7 70.8 52.2 292.6 83.7 27.7 48.8 24.7 184.9 141.4 242.6 Gross Interest Expense 4.3 13.8 1.5 2.1 2.4 1.3 7.3 1.7 1.6 1.5 1.2 6.0 20.5 24.8 Sector-Specific Data Comparable Store Sales (%)d 5.0 2.0 4.0 — (1.0) (2.0) — (2.0) 1.0 (1.0) (2.0) (1.0) (3.0) (3.0) No. of Stores 3,828.0 3,859.0 3,892.0 3,874.0 3,895.0 3,896.0 3,896.0 3,937.0 3,916.0 3,918.0 3,895.0 3,895.0 4,968.0 4,968.0 Gross Margin (%) 39.9 38.7 41.0 36.0 39.8 36.0 38.2 40.2 34.6 40.1 36.4 37.7 42.1 38.6 SG&A/Revenues (%) 29.5 31.6 32.2 31.0 33.6 31.6 32.0 33.2 32.4 35.8 34.3 33.9 33.6 29.2 Operating EBIT Margin (%) 10.4 7.1 8.9 5.0 6.2 4.4 6.1 7.0 2.2 4.2 2.1 3.9 8.5 4.6 Operating EBITDAR 826.3 1,051.2 290.6 247.6 257.5 242.9 1,038.4 276.3 221.8 247.8 225.6 971.6 366.0 1,061.2 Operating EBITDAR Margin (%) 24.6 22.3 24.3 19.5 22.5 20.5 21.7 23.1 17.2 21.5 19.3 20.2 21.9 20.1 Operating EBITDAR/ (Interest + Rent) (x)b 2.2 1.9 2.1 1.8 1.8 1.7 1.9 1.9 1.5 1.7 1.6 1.7 2.3 1.8 Inventory Turnover (x)b 4.5 5.4 4.7 5.7 5.3 5.4 5.4 4.7 5.9 5.4 5.7 5.7 4.3 4.3 Accounts Payable Turnover (x)b 9.3 11.3 10.6 12.4 12.2 11.6 11.6 11.6 13.8 13.0 12.2 12.2 9.7 9.7 Return on Invested Capital (%)b 14.8 14.0 13.9 13.7 13.3 12.8 12.8 12.1 11.8 11.5 11.7 11.7 9.4 9.4 Return on Assets (%)b 5.8 5.3 5.3 4.9 4.7 4.3 4.3 4.2 3.6 3.2 (8.1) (8.1) (5.3) (5.3) Capex/Depreciation (%)b 140.0 165.3 279.0 255.7 250.6 206.5 246.6 191.1 111.3 141.5 132.0 143.2 112.7 112.7 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest first-quarter performance only. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

The Bon-Ton Stores, Inc. Credit Profile

Credit Profile Summary Modestly Negative Comps: Fitch Ratings expects The Bon-Ton Stores, Inc.’s (Bon-Ton) comparable store sales (comps) trend to remain flat to modestly negative in 2016/2017, after expected negative 1.5% comps in 2015. Comps have been highly erratic, with quarterly comps ranging from positive 4% to negative 7% since 2011. Bon-Ton remains competitively disadvantaged longer term compared with its larger and well-capitalized peers that have been spending aggressively on their merchandise offering and omnichannel infrastructure to offset weak mall traffic trends.

Below Industry Profitability: Fitch expects Bon-Ton’s EBITDA to be approximately $110 million in 2015, and to improve only modestly to approximately $125 million over the next two years on expense reduction. Fitch expects it will be challenging for Bon-Ton to reverse trends longer term given its weaker market positioning.

Negative FCF/High Leverage: Fitch expects FCF to be negative $65 million–negative $70 million in 2015, and negative $10 million annually in 2016/2017. Fitch expects leverage (adjusted debt/EBITDAR) to remain around 8.0x over the next two years.

Near-Term Adequate Liquidity: Fitch expects total liquidity to be around $200 million (net of the minimum borrowing availability covenant) at the end of 2015. Bon-Ton repaid the $103 million mortgage loan maturing April 2016 by drawing down on its revolver after Bon-Ton contributed 18 properties as additional collateral. Bon-Ton has adequate liquidity to fund the 2016 holiday season given full availability on its $830 million revolver at seasonal working capital peak. Bon-Ton has another $57 million of second lien secured notes due July 2017, which it could repay by drawing down on its credit facility.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a sustained trend of stable to modestly positive comps; gross margin improvement; and EBITDA growth to a level where it can continue to fund its operations and meet its fixed obligations with internally generated cash flow, and refinance upcoming maturities on a timely basis.

Negative Drivers: Negative credit profile drivers would include further deterioration in comps and EBITDA, leading to concerns about the company’s liquidity position.



Credit Opinion The Bon-Ton Stores, Inc. carries a ‘ccc*’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data The Bon-Ton Stores, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 2,822.9 2,802.6 EBITDA 145.4 120.1 EBITDA Margin (%) 5.2 4.3 FCF (48.0) (89.1) Total Adjusted Debt 1,613.7 1,846.0 Total Adjusted Debt/EBITDAR (x) 6.9 8.6 EBITDAR/(Interest + Rent) (x) 1.6 0.8 Comparable Store Sales (%)a 0.2 (1.0) Real Estate Owned (%) 14 14 No. of Stores 270 270 aComparable store sales for the LTM reflect the performance for the nine months ended Oct. 31, 2015.


JJ Boparai +1 212 908-0543 jj boparai@fitchratings com



Leveraged Finance



A Marginal Player in a Secularly Challenged Sector Fitch expects Bon-Ton to report negative 1.5% comps in 2015 and for EBITDA to decline to approximately $110 million, a step down from $145 million in 2014 and $170 million–$175 million between 2011 and 2014.

Comps have been highly erratic, with quarterly comps ranging from positive 4% to negative 7% since 2011. Fitch expects comps to remain modestly negative over the next 24 months, as the company’s merchandising and localization initiatives and growth in online sales are likely to be offset by the overall soft department store apparel spending, weak mall traffic trends and heavy promotional pressure across the mid-tier department store space.

Bon-Ton has posted below industry average comps trends and operating profitability over the past decade. Comps trends have been negative for much of this period. The company’s EBITDA margin at 4%–6% has been substantially lower than the 12%–14% margins realized by the its larger investment-grade mid-tier department store peers over the past five years, given lagging sales trends and store productivity.

Bon-Ton’s online sales at 6% of revenue in 2014, which the company expects to grow to 8% in 2015, are relatively low compared with the 10%–15% penetration at its major competitors in the department store space. Growth in online sales has been the main driver of comps growth at these retailers over the past three to four years.

Bon-Ton’s overall capital spending has been constrained over the past few years given modest FCF and a highly leveraged balance sheet. However, Bon-Ton has made significant recent omnichannel investments to support its growing business. The company opened a new 743,000-square foot ecommerce distribution center in West Jefferson, OH, in the fall of 2015 and consolidated its five former e-commerce distribution centers into it.

Fitch Base Case Assumptions — The Bon-Ton Stores, Inc. ($ Mil., Year Ended January) 2014A 2015F 2016F 2017F Revenue 2,823 2,785 2,758 2,731 Revenue Growth (%) (0.4) (1.3) (1.0) (1.0) Comparable Store Sales (%) 0.2 (1.4) (1.0) (1.0) EBITDA 145 110 121 122 EBITDA Margin (%) 5.2 4.0 4.4 4.5 Working Capital Change (15) (16) 4 (2) Cash Flow From Operations 47 32 65 64 Capex (Gross) (91) (93) (70) (70) Dividends (4) (4) (4) (4) FCF (48) (64) (9) (10) Share Repurchases — — — — Total Debt 907 902 911 934 Total Adjusted Debta 1,614 1,649 1,686 1,709 Total Adjusted Debt/EBITDAR (x) 6.9 8.2 7.7 7.8 aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


Fitch expects Bon-Ton will continue to face stiff competition from larger, well-capitalized department store peers, off-price retailers and online players. Department store traffic trends remain soft and industry sales are expected to continue to decline 2%–3% annually as volume continues to shift to off-mall channels, such as online, discount and off-price retailers. However, Fitch expects overall apparel, accessories, footwear and home sales to grow 2%–3% annually, with most of the growth coming from online. Fitch expects it will be challenging for Bon-Ton to generate comps of 2% or better to maintain market share in these categories given its weak market position in the overall mid-tier department store space.

2016 Outlook Fitch expects Bon-Ton’s EBITDA to be approximately $110 million in 2015, and to improve only modestly to the $125 million range over the next two years on expense reduction. Gross margins are expected to recover modestly in 2016, after declining an estimated 80 bps in 2015, given excessive inventory across the apparel space in second-half 2015 on unseasonably warm weather and a slowdown in demand for apparel and accessories. Increased distribution and delivery costs associated with the continued growth of e-commerce sales are also pressuring gross margins. The company recently negotiated a contract with FedEx that is expected to produce savings of about $40 million over the next three years and should alleviate some of this pressure starting in fourth-quarter 2015.

(12)

(9)

(6)

(3)

0

3

6

Bon-Ton Middle Market

Comps Versus Industry

Comps – Comparable store sales. Note: Middle market reflects the sales-weighted comps performance of Bon-Ton, Dillard's, J.C. Penney, Kohl's,and Macy's. Source: Company filings, Fitch Ratings.

(%)

(15)

(10)

(5)

0

5

10

(350)

(175)

0

175

350

525

Gross Margin Change (LHS) Comps Sales (RHS) Comps Inventory, Beg. (RHS)

Comps Sales, Comps Inventory and Gross Margin Relationship

Comps – Comparable store sales.Source: Company filings, Fitch Ratings.

(bps) (%)

Leveraged Finance


Selling, general and administrative expense is expected to be flat in 2015, but lower in 2016 as the company has identified $35 million in additional cost savings but not yet quantified the costs to realize them. Fitch has assumed $20 million in net expense reduction given ongoing investments in information technology and its omnichannel operations.

FCF is expected to be negative $65 million–negative $70 million in 2015 and negative $10 million in 2016/2017. Fitch expects leverage to remain at approximately 8.0x over the next two years.

Multiple Banners Bon-Ton is the 10th largest U.S. regional department store chain, with 270 stores in small, midsize and metropolitan markets in 26 states concentrated in the Northeast, Midwest and upper Great Plains. The chain operates under the Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s and Younkers nameplates, encompassing a total of approximately 25 million square feet.

Bon-Ton and Elder-Beerman stores are primarily located in midsized communities, while the Carson’s units are located in midsized and larger cities such as Chicago, Milwaukee and Minneapolis. The localization initiatives the company has implemented over the past two to three years appear to be a logical move to manage its diverse banners. However, these

Snapshot of Mid-Tier Department Stores’ Sales, Industry Share and Operating Profit Performance 2006 2007 2008 2009 2010 2011 2012 2013 2014

LTM 10/31/15

Revenues ($ Mil.) Macy’s, Inc. 26,970 26,313 24,892 23,489 25,003 26,405 27,686 27,931 28,105 27,574 YoY Growth (%) (10.8) (2.4) (5.4) (5.6) 6.4 5.6 4.9 0.9 0.6 (0.3) Kohl’s Corp. 15,597 16,474 16,389 17,178 18,391 18,804 19,279 19,031 19,023 19,154 YoY Growth (%) 16.4 5.6 (0.5) 4.8 7.1 2.2 2.5 (1.3) (0.0) 2.0 J.C. Penney Co., Inc. 19,903 19,860 18,486 17,556 17,759 17,260 12,985 11,859 12,502 12,522 YoY Growth (%) 6.0 (0.2) (6.9) (5.0) 1.2 (2.8) (24.8) (8.7) 5.4 3.1 Dillard’s, Inc. 7,636 7,207 6,743 5,890 6,020 6,194 6,489 6,439 6,490 6,436 YoY Growth (%) 1.7 (5.6) (6.4) (12.6) 2.2 2.9 4.8 (0.8) 0.8 0.0 The Bon-Ton Stores, Inc. 3,362 3,366 3,130 2,960 2,981 2,885 2,919 2,770 2,756 2,732 YoY Growth (%) 161.2 0.1 (7.0) (5.4) 0.7 (3.2) 1.2 (5.1) (0.5) 0.1 Department Stores (Incl. L.D.) 218,132 213,941 202,915 190,788 189,265 188,478 182,879 175,145 171,665 170,231 YoY Growth (%) (1.0) (1.9) (5.2) (6.0) (0.8) (0.4) (3.0) (4.2) (2.0) (2.3) Comps by Year (%) Macy’s, Inc. 4.4 (1.3) (4.6) (5.3) 4.6 5.3 3.7 1.9 0.7 (0.8) Kohl’s Corp. 5.9 (0.8) (6.9) 0.4 4.4 0.5 0.3 (1.2) (0.3) 1.8 J.C. Penney Co., Inc. 3.7 0.0 (7.5) (6.3) 2.5 0.2 (25.2) (7.4) 4.4 4.6 Dillard’s, Inc. (1.0) (5.0) (7.0) (10.0) 3.0 4.0 4.0 1.0 1.4 0.0 The Bon-Ton Stores, Inc. (2.7) (6.5) (7.4) (5.4) 0.9 (2.8) 0.5 (4.2) 0.2 (3.8) Industry Share (%) Macy’s, Inc. 12.4 12.4 12.3 12.3 13.2 14.1 15.1 15.9 16.6 16.2 Kohl’s Corp. 7.2 7.7 8.1 9.0 9.7 10.0 10.5 10.9 11.1 11.3 J.C. Penney Co., Inc. 9.1 9.3 9.1 9.2 9.4 9.2 7.1 6.8 7.3 7.4 Dillard’s, Inc. 3.5 3.4 3.3 3.1 3.2 3.3 3.6 3.7 3.8 3.8 The Bon-Ton Stores, Inc. 1.5 1.6 1.6 1.6 1.6 1.5 1.6 1.6 1.6 1.6 EBITDA Margins (%) Macy’s, Inc. 12.8 13.1 10.9 11.7 12.5 13.4 13.6 13.8 14.2 13.8 Kohl’s Corp. 14.5 15.3 14.3 15.2 15.8 15.9 14.4 14.1 13.8 13.7 J.C. Penney Co., Inc. 11.8 11.6 8.1 8.5 7.9 7.7 (4.5) (5.3) 2.3 5.4 Dillard’s, Inc. 8.1 6.3 2.4 6.8 9.5 10.6 11.9 12.1 12.1 12.2 The Bon-Ton Stores, Inc. 8.3 7.5 5.0 7.1 8.3 5.9 5.8 6.0 5.1 4.4

YoY – Year-over-year. L.D. – Leased department store space. Comps – Comparable store sales. Source: U.S. Census Bureau, Company filings, Fitch Ratings

Leveraged Finance


initiatives are late catch-ups with large and well-capitalized competitors such as Macy’s Inc., and are expected to have only a modestly positive impact on top-line and profitability improvement in the near to intermediate term.

Liquidity and Debt Structure Bon-Ton had $21.7 million in cash and cash equivalents and $247 million available under its asset-based lending credit facility — net of the minimum borrowing availability covenant of $83 million — as of Oct. 31, 2015. This is pro forma for Bon-Ton upsizing its credit facility to $830 million in November 2015. Fitch expects total liquidity to be around $200 million (net of the minimum borrowing availability covenant) at the end of 2015, given FCF is expected to be negative $65 million–negative $70 million in 2015.

Bon-Ton entered into a sale-leaseback arrangement in June 2015 and sold six retail department stores for $84 million, and leased them back for a period of 20 years with three optional 10-year renewal terms. Proceeds from the sale-leaseback transaction, supplemented with borrowings under the Bon-Ton’s secured credit facility, were used to pay the remaining principal balance of $104.5 million on one of the two mortgage facilities due in April 2016.

On Jan. 15, 2016, Bon-Ton retired its remaining $103 million mortgage loan facility due in April using $15 million in cash and $89 million of borrowing under Bon-Ton’s $830 million revolving credit facility. The company’s revolving credit facility was amended to include the special purpose entities (SPEs) that had previously participated in the company’s two mortgage loan facilities. Pursuant to the amendment, all 18 properties owned by the SPEs became real estate in which security interests were granted under the revolving credit facility. As a result, the borrowing base availability under the revolving credit facility increased to reflect the addition of the properties.

Fitch expects the borrowing base to be in the $675 million–$725 million range for the first three quarters of the year to reflect the additional collateral. The company should have full availability on its $830 million revolver — adjusted for the minimum borrowing availability covenant of $83 million — during peak working capital needs based on $950 million–$1 billion in inventory.

Bon-Ton has $57 million of second lien secured notes due July 2017, which Fitch anticipates can be repaid using borrowings under its credit facility.

Bon-Ton Liquidity Analysis Revolver Required Availability Total Minimum Less

Facility Borrowing

Revolver Borrowing Required Total LTM

($ Mil.) Cash Size Base Borrowings LOCs Availability Availability Minimum Liquidity EBITDA CFO Capex FCF 4Q13 7.1 675.0 608.1 184.9 4.0 419.2 60.8 358.4 365.5 169.6 120.1 (77.3) 39.8 1Q14 8.2 675.0 669.1 227.1 3.0 439.0 66.9 372.1 380.3 161.0 94.3 (79.5) 10.9 2Q14 7.7 675.0 626.4 237.2 5.0 384.2 62.6 321.6 329.2 155.8 69.5 (79.5) (13.0) 3Q14 7.5 675.0 675.0 358.3 3.9 312.8 67.5 245.3 252.8 146.7 36.3 (80.5) (47.2) 4Q14 8.8 675.0 625.8 238.9 4.0 382.9 62.6 320.3 329.0 145.4 46.6 (90.7) (48.0) 1Q15 8.7 675.0 663.0 290.7 4.0 368.3 66.3 302.0 310.7 142.0 44.6 (99.7) (59.1) 2Q15 20.9 675.0 601.3 332.1 4.0 265.2 60.1 205.1 226.0 142.5 63.2 (100.4) (42.1) 3Q15 21.7 830.0a 830.0 495.4 4.4 330.2 83.0 247.2 268.9 120.1 13.1 (97.2) (89.1) 4Q15E 21.7 830.0a 620.5 355.4 4.4 260.7 62.1 198.7 220.3 100.0 21.1 93.0 (76.0) aReflects the upsize of the credit facility on Nov. 17, 2015. Source: Company filings, Fitch Ratings.

Leveraged Finance


Recovery Analysis In accordance with Fitch’s Recovery Rating (RR) methodology, issue ratings are derived from the Issuer Default Rating and the relevant RR. Fitch’s recovery analysis assumes a liquidation value under a distressed scenario of approximately $865 million.

Bon-Ton’s senior secured credit facility has outstanding recovery prospects (91%−100%) in a distressed scenario. The facility is secured by a first lien on substantially all of the assets, which mainly consists of inventory of the borrowing entities and guarantors.

Availability for borrowings and letter of credit obligations under the credit agreement is limited to 95% of the inventory of the company’s certain unrestricted operating subsidiaries, as well as stated percentages of eligible real estate and credit card receivables. There is a minimum borrowing availability covenant required under the facility, equal to an amount greater than or equal to the greater of (i) 10% of the lesser of: (a) $830 million and (b) the borrowing base; and (ii) $50 million.

The 10.625% senior secured notes due July 2017 and 8.000% senior secured notes due June 2021, which have a second lien on the assets that support the credit facility, are considered to have average recovery prospects (31%–50%).

Capital Structure ($ Mil., At Oct. 31, 2015) Description Amount (%) Secured Debt $830 Mil. Senior Secured ABL Revolver Due 12/12/18a 584.5 51.9 Mortgage Loan Facility Due Through 4/1/16a — — 10.625% Second Lien Senior Secured Notes Due 7/15/17 57.3 5.2 8.000% Second Lien Senior Secured Notes Due 6/15/21 350.0 31.1 Total Secured Debt 991.8 88.1 Capital Leases/Other 133.4 11.9 Total Debt 1,125.2 100.0 aReflects upsizing of the facility in November 2015 to $830 Mil. from $750 Mil. and the January 2016 retirement of the mortgage loan facility. ABL – Asset-based revolving credit facility. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015) 2016 103.0 2017 57.3 2018 — 2019 — 2020 — Thereafter 350.0

Note: Excludes borrowings under credit facility, mortgages and capital leases. Source: Company filings, Fitch Ratings.

Liquidity ($ Mil., At Oct. 31, 2015) Cash 21.7 Revolver Availabilitya 247.2 Total 268.9 aReflects upsizing of the facility in November 2015 to $830 Mil. from $750 Mil. Revolver availability is net of the minimum borrowing availability covenant. Source: Company filings, Fitch Ratings.

Leveraged Finance



Recovery Analysis — The Bon-Ton Stores, Inc. ($ Mil., Except Where Noted; Credit Opinion: ccc*)


Liquidation Value (LV) Book Value Advance Rate (%)

Available to Creditors

Going Concern EBITDA 120

Cash 21.7 0 — GC EV Multiple (x) 4

Accounts Receivable 0 80 —

EV on GC Basis 480

Inventory 950.0 70 665

Net PPEa 524.3 35 183.5

Total LV

848.5


Greater of GC or LV

849

Less Administrative Claims (10%)

85

Adjusted LV Available for Claims

764



Recovered Recovery


Credit Opinion

Sr. Secured Facilityb 581.0 581.0 100 rr1* 3 b* Sr. Secured (Second Lien) 407.3 182.7 45 rr4* 0 ccc*

Concession Payment Availability Table Adjusted LV Available for Claims 763.7

Less Secured Debt Recovery 763.7 Remaining Recovery for Unsecured Claims

Unsecured Priority Amount Value

Recovered Recovery


Credit Opinion

Sr. Unsecuredc 112.9 0 Unsecured 0.0 0 aNet PPE value is reduced by the net capital lease assets of $31 Mil. as of Jan. 31, 2015, and sale-leaseback assets of $88 Mil in June 2015. bFitch assumes the recently upsized $830 Mil. credit facility is 70% drawn (of the lower of the borrowing base or $830 Mil.) under a distressed scenario. cReflects estimated operating lease claims. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Fitch Ratings.

Leveraged Finance


Appendix A

Debt Organizational Structure — The Bon-Ton Stores, Inc.($ Mil., Pro Forma As of Oct. 31, 2015)

aReflects upsizing of the facility in November 2015 to $830 Mil. from $750 Mil. and the January 2016 retirement of the mortgage loan facility. CO – Credit Opinion. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions.Source: Company filings, Fitch Ratings.

The Bon-Ton Stores, Inc. (PA)(Guarantor of Credit Facility)

CO — ccc*

The Bon-Ton Department Stores, Inc. (PA)CO — ccc*

$830 Mil. Senior Secured Asset-Based Revolving Credit Facility Due 12/12/18a

10.625% Second Lien Senior Secured Notes Due 7/15/178.000% Second Lien Senior Secured Notes Due 6/15/21Total

Amount584.557.3

350.0991.8

Management and Directors Other Public Investors

30.34% 69.66%

Carson Pirie Scott II, Inc. (FL)(Co-Borrower of Credit Facility)

Bonstores Realty One & Two (Nonguarantor)a

Amount —

Bon-Ton Distribution, LLC (IL)(Co-Borrower of Credit Facility)

McRIL, LLC (VA)(Co-Borrower of Credit Facility)

The Bon-Ton Giftco, LLC (VA)

Mortgage Loan Facility Due 4/1/16a

COb*/rr1*ccc*/rr4*ccc*/rr4*

CO —

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary The Bon-Ton Department Stores, Inc. Overview Borrower The Bon-Ton Department Stores, Inc.; Carson Pirie Scott II, Inc.; Bon-Ton Distribution, LLC; and McRIL, LLC Document Date and Location Second Amended and Restated Loan and Security Agreement dated 3/21/11 (Exhibit 10.1 to 8-K filed 3/24/11).

First Amendment to Second Amended and Restated Loan and Security Agreement dated 10/25/12 (Exhibit 10.1 to 8-K filed 10/31/12). Second Amendment to Second Amended and Restated Loan and Security Agreement dated 12/12/13 (Exhibit 10.1 to 8-K filed 12/13/13). Commitment Increase Acknowledgement Letter dated 8/28/15 (Exhibit 10.1 to 8-K filed 9/2/15). Commitment Increase Acknowledgement Letter dated 11/17/15 (Exhibit 10.1 to 8-K filed 11/18/15).

Maturity Date Dec. 12, 2018 Description of Debt $830 Mil. senior secured revolving credit facility subject to a borrowing base consisting of stated percentages of eligible inventory, real

estate (excluding real estate subject to mortgages) and credit card receivables. Amount ($ Mil.) Tranche A Revolver Loan: $730

Tranche A-1 Revolver Loan: $100 Ranking Senior secured. Security Secured by a first-priority lien on substantially all of the current and future assets of the borrowers and the other obligors, including,

but not limited to, inventory, general intangibles, trademarks, equipment, certain real estate and proceeds from any of the foregoing, subject to certain exceptions and permitted liens. The borrowing entities are several of the company’s operating subsidiaries, including The Bon-Ton Department Stores, Inc., and these entities will be jointly and severally liable.

Guarantee Guaranteed by the parent (The Bon-Ton Stores, Inc.) and other nonborrowing entities. Financial Covenants Minimum Excess Availability An amount greater than or equal to the greater of (i) 10% of the lesser of: (x) the total commitments and (y) the borrowing base and

(ii) $50 Mil. Debt Restrictions Debt Incurrence Coverage Debt Ratio: None.

Notable Permitted Debt Incurrence: (1) Purchase Money debt of $30 Mil. (2) Debt that is not secured by a lien and the principal amount does not exceed, in the aggregate at any time (x) $10 Mil. minus (y) the then outstanding principal amount of permitted purchase Money debt in excess of $25 Mil.; (3) junior lien debt up to $100 Mil., provided that (i) final maturity, scheduled amortization or mandatory prepayments of the new junior lien debt shall be set 60 days beyond the existing loans’ termination date; (ii) 100% of the proceeds from the new junior lien debt issuance should be applied to repay the existing loans; (iii) no EoD; (iv) same obligors as the existing loans; (v) new intercreditor agreement shall be in place; (4) convertible note debt in an aggregate principal amount not to exceed $100 Mil.; provided that (i) final maturity, scheduled amortization or mandatory prepayments of the new convertible note debt shall be set 91 days beyond the existing loans’ termination date; (ii) 100% of the proceeds from the new debt issuance should be applied to repay the existing loans; (iii) no EoD; (5) refinancing debt: the company can issue up to $600 Mil. in debt with respect to refinancing the $510 Mil. unsecured debt due March 2014), and up to $260 Mil. in debt with respect to refinancing the mortgage loan debt.

Limitation on Liens Liens securing the junior lien debt are permitted. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related

covenants. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 50% of voting stock and constitutes an EoD. M&A, Investments Restriction Acquisitions permitted provided pro forma excess availability for the upcoming six-month period is ≥ 15% of the lesser of the

aggregate commitments and the aggregate borrowing base, and consolidated fixed charge coverage ratio ≥ 1.0x. If pro forma excess availability for six months remains ≥ 30%, no fixed-charge coverage test is required.

Sale of Assets Restriction As long as no EoD has occurred, the company may sell equipment (a) in the normal course of business and (b) worth $1 Mil. or less, up to a total of $5 Mil. per year. In addition, the company may sell unpledged real estate without limit and pledged real estate as long as the proceeds are used to repay the loan.

Restricted Payments Restricted Payments (RP) RP Basket: None.

Notable Permitted RPs: 1) Dividends may not exceed $10 Mil. in any year or $30 Mil. for the term of the agreement, unless pro forma excess availability is ≥ 17.5% of the lesser of the aggregate commitments and the aggregate borrowing base, and pro forma consolidated fixed-charge coverage ratio ≥ 1.1x. If pro forma excess availability for six months remains ≥ 35%, no fixed-charge coverage test is required ; 2) prepayment or retirement of senior notes and mortgage loan debt permitted provided pro forma excess availability is ≥ 15.0% of the lesser of the aggregate commitments and the aggregate borrowing base, and pro forma consolidated fixed-charge coverage ratio ≥ 1.0x. If pro forma excess availability for six months remains ≥ 30%, no fixed-charge coverage test is required.

Other Cross-Default Yes. Cross-Acceleration Yes. MAC Clause Exists as precedent condition of an EoD. Equity Cure None. Covenant Suspension None. Required Lenders/Voting Rights > 50% of total commitments

EoD – Event of default. MAC − Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/878079/000095012311028336/c14483exv10w1.htm


http://www.sec.gov/Archives/edgar/data/878079/000115752313005767/a50768305ex10_1.htm



Leveraged Finance


Bank Agreement Covenant Summary The Bon-Ton Department Stores, Inc. (Continued) Financial Covenants Maintenance Incurrence Leverage (Maximum) Consolidated Net Leverage: None. Senior Secured Leverage: None. Coverage (Minimum) Interest Coverage: None. Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment None. Amortization Schedule None. Callability/Optional Prepayment None. Pricing Pricing Grid Availability Percentage Applicable Rate If facility availability > 60% Tranche A = LIBOR + 1.50% or Base Rate +0.50% Tranche A-1 = LIBOR + 3.25% or Base Rate + 2.25% If facility availability ≤ 60% but > 30% Tranche A = LIBOR + 1.75% or Base Rate + 0.75% Tranche A-1 = LIBOR + 3.50% or Base Rate + 2.50% If facility availability ≤ 30% Tranche A = LIBOR + 2.00% or Base Rate + 1.00% Tranche A-1 = LIBOR + 3.75% or Base Rate + 2.75% Commitment fee of 0.25%.


Leveraged Finance


Appendix C

Bond Covenant Summary — The Bon-Ton Department Stores, Inc. Overview Issuer The Bon-Ton Department Stores, Inc. The Bon-Ton Department Stores, Inc. Document Date and Location Indenture dated 7/9/12 (Exhibit 4.1 to 8K filed 7/13/12)

Supplemental Indenture dated 7/9/12 (Exhibit 4.3 to 8-K filed 7/13/12) Indenture dated 5/28/13 (Exhibit 4.1 to 8-K filed 6/3/13)

Description of Debt 10.625% second lien senior secured notes 8.000% second lien senior secured notes Maturity Date July 15, 2017 June 15, 2021 Original Issue/Outstanding $330 Mil./$57.3 Mil. $350 Mil./$350 Mil. Ranking Senior Senior Security Second lien secured. Second lien secured. Guarantee Guaranteed by the parent (The Bon-Ton Stores, Inc.) and all the subsidiaries that provide guarantees under the credit agreement

of the revolving credit facility. Debt Restrictions Debt Incurrence Coverage Debt Ratio: Fixed-charge coverage ≥ 2.0x on a pro forma basis. Notable Permitted Debt Incurrence: 1) Incurrence by the

Company or any Guarantor under Credit Facilities, in an aggregate principal amount at any one time outstanding not to exceed the greater of (x) $800 Mil. and (y) the Borrowing Base on such date of Incurrence; 2) capital lease obligations up to the greater of $40 Mil. and 1.75% of total assets; 3) general all-purpose indebtedness not to exceed $50 Mil.

Notable Permitted Debt Incurrence: 1) Incurrence by the Company or any Guarantor under Credit Facilities, in an aggregate principal amount at any one time outstanding not to exceed the greater of (x) $800 Mil. and (y) the Borrowing Base on such date of Incurrence; 2) capital lease obligations up to the greater of $50 Mil. and 3.0% of total assets; 3) general all-purpose indebtedness not to exceed the greater of $75 Mil. or 4.5% of total assets.

Limitation on Liens Permitted liens include liens related to the bank facility (up to the greater of $800 Mil. and borrowing base) and mortgage loan facility; liens securing permitted refinancing debt; capital leases up to $40 Mil.; miscellaneous $50 Mil.; general carveout of $25 Mil.

Permitted liens include liens related to the bank facility (up to the greater of $800 Mil. and borrowing base) and mortgage loan facility plus $40 Mil. of purchase money financing plus $50 Mil. of other permitted indebtedness plus $50 Mil. of capital leases plus $75 Mil. of miscellaneous plus general carveout of $35 Mil.

Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 50% of voting stock. There is a CoC put at 101. M&A, Investments Restriction General carveout of $25 Mil. for investments. Sale of Assets Restriction Asset sale proceeds in excess of $25 Mil. that are not used to repay secured debt or purchase replacement assets within one year

must be used to offer to repurchase a like amount of the notes at par. Restricted Payments Restricted Payments (RP) RP Basket: Cumulative sum of: 1) 50% of net income, plus 2) 100% cash equity proceeds, plus 3) other customary items; subject

to Fixed-Charge Coverage Ratio ≥ 2.0. Notable Permitted RPs: 1) Dividend to parent company not to

exceed $0.24/share per year; 2) general all-purpose payment not to exceed $40 Mil.

Notable Permitted RPs: 1) Dividend to parent company not to exceed $0.40/share per year; 2) general all-purpose payment not to exceed $75 Mil.

Other Cross-Default Yes. Yes. Cross-Acceleration Yes, exceeding $25 Mil. Yes, exceeding $50 Mil. MAC Clause None. Equity Clawback None. Max. 35% of the issue can be redeemed @108.000%

with proceeds from an IPO on or before 6/15/16. Callability Any time at par. Redeemable on or after 6/15/16 at the redemption

price below 2016 106.000% 2017 104.000% 2018 102.000% 2019+ 100.000%

MAC − Material adverse change. Source: Company filings, Fitch Ratings.





Leveraged Finance


Appendix D

Financial Summary — The Bon-Ton Stores, Inc.




LTM Ended


Operating EBITDAa 175.4 173.2 38.0 104.3 169.6 8.4 5.2 28.9 103.0 145.4 4.9 5.7 6.4 120.1 Operating EBITDA Margin (%) 5.9 5.8 5.7 11.2 6.0 1.3 0.9 4.4 10.7 5.2 0.8 1.0 1.0 4.3 FFO Return on Adjusted Capital (%)b 16.9 16.9 16.0 14.8 14.8 14.3 13.8 11.9 12.4 12.4 12.8 11.9 11.1 11.1 FCF Margin (%) 1.0 (0.2) (14.2) 13.5 1.4 (5.2) (2.1) (19.6) 13.0 (1.7) (6.9) 0.9 (27.4) (3.2)

Coverages (x) FFO Interest Coverage 2.3 2.5 2.3 6.0 2.4 0.6 0.0 1.3 6.1 2.0 1.1 (1.2) 1.3 1.9

Operating EBITDA/ Gross Interest Expense 2.0 2.1 2.3 6.6 2.5 0.5 0.3 1.9 6.6 2.4 0.3 0.4 0.4 1.9 FFO Fixed-Charge Coverage 1.6 1.7 1.6 3.1 1.6 0.8 0.6 1.1 3.1 1.4 1.0 0.1 1.1 1.4 FCF Debt Service Coverageb 1.2 0.5 1.3 1.4 1.4 1.0 0.7 0.2 0.2 0.2 0.0 0.1 (0.2) (0.2) Cash Flow from Operations/Capex 1.5 1.0 (2.7) 8.7 1.6 (1.0) 0.5 (3.9) 5.8 0.5 (0.7) 1.3 (6.6) 0.1

Leverage (x)b Long-Term Secured Debt/

Operating EBITDA 2.0 3.7 4.9 4.7 4.7 5.2 5.5 6.6 5.9 5.9 4.9 5.2 7.5 7.5 Long-Term Secured Debt/FFO 3.0 5.3 7.9 8.5 8.5 9.4 10.7 15.8 13.8 13.8 10.0 14.2 16.9 16.9 Total Debt with Equity Credit/ Operating EBITDA 5.0 5.2 5.3 5.1 5.1 5.6 5.8 7.0 6.2 6.2 6.7 6.9 9.5 9.5 FFO-Adjusted Leverage 5.5 5.5 6.1 6.2 6.2 6.6 7.0 8.2 7.6 7.6 7.6 8.4 9.1 9.1 Total Adjusted Debt/Operating EBITDAR 6.1 6.2 6.1 6.1 6.1 6.4 6.6 7.4 6.9 6.9 7.2 7.3 8.9 8.9 FCF/Total Adjusted Debt (%) 1.8 (0.3) 2.4 2.5 2.5 0.7 (0.8) (2.7) (3.0) (3.0) (3.6) (2.5) (4.8) (4.8)

Balance Sheet Short-Term Debt 12.4 79.8 11.1 11.2 11.2 10.8 11.0 11.2 10.7 10.7 213.7 109.0 108.3 108.3

Long-Term Senior Secured Debt 350.3 634.9 931.8 804.4 804.4 844.1 852.4 971.6 851.0 851.0 698.0 739.4 902.6 902.6 Long-Term Senior Unsecured Debt 520.7 186.5 49.6 49.0 49.0 47.7 46.7 46.0 45.0 45.0 43.6 129.5 128.1 128.1 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 883.4 901.2 992.5 864.5 864.5 902.6 910.1 1,028.8 906.7 906.7 955.3 977.9 1,139.0 1,139.0 Off-Balance Sheet Debtc 744.1 721.4 710.0 710.0 710.0 707.0 707.0 707.0 707.0 707.0 707.0 707.0 707.0 707.0 Total Adjusted Debt with Equity Credit 1,627.5 1,622.5 1,702.5 1,574.5 1,574.5 1,609.6 1,617.1 1,735.8 1,613.7 1,613.7 1,662.3 1,684.9 1,846.0 1,846.0

Cash Flow Funds From Operations 114.9 120.5 22.1 79.3 94.6 (6.6) (15.2) 3.9 79.4 61.6 1.8 (33.2) 5.3 53.3

Change in Working Capital (15.1) (47.3) (90.4) 64.1 25.4 (9.2) 25.3 (105.5) 74.4 (15.0) (19.6) 62.0 (157.0) (40.2) Cash Flow from Operations 99.8 73.3 (68.3) 143.5 120.1 (15.8) 10.1 (101.5) 153.8 46.6 (17.8) 28.8 (151.7) 13.1 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (67.2) (73.8) (25.3) (16.6) (77.3) (15.4) (22.2) (26.3) (26.7) (90.7) (24.4) (22.9) (23.1) (97.2) Common Dividends (2.9) (4.9) (1.0) (1.0) (3.0) (1.0) (0.0) (1.0) (2.0) (4.0) (1.0) (1.0) (1.0) (5.0) FCF 29.7 (5.4) (94.6) 125.9 39.8 (32.2) (12.1) (128.8) 125.1 (48.0) (43.3) 4.9 (175.8) (89.1) Net Acquisitions and Divestitures 2.8 8.3 0.0 0.1 1.3 5.0 0.0 0.3 0.1 5.3 — 84.1 1.2 85.3 Net Debt Proceeds (32.2) 16.7 89.0 (128.0) (38.0) 38.0 7.5 118.7 (122.1) 42.1 48.6 (70.4) 161.1 17.2 Net Equity Proceeds 0.4 0.5 — — 0.6 — — 0.0 — 0.0 0.5 — — 0.5 Other (Investing and Financing) (2.7) (26.5) 5.6 1.0 (4.6) (9.6) 4.1 9.6 (1.8) 2.3 (5.8) (6.3) 14.3 0.3 Total Change in Cash (2.1) (6.3) (0.1) (1.0) (0.9) 1.2 (0.5) (0.2) 1.2 1.7 (0.0) 12.2 0.7 14.2 Ending Cash and Securities Balance 14.3 7.9 8.1 7.1 7.1 8.2 7.7 7.5 8.8 8.8 8.7 20.9 21.7 21.7 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — The Bon-Ton Stores, Inc. (Continued)




LTM Ended

($ Mil.) 1/28/12 2/2/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Income Statement

Revenue 2,953.5 2,978.8 666.6 934.6 2,834.1 622.5 578.1 658.8 963.5 2,822.9 627.2 571.0 640.9 2,802.6 Revenue Growth (%) (3.1) 0.9 (2.4) (9.6) (4.9) (5.9) 1.3 (1.2) 3.1 (0.4) 0.8 (1.2) (2.7) 0.3 Operating EBIT 75.6 80.3 15.7 82.5 79.2 (14.4) (20.0) 5.7 79.4 50.7 (18.2) (19.5) (17.4) 24.3 Gross Interest Expense 89.9 82.8 16.5 15.8 68.6 15.3 15.4 15.5 15.5 61.7 15.2 15.2 15.8 61.7

Sector-Specific Data Comparable Store Sales (%)d (2.8) 0.5 (2.8) (7.3) (4.2) (5.8) 1.6 0.8 4.3 0.2 0.8 (1.3) (2.6) (1.0)

No. of Stores 272 271 273 270 270 271 273 273 270 270 270 270 270 270 Gross Margin (%) 36.0 35.8 36.6 36.3 36.2 35.3 36.6 36.3 35.0 35.7 33.8 36.8 33.4 34.7 SG&A/Revenues (%) 35.7 35.1 36.5 29.4 35.6 40.1 42.8 37.9 28.7 36.3 39.4 43.2 39.0 36.4 Operating EBIT Margin (%) 2.6 2.7 2.4 8.8 2.8 (2.3) (3.5) 0.9 8.2 1.8 (2.9) (3.4) (2.7) 0.9 Operating EBITDAR 268.4 263.4 60.2 126.4 258.4 30.5 27.3 51.0 125.0 233.8 27.0 27.8 28.5 208.4 Operating EBITDAR Margin (%) 9.1 8.8 9.0 13.5 9.1 4.9 4.7 7.7 13.0 8.3 4.3 4.9 4.5 7.4 Operating EBITDAR/(Interest + Rent) (x)b 1.5 1.5 1.6 3.3 1.6 0.8 0.7 1.4 3.3 1.6 0.7 0.7 0.8 1.4 Inventory Turnover (x)b 2.7 2.6 2.0 2.4 2.4 2.4 2.4 1.8 2.5 2.5 2.5 2.4 1.8 1.8 Accounts Payable Turnover (x)b 9.7 9.4 5.1 9.0 9.0 9.3 7.4 4.8 8.7 8.7 9.2 7.4 4.8 4.8 Return on Invested Capital (%)b 9.6 9.8 10.7 9.9 9.9 9.3 9.1 8.0 8.2 8.2 7.9 8.0 6.2 6.2 Return on Assets (%)b (0.7) (1.3) 0.5 (0.2) (0.2) (0.5) (0.5) (0.9) (0.4) (0.4) (0.6) (0.8) (1.9) (1.9) Capex/Depreciation (%)b 67.4 79.3 113.5 76.0 85.5 67.9 88.2 113.5 113.6 95.8 105.7 90.7 97.0 101.5 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

Burlington Stores, Inc. Credit Profile

Credit Profile Summary Positive Operating Trends: Burlington Stores, Inc.’s (Burlington) comparable store sales (comps) have been on a positive trajectory since 2011, with comps approaching 5% in 2013 and 2014, and projected around 2% in 2015. EBITDA has grown at a CAGR of 6.4% over the last five years to an LTM level of $470 million. Revenues have grown over 31% to $5.1 billion and EBITDA margin has expanded by 40 bps to 9.3% over this time frame on management’s merchandising initiatives, strong inventory management and square footage expansion.

Sustained 4%–5% Revenue Growth: Fitch Ratings expects Burlington to sustain top-line growth in the midsingle-digit range on 2% comps growth and a 2%–3% contribution from new stores. Comps growth is predicated on ongoing improvements to the customer experience, merchandise category expansions — including home — and technology-enhanced inventory management and forecasting. Fixed-cost leverage resulting from sales growth should allow EBITDA margin to improve 30 bps–50 bps over the next 24–36 months from the expected 9.7% level in 2015.

Off-Price Model Well Positioned: Burlington has a hybrid business model, coupling a traditional department store’s broad merchandise offering with an off-price retailer’s approach to providing low prices on branded merchandise. The company’s product assortment and price positioning are a good fit with the high/low bifurcation in apparel, as consumers hunt for value in either sticker price or brand attributes. Burlington operates 566 stores as of Oct. 31, 2015, and the company expects to open 25 net new units annually.

Improving Credit Metrics: Lease-adjusted leverage was 4.6x as of Oct. 31, 2015, versus 4.7x in 2014 and 5.9x in 2011. As of third-quarter 2015, management targeted debt/EBITDA of 2.5x, which equates to Fitch-defined leverage of 4.4x. Based on updated management guidance following the holiday sales period, Fitch expects leverage modestly higher at 4.5x. Absent any debt-financed share buybacks, Fitch forecasts leverage improving to the low-4x range over the next two to three years on EBITDA growth, in line with management guidance for continued leverage reduction.

Steady FCF and Liquidity: Fitch expects FCF to increase to approximately $190 million in 2015 from $81 million in 2014 on higher EBITDA and reduced interest expense (lower debt). FCF is expected to trend in the $165 million–$195 million range over the next two to three years. Fitch assumes FCF will be used for share repurchases, including approximately $200 million purchased in 2015. In addition to modest cash on its balance sheet, Burlington had $279 million available under its asset-based revolver (ABL) as of Oct. 31, 2015.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a consistent trend of positive comps and EBITDA growth, and a public commitment to target debt/EBITDA in the low-2x range, which equates to the low-4x range on an adjusted debt/EBITDAR basis.

Negative Drivers: Negative credit profile drivers would include weakening operating trends and shareholder-friendly activity that result in leverage returning to the low- to mid-5x level.



Credit Opinion Burlington Stores, Inc. carries a ‘bb–*/ Positive’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data Burlington Stores, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 4,849.6 5,077.7 EBITDA 434.2 470.2 EBITDA Margin (%) 9.0 9.3 FCF 81.4 107.4 Total Adjusted Debt 3,246.8 3,410.2 Total Adjusted Debt/EBITDAR (x) 4.8 4.6 EBITDAR/ (Interest + Rent) (x) 2.1 2.3 Comparable Store Sales (%)a 4.9 3.0 Real Estate Owned (%) 7.3 7.3 aComparable store sales for the LTM period reflect the performance for the nine months ended Oct. 31, 2015.





Leveraged Finance


Business Profile Assessment Burlington is a national off-price retailer of high-quality branded apparel at everyday low prices. The company opened its first store in 1972, selling primarily coats and outerwear. Burlington has since expanded its store base to 566 units in 45 states and significantly diversified its merchandise offering. The company is focused on increasing its sales of women’s apparel, shoes and accessories, and its home décor and gifts business, which together account for approximately 56% of sales.

The core customer is female, 25–49 years of age, with an annual income of $25,000–$75,000. Burlington’s core customer is price conscious and value oriented, but enjoys style and nationally recognized brands.

The off-price format, typically offering 60%–70% off department and specialty store regular prices, has held up well over the last few years as consumers continue to seek value in a slow-growth retail spending environment. The availability of trend-right and quality apparel, coupled with a reduction to the negative stigma of shopping off-price, has benefited the sector. High levels of inventory at apparel retail chains exiting 2015 should benefit Burlington and its peers as retailers seek liquidation opportunities. Burlington has increased its level of pack-and-hold inventory, which allows it to buy merchandise from full-price retailers at the end of a season and hold the inventory until the next appropriate season. For example, winter coats would be purchased at the end of the winter selling season and held in warehouse until the following fall.

Over the past several years, Burlington has focused on purchasing less pre-season merchandise and doing more in-season and opportunistic buys, and flowing goods more frequently into the stores. Burlington purchases a portion of its apparel and apparel-related merchandise through opportunistic purchases created by manufacturer overruns and canceled orders, both during and at the end of a season. These buys allow the company to get in-season goods into stores at lower prices than traditional department store merchandise. This merchandising strategy has helped drive traffic growth and improve gross margin through more efficient inventory management.

Fitch Base Case Assumptions — Burlington Stores, Inc. ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 4,850 5,133 5,392 5,657 — Revenue Growth (%) 8.7 5.8 5.1 4.9 — Comparable Store Sales (%) 4.9 2.1 2.0 2.0 — EBITDA 434 471 511 539 — EBITDA Margin (%) 9.0 9.2 9.5 9.6 — Working Capital Change 1 7 (19) (12) — Cash Flow from Operations 302 349 323 349 Reduction in 2016 due

to tax loss carryforward in 2015.

Capex (221) (160) (155) (165) — Dividends — — — — — FCF 81 189 168 184 — Share Repurchases (4) (201) (165) (180) — Total Debt 1,250 1,230 1,230 1,230 — Total Adjusted Debta 3,247 3,307 3,390 3,476 — Adjusted Debt/EBITDAR (x) 4.7 4.5 4.3 4.2 — aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


A Smaller Player in a Crowded and Competitive Sector Burlington’s scale — with LTM sales of $5.1 billion, EBITDA of $470 million and a current base of 566 stores — is small relative to the two leading off-price retailers. TJX Companies, Inc. (TJX, composed of T.J. Maxx, Marshalls, HomeGoods and international operations) generates $30 billion in revenue on a store base of approximately 3,500 units with a global reach, while Ross Stores, Inc. (Ross) generates close to $12 billion in revenue on 1,488 stores. Both Ross and TJX offer family apparel and home fashions comparable to the assortment at Burlington. The broader set of retail competitors include the mid-tier and value-oriented department stores such as Macy’s Inc., Kohl’s Corporation and J. C. Penney Company, Inc.; specialty retailers such as The Gap Inc. (including its Gap and Old Navy divisions) and Babies ‘R’ Us; discounters such as Target Corp. and Wal-Mart Stores, Inc.; and warehouse clubs such as Costco Wholesale Corporation and Sam’s Clubs.

Burlington’s comps were negative the first five years following its LBO by Bain Capital in 2006, with sales and EBITDA growth driven by store additions. However, beginning in 2011, comps have been positive on an annual basis, and at nearly 5% in 2013 and 2014. Positive comps have been driven by improved merchandise assortment and in-store execution. The company has invested in technology to sharpen its inventory forecasting and better match assortments to customer needs. Management is also enhancing the in-store experience through better signage, lighting, merchandising and improved associate-customer engagement. Fitch expects these initiatives, plus a supportive climate for off-price retail, to allow Burlington to sustain comps in the 2% range over the next 24–36 months.

Burlington’s Store Formatsa Concept

No. of Stores

Avg. Size (Sq. Ft.) Merchandise Focus

Burlington Coat Factory 549 80,000 Value-priced women’s, men’s, and children’s apparel and accessories. Most stores include linens, bath items, gifts, luggage, family footwear, baby apparel and furniture.

MJM Designer Shoes 13 28,000 Moderate to higher priced designer and fashion men’s, women’s and children’s footwear, handbags and other accessories.

Cohoes Fashions 2 45,000 Broad selection of luxury and designer-label merchandise for men and women, decorative gifts and home furnishings.

Super Baby Depot 2 25,000 Apparel, furniture and accessories for newborns, infants and toddlers. aAs of Oct. 31, 2015. Source: Company filings, Fitch Ratings.

Revenue Contribution from Comps and New Stores ($ Mil.) 2008 2009 2010 2011 2012 2013 2014 Revenue 3,393 3,542 3,670 3,854 4,131 4,428 4,815 YoY Growth (%) (0.3) 4.4 3.6 5.0 7.2 7.2 8.7 Comps (5.2) (2.5) (2.0) 0.7 1.2 4.7 4.9 No. of Stores 397 433 462 477 500 521 542 YoY Store Growth 18 36 29 15 23 21 21 % YoY Growth 4.7 9.1 6.7 3.2 4.8 4.2 4.0

Total Sq Ft (Mil.) 31.8 34.6 36.8 38.2 40.0 41.7 43.1 % YoY Sq Ft Growth 4.7 9.1 6.2 3.7 4.8 4.2 3.4

Capex 96 130 132 153 167 168 221 % Capex of Revenue 2.8 3.7 3.6 4.0 4.0 3.8 4.6

Comps – Comparable store sales. YoY – Year-over-year. Sq Ft – Square feet. Source: Company filings, Fitch Ratings.

Leveraged Finance


In addition to positive comps, Fitch expects new store growth will add another 2%–3% to annual sales growth. Burlington has grown its store base at an average rate of 20 units annually since Bain acquired the company in 2006 (Bain no longer has ownership in the company — see Bain Exits Investment Through Partial IPO and Secondary Offerings section). The company expects to open approximately 25 net new stores annually, with a long-term goal of growing its footprint to 1,000 stores to increase scale against larger competitors. This level of store growth is somewhat unique in the mature retail sector, and is mostly supported by the strong growth momentum associated with the off-price concept at the expense of traditional mid-tier department and specialty apparel stores.

The new stores are planned to be 50,000 square feet (sq ft)–60,000 sq ft, versus the average 78,000-sq ft stores Burlington currently operates. The company also continues to devote capex into existing store remodels.

While the business has shown a marked improvement over the last few years, operating metrics such as sales productivity, as measured by sales per square foot, and EBITDA margin remain well below its main competitors, as shown in the Off-Price Retailers’ Operating Trends table on the next page.

2016 Outlook Fitch expects Burlington to sustain top-line growth in the midsingle-digit range on 2% comps growth and 2%–3% contribution from new stores, and expects EBITDA margin to be modestly better over the next 24–36 months.

Burlington’s lease-adjusted leverage is expected to be 4.5x at the end of 2015, versus 4.8x in 2014, and well below the 2011 level of 5.9x, due to higher EBITDA and debt paydown.

Absent any debt-financed share buybacks, Fitch forecasts leverage improving to the low-4x range over the next two to three years on EBITDA growth, in line with management guidance for continued leverage reduction.

FCF in 2015 is expected to be $189 million, above the $81 million level in 2014 due to higher EBITDA and lower interest expense resulting from a $200 million debt paydown in 2014. Fitch anticipates Burlington will generate annual FCF of $165 million–$195 million in the next two to three years. The company began a share repurchase program in 2015, purchasing approximately $200 million of equity through Jan. 11, 2016. Fitch does not expect the company to issue debt for share repurchases given FCF generation, but does not expect significant debt paydown over the next several years.

Leveraged Finance


Off-Price Retailers’ Operating Trends ($ Mil.) 2008 2009 2010 2011 2012 2013 2014

LTM 10/31/15

Revenues Burlington 3,542 3,523 3,670 3,854 4,131 4,428 4,815 5,044

TJX 19,000 20,288 21,942 23,191 25,878 27,423 29,078 30,287 Ross 6,486 7,184 7,866 8,608 9,721 10,230 11,042 11,722 Nordstrom Rack 1,241 1,440 1,720 2,045 2,445 2,738 3,215 3,472

Revenues Growth (%)

Burlington 4.4 (0.5) 4.2 5.0 7.2 7.2 8.7 7.4

TJX 3.6 6.8 8.2 5.7 11.6 6.0 6.0 6.0 Ross 8.6 10.8 9.5 9.4 12.9 5.2 7.9 9.0 Nordstrom Rack — 16.0 19.4 18.9 19.6 12.0 17.4 12.6

Comp Sales (%)a

Burlington (5.1) (4.8) (0.2) 0.7 1.2 4.7 4.9 3.0

TJX 1.0 6.0 4.0 4.0 7.0 3.0 2.0 5.0 Ross 2.0 6.0 5.0 5.0 6.0 3.0 3.0 4.0 Nordstrom Rack 3.1 2.5 0.7 3.7 7.4 2.7 3.8 (0.2)

Annual Sales per Sq Ft ($)

Burlington 111 102 100 101 103 106 114 —

TJX 309 320 332 345 370 375 380 — Ross 298 311 324 338 355 362 372 — Nordstrom Rack 540 514 508 545 568 553 552 —

Store Count

Burlington 433 442 462 477 500 521 542 566

TJX 2,652 2,743 2,859 2,905 3,050 3,219 3,395 3,559 Ross 956 1,005 1,055 1,125 1,199 1,276 1,362 1,488 Nordstrom Rack 60 72 89 108 123 143 176 194

EBIT

Burlington 126 147 180 193 176 225 267 305

TJX 1,465 1,991 2,203 2,447 3,107 3,351 3,590 3,758 Ross 495 726 907 1,063 1,272 1,343 1,488 1,610

EBITDA

Burlington 296 303 327 346 343 393 434 470 TJX 1,888 2,481 2,709 2,997 3,680 3,975 4,284 4,363 Ross 660 911 1,104 1,264 1,506 1,596 1,721 1,875

EBITDA Growth (%)

Burlington 9.5 2.3 7.9 5.7 (0.8) 14.8 10.4 10.8 TJX 1.2 31.5 9.2 10.6 22.8 8.0 7.7 5.1 Ross 14.3 38.1 21.2 14.5 19.2 6.0 7.9 9.4 EBITDA Margin (%) Burlington 8.4 8.6 8.9 9.0 8.3 8.9 9.0 9.3 TJX 9.9 12.2 12.3 12.9 14.2 14.5 14.7 14.4 Ross 10.2 12.7 14.0 14.7 15.5 15.6 15.6 16.0 aLTM comparable store sales reflects the nine months ended Oct. 31, 2015. Source: Company filings, Fitch Ratings.

Leveraged Finance


Liquidity and Debt Structure Burlington had $29 million in cash and $279 million available under its $600 million ABL revolver as of Oct. 31, 2015. The $600 million revolving credit facility has a first lien on inventory and accounts receivable, and a second lien on real estate, property and equipment.

The $1.2 billion Term B-3 loans are secured by a first lien on real estate, favorable leases, machinery and equipment; and a second lien on inventory and receivables. The term loan does not contain any maintenance financial covenants.

In May 2015, the company elected to make a $50 million prepayment on the term loan, which offset the mandatory quarterly payments due through May 1, 2021. The loan requires 50% excess cash flow sweep as long as leverage (essentially total debt/EBITDA) is more than 4.0x. Restricted payments are not allowed as long as leverage is more than 3.5x. Debt/EBITDA was about 2.9x at the end of 2014, and Fitch expects it to trend down to 2.6x at the end of 2015.

Capital Structure ($ Mil., At Oct. 31, 2015)

Description Amount (%) Secured Debt

$600 Mil. ABL Revolver due 8/13/19 276.2 19.5 Term B-3 Loans due 8/31/21 1,112.4 78.7 Total Secured Debt 1,388.6 98.2

Capital Lease Obligations 25.2 1.8 Total Debt 1,413.8 100.0


Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015)

2016 11.1 2017 11.1 2018 11.1 2019 11.1 2020 11.1 Thereafter 1,054.0

Note: Excludes borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

Liquidity ($ Mil., At Oct. 31, 2015)

Cash 28.8 Revolver Availability 278.2 Total 307.0


Leveraged Finance


Bain Exits Majority Position Through Partial IPO and Secondary Offerings Burlington was acquired by Bain in 2006 for $2.1 billion, reflecting an enterprise value/EBITDA multiple of just over 7.0x. This value was at least two turns lower than most retail LBOs at the time.

Burlington pursued a partial IPO in October 2013, with approximately $205 million in net proceeds. Following the IPO, Bain remained the majority shareholder, with a 74% interest in the company. As a result of two secondary offerings in May 2014 and December 2014, Bain reduced its ownership to 34%. The company closed another secondary offering in April 2015, in which Bain completely exited its investment in the company. Burlington received no proceeds from the offering. Approximately 98% of shares are held by the public and 2% is held by management.


Fitch has assigned ‘bb+*/rr1*’ to the senior secured revolver, indicating outstanding recovery prospects (91%–100%) in the event of default. The senior secured term loan has been assigned ‘bb–*/rr2*’, indicating superior recovery prospects (71%–90%).


Leveraged Finance


Appendix A

Organizational Structure — Burlington Stores, Inc.($ Mil., As of Oct. 31, 2015)

CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions. Source: Company filings, Fitch Ratings.

Burlington Stores, Inc.(Parent Holding Company)

CO — bb–*/Positive

Burlington Holdings, LLC

Management

2%

Operating Subsidiaries(Guarantor of All Debt at BCFWC)

Burlington Coat Factory Warehouse Corporation (BCFWC)

Burlington Holdings Finance, Inc. Burlington Coat Factory Investments Holdings, Inc.(Guarantor of All Debt at BCFWC)

CO — bb–*/Positive

Public Shareholders

98%

Debt Issue Amount CO$600 Mil. ABL Revolver due 8/13/19 276.2 bb+*/rr1*Senior Secured Term B-3 Loan due 8/31/21 1,112.4 bb–*/rr2*Total 1,388.6

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — Burlington Coat Factory Warehouse Corporation Overview Borrower Burlington Coat Factory Warehouse Corporation Document Date and Location Second Amended and Restated Credit Agreement dated 9/2/11 (Exhibit 10.1 to 8-K filed 9/9/11)

First Amendment to Second Amended and Restated Credit Agreement dated 8/13/2014 (Exhibit 10.2 to 8-K filed 8/18/14) Description of Debt Senior secured asset based revolving facility of up to $600 Mil. subject to a borrowing base equal to (i) 90% of eligible credit card

receivables plus (ii) 85% of appraised value of eligible inventory (net of inventory reserve), minus all availability reserves. Amount $600 Mil. Maturity Date Aug. 13, 2019 Ranking Senior secured Security Secured by a first lien on inventory and receivables; and a second lien on real estate, property and equipment. Guarantee Guaranteed by the borrower’s direct holding company (Burlington Coat Factory Investments Holdings, Inc. or Holdings) and all of the

borrower’s subsidiaries. Debt Restrictions Debt Incurrence Coverage Debt Ratio: Qualifying unsecured debt of any Loan Party as long as pro forma consolidated interest coverage ratio is

≥ 2.0x. Notable Permitted Debt Incurrence: 1) Purchase money debt in respect of financing the purchase, lease or improvement of property or equipment shall not exceed $75 Mil.; 2) indebtedness under Term Loan Financing Facility not to exceed the sum of a) $1.2 Bil. plus b) amount of any Incremental Term Loans; 3) subordinated debt when aggregated with the amount of Permitted Refinancing not to exceed $200 Mil.; 4) unsecured Indebtedness of Holdings not to exceed $100 Mil.; 5) qualifying secured debt of any Loan Party issued solely for cash consideration and net proceeds applied to prepayment of Term Obligations; 6) qualifying secured debt of any Loan Party as long as pro forma consolidated secured leverage ratio is ≤ 3.25x; 8) permitted real estate financings; 9) general unsecured debt not to exceed $150 Mil.

Limitation on Liens Liens securing new indebtedness permitted under debt incurrence covenant; general Liens (other than Liens on assets constituting ABL Priority Collateral) securing obligations in an amount not to exceed $75 Mil.

Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) A CoC is an event of default that can result in the termination of the facility commitments. It is defined as the permitted holders failing to

control a majority of the board of directors or to own 100% of the capital stock. A CoC is defined as a person or group owning at least 50% of the voting power of the company.

M&A, Investments Restriction Investments by any loan party to any other loan party not to exceed $75 Mil.; guarantees of indebtedness of nonloan party subsidiaries not to exceed $75 Mil.; additional investments not to exceed available amount (defined at the bottom of term loan agreement) if payment conditions (defined at the bottom of this page) are satisfied; general carveout of $75 Mil.

Sale of Assets Restriction Dispositions of inventory not in the ordinary course of business are permitted if at arm’s length and such store closures and related inventory dispositions shall not exceed 15% of store count at the beginning of such fiscal year; sales and transfers (including sale-leaseback transactions) of real estate of any loan party are permitted to the extent permitted by the term loan agreement, or if the term loan facility has been repaid in full, such sale or transfer shall be made for fair market value and at least 75% of the consideration shall be in cash; general carveout of $10 Mil.


Notable Permitted RP’s: 1) Repurchase of stock not to exceed $25 Mil. in any fiscal year; 2) payment to direct or indirect parent to declare and pay regular quarterly dividends on its common stock in an amount not to exceed 6% per year of the aggregate net cash proceeds of the initial public offering; 3) Restricted Payments to Burlington Stores, Inc. using solely a portion of the net proceeds of the Additional Term B-3 to fund Burlington Stores, Inc.’s repurchase or redemption, defeasance or other retirement of the Holdco Notes.

Prepayment of Debt 1) Prepayment of term loan facility or any other permitted indebtedness in an amount not to exceed $600 Mil. in aggregate with proceeds from equity issuance or capital contributions; 2) prepayment of term loan facility from any permitted refinancings thereof or any refinancing with the proceeds of qualifying secured or unsecured debt; 3) payments of principal and interest in respect of any Subordinated Indebtedness; 4) i) payments of principal and interest when due in respect of any permitted indebtedness; and ii) as long as payment conditions are satisfied, prepayment of permitted indebtedness; 5) as long as payment conditions are satisfied, payments or other distributions in an amount not to exceed the then available amount (defined in the term loan covenant summary) are permitted; 6) redemption of the Lead Borrower’s 10% unsecured Senior Notes Due 2019 on or about the First Amendment Effective Date; 7) prepayment of term loan facility is permitted as long as projected average excess availability during the six fiscal months following, after giving effect of such payment, will be no less than 15% of the then borrowing base.

Other Cross-Default Yes, exceeding $75 Mil. Cross-Acceleration No. MAC Clause None. Cash Dominion Event The company’s funds will be swept daily to reduce the borrowings outstanding under the ABL revolver if borrowings availability falls

below designated thresholds. This means either (a) the occurrence and continuance of any specified default, or (b) the borrower’s failure to maintain availability of at least the greater of $60 Mil. or 12.5% of the loan cap for five consecutive days.

Key Definitions Payment Conditions: with respect to a specified transaction or payment (a) no event of default exists or would arise therefrom; (b) pro forma availability will be equal to or greater than 15% of the loan cap (lesser of the total commitments or borrowing base) for each of the six fiscal months following, and (c) pro forma consolidated fixed-charge coverage ratio is not less than 1.0x.

Financial Covenants None. Pricing Level Average Daily Availability LIBOR (%) Prime Rate (%) I Equal to or greater than 50% of the Loan Cap 1.25 0.25% II Less than 50% of the Loan Cap 1.50 0.50

MAC – Material adverse change. ABL – Asset-based loan. Source: Company filings, Fitch Ratings.



Leveraged Finance


Appendix C

Term Loan Covenant Summary — Burlington Coat Factory Warehouse Corporation Overview Borrower Burlington Coat Factory Warehouse Corporation Document Date and Location Credit Agreement dated 2/24/11 (Exhibit 10.2 to 8-K filed 2/24/11)

Amendment No. 1 dated 5/16/12 (Exhibit 10.1 to 8-K filed 5/17/12) Amendment No. 2 dated 2/15/13 (Exhibit 10.1 to 8-K filed 2/21/13) Amendment No. 3 dated 5/17/13 (Exhibit 10.1 to 8-K filed 5/22/13) Amendment No. 4 dated 8/13/2014 (Exhibit 10.1 to 8-K filed 8/14/14)

Description of Debt Senior secured term loan (Term B-3 loan) Maturity Date Aug. 13, 2021 Amount $1,200 Mil. Ranking Senior secured Security Secured by a first lien on real estate, favorable leases, machinery and equipment; and a second lien on inventory and receivables. Guarantee Guaranteed by the borrower’s direct holding company (Burlington Coat Factory Investments Holdings, Inc.) and all of the borrower’s

subsidiaries. Debt Restrictions Debt Incurrence Coverage Debt Ratio: None.

Notable Permitted Debt Incurrence: 1) ABL revolver up to the greater of $900 Mil. and the borrowing base (at time incurred); 2) qualifying secured debt permitted provided that the borrower is compliance with the financial covenants on a pro forma basis and pro forma consolidated interest coverage is at least 2.0x; 3) debt of any loan party or any of its subsidiaries acquired pursuant to permitted acquisition is subject to a minimum consolidated interest coverage test of 2.0x; 4) purchase money debt in respect of financing the purchase, lease or improvement of property or equipment shall not exceed the greater of $75 Mil. and 3% of consolidated total assets; 5) permitted real estate financing; 6) indebtedness of any Restricted Subsidiary that is not a Loan Party not to exceed the greater of $25 Mil. and 1.0% of Consolidated Total Assets; 7) subordinated indebtedness in an amount, when aggregated with the amount of Permitted Refinancing not to exceed $200 Mil.; 8) indebtedness of (i) any Securitization Subsidiary arising under any Securitization Facility or (ii) the Borrower or any Restricted Subsidiary arising under any Receivables Facility shall not exceed $150 Mil.; 9) general carveout not to exceed the greater of $150 Mil. and 6% of Consolidated Total Assets.

Limitation on Liens General carveout not to exceed the greater of 1) $75 Mil. and 2) 3.0% of Consolidated Total Assets. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) A CoC is an event of default that can result in the termination of the facility commitments. It is defined as the permitted holders failing to

control a majority of the board of directors or to own 100% of the capital stock. A CoC is defined as a person or group owning at least 50% of the voting power of the company.

M&A, Investments Restriction 1) Investments by any loan party to any other loan party not to exceed greater of a) $125 Mil. and b) 5.0% of Consolidated Total Assets; 2) guarantees of indebtedness of nonloan party subsidiaries not to exceed greater of a) $125 Mil. and b) 5.0% of Consolidated Total Assets; 3) additional investments not to exceed Available Amount (defined at the bottom of this page); 4) as long as no Event of Default has occurred or would occur, on pro forma basis consolidated leverage ratio must be ≤3.5x; 5) investments made by a Loan Party or any Restricted Subsidiary in any joint venture or any Unrestricted Subsidiary not to exceed the greater of a) $25 Mil. and b) 1.0% consolidated total assets at any time; 6) general carveout not to exceed greater of a) $100 Mil. and b) 4.0% of Consolidated Total Assets.

Sale of Assets Restriction Dispositions of inventory not in the ordinary course of business are permitted if at arm’s length and such store closures and related inventory dispositions shall not exceed 15% of store count at the beginning of such fiscal year; sales and transfers (including sale-leaseback transactions) of real estate of any loan party are permitted to the extent permitted by the term loan agreement, or if the term loan facility has been repaid in full, such sale or transfer shall be made for fair market value and at least 85% of the consideration shall be in cash; general carveout of $10 Mil.

Restricted Payments Restricted Payments (RP) RP Basket: Cumulative sum of 1) 50% consolidated net income commencing second quarter of fiscal 2012 plus 2) 100% of the net

proceeds from an equity issuance and other adjustments; Consolidated interest coverage ratio must be ≥ 2.0x on a pro-forma basis. Notable Permitted RP’s: 1) Loan Parties and their Restricted Subsidiaries may make Restricted Payments constituting repurchases of Capital Stock in BCF Holdings, Burlington Stores, Inc. or any Restricted Subsidiary not to exceed $10 Mil., with max. carry-forward amount of $20 Mil. in any fiscal year; 2) general basket not to exceed greater of a) $50 Mil. and b) 2.0% of consolidated total assets. Special Condition: If (a) no Event of Default has occurred or would result therefrom and (b) the Consolidated Leverage Ratio as of the last day of the most recently ended Fiscal Quarter is ≤ 3.5x, any Loan Party or any Restricted Subsidiary may make any Restricted Payment.

Prepayment of Debt Payments of scheduled interest in respect of any subordinated indebtedness; prepayment of Specified Indebtedness from equity issuance or capital contributions or from any permitted refinancings thereof or any refinancing with the proceeds of qualifying secured or unsecured debt as permitted under debt incurrence covenant; payments of specified indebtedness by any Loan Party and any of its Restricted Subsidiaries given a) no Event of Default has occurred and consolidated interest coverage ratio must be ≥2.0x on pro forma basis or b) no Event of Default has occurred and consolidated leverage ratio must be ≤3.5x on pro forma basis; as long as payment conditions are satisfied, prepayment of senior notes and payments or other distributions in an amount not to exceed the then available amount are permitted.

Other Cross-Default Yes, exceeding $75 Mil. Cross-Acceleration No. MAC Clause None. Equity Cure None. Key Definitions Available Amount: Cumulative excess cash flow commencing from fiscal year ending Jan. 28, 2012, minus (a) excess cash flow

sweep required under the mandatory prepayment of term loan, plus (b) $366 Mil. (amount permitted by the definition of Available Amount prior to giving effect to Amendment No. 4), plus (c) capex and investments as permitted under investment covenant, and (d) payments in respect of senior notes, qualifying secured and unsecured debt as permitted under debt covenant and permitted refinancing thereof, and plus capital contributions (excluding proceeds constituting the cure amount).


http://www.sec.gov/Archives/edgar/data/718916/000119312511045577/dex102.htm





Leveraged Finance


Term Loan Covenant Summary — Burlington Coat Factory Warehouse Corporation Financial Covenants None.

Principal Repayments Mandatory/Tax Prepayment 50% excess cash flow, reduced to 25% if consolidated leverage is between 2.75x and 3.00x, 0% if leverage is below 2.75x. This payment offsets future mandatory quarterly payments.

Amortization Schedule 0.25% quarterly installments (1.0% annually) with the balance due upon maturity on Aug. 13, 2021. Callability/Optional Prepayment 1% premium on or prior to the first anniversary of closing.

Pricing

Coupon Type/Index Term B-3 LIBOR loan: L + 3.25% Term B-3 Prime Rate loan: Prime Rate + 2.25%


Leveraged Finance


Appendix D

Financial Summary — Burlington Stores, Inc.




LTM Ended

($ Mil.) 2/2/13 8/3/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Profitability Operating EBITDAa 347.8 51.6 64.3 196.8 393.4 93.6 59.8 74.0 206.7 434.2 102.4 77.2 83.9 470.2 Operating EBITDA Margin (%) 8.3 5.3 6.0 14.6 8.8 8.2 5.7 6.3 13.8 9.0 8.6 6.7 6.8 9.3 FFO Return on Adjusted Capital (%)b 18.9 20.3 9.6 18.3 20.6 20.3 19.2 18.4 17.4 19.9 18.9 19.2 22.3 22.3 FCF Margin (%) 6.8 (7.8) (32.6) 11.2 (4.8) 0.1 (4.2) (2.8) 10.5 1.7 (5.5) (1.5) 2.6 2.1 Coverages (x) FFO Interest Coverage 3.1 3.2 2.3 7.2 3.2 1.5 1.7 3.1 16.7 4.6 1.3 3.6 9.9 7.9 Operating EBITDA/ Gross Interest Expense 3.1 2.1 2.0 7.2 3.1 3.5 2.3 4.5 13.8 5.2 6.9 5.3 5.7 7.9 FFO Fixed-Charge Coverage 1.7 1.7 1.5 2.8 1.8 1.1 1.2 1.5 3.6 1.9 1.1 1.5 2.7 2.3 FCF Debt Service Coverageb 3.5 1.6 (1.2) (0.6) (0.5) (1.5) (1.2) 1.6 1.9 1.9 1.2 1.7 2.8 2.7 Cash Flow from Operations/Capex 2.7 (1.0) 0.7 4.3 1.7 1.0 0.1 0.5 3.8 1.4 (0.5) 0.5 1.5 1.5 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA 2.5 2.3 2.2 2.1 2.1 2.0 2.0 3.3 2.8 2.8 2.9 2.9 3.0 3.0 Long-Term Secured Debt/FFO 3.7 3.2 3.3 2.9 2.9 3.0 3.4 5.9 4.1 4.1 4.4 4.2 3.4 3.4 Total Debt with Equity Credit/ Operating EBITDA 3.8 3.5 4.4 3.6 3.6 3.4 3.3 3.4 2.9 2.9 3.0 2.9 3.0 3.0 FFO Adjusted Leverage 5.4 5.1 5.7 5.7 5.1 5.2 5.5 5.7 5.9 5.1 5.4 5.3 4.7 4.7 Total Adjusted Debt/ Operating EBITDAR 5.4 5.1 5.5 5.7 5.2 5.0 4.9 4.9 5.4 4.8 4.8 4.7 4.7 4.7 FCF/Total Adjusted Debt (%) 9.2 2.6 (7.6) (6.0) (6.6) (8.6) (7.5) 2.3 2.2 2.5 0.5 1.2 3.1 3.1 Balance Sheet Short-Term Debt 0.8 9.7 9.7 59.0 59.0 1.1 1.3 13.3 1.2 1.2 1.2 1.3 1.4 1.4 Long-Term Senior Secured Debt 863.1 862.0 860.3 828.8 828.8 825.4 825.8 1,383.1 1,223.7 1,223.7 1,290.8 1,324.5 1,387.2 1,387.2 Long-Term Senior Unsecured Debt 472.4 479.0 851.8 540.3 540.3 541.0 546.0 27.7 25.6 25.6 25.3 25.4 25.2 25.2 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 1,336.3 1,350.7 1,721.8 1,428.2 1,428.2 1,367.5 1,373.1 1,424.1 1,250.4 1,250.4 1,317.2 1,351.3 1,413.8 1,413.8 Off-Balance Sheet Debtc 1,740.8 1,740.8 1,740.8 2,145.6 1,842.0 1,842.0 1,842.0 1,842.0 2,459.6 1,996.4 1,996.4 1,996.4 1,996.4 1,996.4 Total Adjusted Debt with Equity Credit 3,077.1 3,091.5 3,462.5 3,573.8 3,270.2 3,209.5 3,215.1 3,266.1 3,710.0 3,246.8 3,313.6 3,347.7 3,410.2 3,410.2 Cash Flow Funds From Operations 234.1 55.1 41.5 169.8 285.1 12.0 17.8 35.0 236.1 300.9 3.7 38.6 131.7 410.1 Change in Working Capital 218.4 (92.9) (5.4) 25.9 4.3 34.9 (13.1) 1.9 (22.3) 1.4 (25.5) (17.4) (27.3) (92.5) Cash Flow from Operations 452.5 (37.8) 36.1 195.7 289.4 46.9 4.7 36.9 213.8 302.3 (21.9) 21.2 104.4 317.5 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (166.7) (38.2) (54.6) (45.6) (168.3) (46.0) (48.6) (70.0) (56.5) (221.0) (43.1) (38.8) (71.8) (210.2) Common Dividends (1.7) — (331.0) — (336.0) — — — — — — — — — FCF 284.1 (76.0) (349.6) 150.1 (214.9) 0.9 (43.9) (33.0) 157.4 81.4 (64.9) (17.7) 32.6 107.4 Net Acquisitions and Divestitures 1.4 0.3 0.2 0.2 0.8 0.1 — — — 0.2 0.1 — 4.1 4.2 Net Debt Proceeds (279.6) 12.6 363.6 (292.2) 83.8 (62.2) (0.2) 45.2 (172.1) (189.4) 66.4 33.5 62.3 (10.0) Net Equity Proceeds — — 260.7 (21.2) 239.4 — (3.1) 1.6 0.1 (1.4) 0.6 (24.9) (97.9) (122.1) Other (Investing and Financing) 1.8 (8.7) (263.5) 254.2 (19.4) (2.3) 7.0 (13.6) 10.5 1.6 7.3 1.6 0.5 19.9 Total Change in Cash 7.7 (71.8) 11.4 91.1 89.6 (63.5) (40.2) 0.1 (4.1) (107.6) 9.4 (7.5) 1.6 (0.6) Ending Cash and Securities Balance 43.3 30.6 31.6 133.0 133.0 69.5 29.3 29.4 25.3 25.3 34.7 27.2 28.8 28.8 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — Burlington Stores, Inc. (Continued)




LTM Ended

($ Mil.) 2/2/13 8/3/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Income Statement Revenue 4,165.5 971.5 1,072.9 1,344.7 4,462.0 1,135.9 1,051.1 1,166.1 1,496.5 4,849.6 1,190.9 1,151.6 1,238.7 5,077.7 Revenue Growth (%) 7.2 11.4 9.9 1.3 7.1 5.9 8.2 8.7 11.3 8.7 4.8 9.6 6.2 8.1 Operating EBIT 181.0 10.4 23.2 154.9 225.2 52.4 19.3 31.4 163.5 266.6 60.3 35.4 40.7 299.9 Gross Interest Expense 113.9 24.6 32.7 27.4 127.7 26.6 25.5 16.6 15.0 83.7 14.8 14.6 14.8 59.2 Sector-Specific Data Comparable Store Sales (%)d 1.2 7.8 3.9 4.0 4.7 2.7 4.7 5.2 6.7 4.9 0.8 5.6 2.8 3.0 No. of Stores 500 503 521 512 512 523 539 539 542 542 546 546 566 566 Gross Margin (%) 38.8 37.7 39.0 41.7 39.1 38.1 38.2 39.6 42.2 39.7 39.7 39.2 39.8 40.3 SG&A/Revenues (%) 35.4 37.6 37.7 31.0 35.0 34.3 37.3 37.8 31.6 34.9 35.3 36.7 37.1 35.0 Operating EBIT Margin (%) 4.3 1.1 2.2 11.5 5.0 4.6 1.8 2.7 10.9 5.5 5.1 3.1 3.3 5.9 Operating EBITDAR 565.4 106.0 118.7 263.8 623.6 151.2 117.4 131.5 283.6 683.7 164.8 139.6 146.2 734.2 Operating EBITDAR Margin (%) 13.6 10.9 11.1 19.6 14.0 13.3 11.2 11.3 18.9 14.1 13.8 12.1 11.8 14.5 Operating EBITDAR/ (Interest + Rent) (x)b 1.7 1.3 1.4 2.8 1.7 1.8 1.4 1.8 3.1 2.1 2.1 1.8 1.9 2.3 Inventory Turnover (x)b 3.7 3.8 3.1 3.9 3.9 3.8 3.8 3.1 3.8 3.8 3.8 3.9 3.3 3.3 Accounts Payable Turnover (x)b 6.5 5.3 3.9 5.2 5.2 4.5 4.9 3.8 5.0 5.0 4.8 5.1 4.1 4.1 Return on Invested Capital (%)b 13.3 14.7 7.2 13.3 14.6 15.4 15.8 16.1 14.2 16.2 16.1 16.6 17.1 17.1 Return on Assets (%)b 1.0 1.4 0.9 1.0 0.6 1.5 2.0 1.2 2.5 2.5 3.0 3.6 5.2 5.2 Capex/Depreciation (%)b 100.0 92.7 133.0 108.9 100.0 111.6 119.8 164.3 130.6 131.9 102.2 93.1 166.2 123.4 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

Claire’s Stores, Inc. Credit Profile

Credit Profile Summary Weak Traffic Hurting Business: Same-store sales trends for Claire’s Stores, Inc. (Claire’s) were negative 2.9% in North America for 2014, while Europe was down 1.2%, due to weak traffic trends. Total same-store sales remained negative through the first nine months of 2015, with North America modestly down 0.4% and Europe down 3.5%. Fitch Ratings does not see much upside to Claire’s business, with total same-stores sales expected to remain flat to modestly negative given declining mall traffic in the U.S. and tough macroeconomic conditions in Europe.

Below-$200 Million EBITDA Possible: LTM EBITDA was $217 million, versus $247 million in 2014. Fitch expects 2015 EBITDA to be modestly over $200 million and 2016 and 2017 EBITDA to be $185 million–$190 million, assuming negative 2% top-line growth and modest EBITDA margin compression. The contribution from its concession business, which could grow into $100 million–$120 million in revenue over the next 12–18 months, could keep EBITDA at approximately $200 million.

Negative FCF/Tight Liquidity: Liquidity (cash and revolver availability) has tightened materially over the last three quarters on EBITDA declines, with LTM FCF negative $49 million. Domestic liquidity at Oct. 31, 2015, Claire’s seasonal trough, was $8 million, while European liquidity was approximately $56 million. Total liquidity at the end of 2015 is projected to be around $130 million, but with FCF expected to be negative $40 million in 2016, Claire’s will most likely have to raise additional funds mid-year 2016 to fund the holiday season.

Potential Debt Restructuring: The company’s substantial debt load suggests a near-term balance sheet restructuring given tightened liquidity, seasonal working capital needs and the need to address the maturity of $260 million senior subordinated notes due June 2017. Fitch notes the junior ranking of the maturing notes in the debt structure adds complexity to the refinancing process, as even the more senior tranches have less than full recovery prospects. Fitch recognizes Claire's owner, Apollo Management (Apollo) could provide additional equity to address near term maturities and operating liquidity.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include positive same-store sales trends and EBITDA growth to cover fixed obligations, such as interest expense, modest taxes and maintenance capex, and to have adequate liquidity to fund seasonal working capital buildup.

Negative Drivers: Negative credit profile drivers would include deteriorating operating momentum, weakening credit metrics and tightening liquidity, including the inability to refinance maturities in a timely fashion.



Credit Opinion Claire’s Stores, Inc. carries a ‘cc*’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data Claire’s Stores, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 1,494.3 1,412.7 EBITDA 246.5 216.8 EBITDA Margin (%) 16.5 15.3 FCF (27.3) (48.9) Total Adjusted Debt 4,329.1 4,450.5 Total Adjusted Debt/EBITDAR (x) 8.8 9.7 EBITDAR/(Interest + Rent) (x) 1.1 1.0 Same-Store Sales (%)a (2.2) (1.6) Real Estate Owned (%) 0 0 No. of Stores 2,998 2,926 aSame-store sales for the LTM reflect the performance for the nine months ended Oct. 31, 2015.





Leveraged Finance


Heightened Liquidity Concerns Same-store sales trends in 2015 continued to be negative following the weakness in 2013 and 2014, primarily due to a decline in traffic and average transaction per store of 0.7% in the first nine months of 2015. Same-store sales in North America were modestly down 0.4% and Europe was down 3.5%. Some bigger markets, such as France, Switzerland and Germany, are very challenged this year.

Fitch does not see catalysts for significant improvement, given mall traffic declines in the U.S. Management’s focus on growing its business via concession, franchising and wholesale opportunities is likely to offset declines in the mall-based business rather than be additive to overall top line and profitability. In addition, approximately one-third of sales are generated in Europe, where macroeconomic headwinds remain strong. Fitch expects same-store sales to be negative 1%–negative 2% in the fourth quarter of 2015 and flat to modestly negative in 2016. Total top-line growth is expected to be down 1%–2% over the next 24–36 months on continued store closings, offset somewhat by new concession stores and excluding any impact from foreign currency fluctuations.

EBITDA Could Trend Below $200 Million LTM EBITDA was $217 million, versus $247 million in 2014 and almost $300 million in 2012, on both top-line and gross margin contraction. Fitch expects 2015 EBITDA to be just over $200 million, and expects 2016 and 2017 EBITDA to be $185 million–$190 million, assuming negative 2% top-line growth and modest EBITDA margin compression. The contribution from its concession business, which could grow into $100 million–$120 million in revenue over the next 12–18 months, could potentially keep EBITDA at approximately $200 million.

Same-Store Sales Trends (%) 2008 2009 2010 2011 2012 2013 2014 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Consolidated (6.9) (1.7) 6.5 0.1 1.8 (3.9) (2.3) 2.9 (0.1) (5.2) (10.7) (4.4) (0.6) (1.4) (2.3) (2.5) (1.7) (0.6) North America (9.2) (3.2) 7.8 2.8 1.9 (4.6) (1.5) 2.3 1.1 (7.2) (12.0) (5.6) (2.9) (1.6) (1.5) (1.9) 0.7 0.1 Europe (2.5) 1.1 4.3 (4.4) 1.7 (2.8) (3.8) 4.0 (2.0) (2.0) (8.5) (2.4) 2.5 (1.1) (3.8) (3.6) (5.2) (1.6) Average Transactions Per Store (10.7) (6.7) 0.9 (3.9) (2.2) (1.9) (0.1) 2.7 (0.3) (3.2) (7.2) (3.1) (0.6) (1.3) (0.1) (1.3) (0.4) (1.9) Average Transaction Value NR 4.7 6.7 4.0 4.2 (1.0) (1.2) 1.1 0.2 (1.2) (2.9) (0.2) 1.4 0.9 (1.2) (0.8) (1.2) 1.6

NR – Not reported. Source: Company filings, Fitch Ratings.

Fitch Base Case Assumptions — Claire’s Stores, Inc. ($ Mil.,) 2014A 2015F 2016F 2017F Revenue 1,494 1,397 1,371 1,345 Revenue Growth (%) (1.3) (6.5) (1.9) (1.9) Same Store Sales (%) (2.2) (1.5) (0.4) (0.4) EBITDA 247 207 192 186 EBITDA Margin (%) 16.5 14.8 14.0 13.8 Working Capital Change 22 (9) (3) (4) Cash Flow From Operations 21 (16) (25) (35) Capex (48) (25) (25) (25) Dividends — — — — FCF (27) (41) (50) (60) Share Repurchases — — — — Total Debt 2,382 2,433 2,483 2,544 Total Adjusted Debta 4,329 4,381 4,431 4,491 Total Adjusted Debt/EBITDAR (x) 8.8 9.7 10.2 10.5 aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


Negative FCF/Tight Liquidity Liquidity (cash and revolver availability) has tightened materially over the last three quarters on EBITDA declines, with LTM FCF down $49 million, even as LTM capex has been cut to approximately $30 million from approximately $100 million in 2013.

Claire’s had consolidated (domestic and European) cash of $24 million as of Oct. 31, 2015, and total liquidity stood at $64 million. The company fully drew down on its $115 million domestic revolver in the second quarter. Domestic liquidity at Oct. 31, 2015 was $8 million, reflecting seasonal working capital buildup, while European liquidity was approximately $56 million.

Total liquidity at the end of 2015 is projected to be around $130 million, but with FCF expected to be negative $40 million in 2016, Claire’s will most likely have to raise additional funds to fund the 2016 holiday season.

Claire’s Liquidity Analysis ($ Mil.) Domestic Liquidity

Domestic

Cash

Facility Size

(U.S.)

U.S. Borrowings

(Secured) LOC

(U.S.)


(U.S.)

Total Domestic Liquidity

4Q13 13.9 115.0 0.0 6.3 108.7 122.6 1Q14 7.3 115.0 34.6 3.3 77.1 84.4 2Q14 7.8 115.0 19.5 3.3 92.2 100.0 3Q14 6.8 115.0 34.7 3.3 77.0 83.8 4Q14 7.5 115.0 0.0 3.0 112.0 119.5 1Q15 5.8 115.0 67.5 3.6 43.9 49.7 2Q15 41.3 115.0 111.3 3.6 0.1 41.4 3Q15 8.0 115.0 111.3 3.6 0.1 8.1 International/Europe Liquidity

Available (Excluding

Restricted) Cash Facility Size

(Europe)

Europe Borrowings

(Unsecured) LOC

(Europe)


(Europe)

Total European Liquidity

4Q13 44.4 — — — — 44.4 1Q14 17.1 — — — — 17.1 2Q14 19.3 — — — — 19.3 3Q14 21.1 43.8 40.0 0.0 3.8 24.9 4Q14 19.9 39.5 0.0 0.0 39.5 59.4 1Q15 14.7 39.2 0.0 0.0 39.2 53.9 2Q15 41.4 50.0 0.0 0.0 50.0 91.4 3Q15 15.9 50.0 10.3 0.0 39.7 55.6

Consolidated Liquidity Total Total Unrestricted Revolver Total LTM Cash Availability Liquidity EBITDA CFO Capex FCF 4Q13 58.3 108.7 167.0 262.0 (3.2) (96.2) (99.4) 1Q14 24.4 77.1 101.5 258.9 (3.8) (95.4) (99.2) 2Q14 27.1 92.2 119.3 259.1 23.5 (86.5) (62.9) 3Q14 27.9 80.8 108.7 257.3 36.6 (69.0) (32.4) 4Q14 27.4 151.5 178.9 246.5 21.1 (48.4) (27.3) 1Q15 20.4 83.1 103.5 234.4 1.0 (35.6) (34.6) 2Q15 82.6 50.1 132.7 229.8 (2.0) (31.8) (33.8) 3Q15 23.9 39.8 63.7 216.8 (19.5) (29.4) (48.9)


Leveraged Finance


Potential Debt Restructuring The company’s substantial debt load suggests a near term balance sheet restructuring is likely with tightened liquidity, seasonal capital needs to fund inventory purchases, and the need to address the maturity of $260 million of 10.5% senior subordinated notes due June 2017. Fitch notes that the junior ranking of the maturing notes in the debt structure adds complexity to the refinancing process, given that even the more senior tranches have less than full recovery prospects. Fitch recognizes Apollo could provide additional equity to address near-term maturities and operating liquidity.

Liquidity and Debt Structure

Business Profile Assessment Claire’s is a retailer of fashionable accessories and jewelry aimed at girls and young women. The company operates 2,926 company-operated stores and another 530 franchised or licensed stores under two main brands: Claire’s, which is its primary brand and targets girls aged 3–18; and Icing, which targets women in their early 20s to mid-30s.

Claire’s has strong brand recognition within its target base of girls and young women. There is no direct competitor of national size and scale in the U.S. that focuses on the same customer demographic with a comparable merchandise assortment. There are more pure-play accessory and jewelry retailers in Europe than there are in North America notably Accessorize, a U.K.-based chain with a handful of stores in the U.S.


2016 — 2017 260 2018 — 2019 1,575 2020 530 Thereafter —

Note: Excludes borrowings under credit facility. Source: Company filings, Fitch Ratings.


Cash 23.9 Domestic Revolver Availability 0.1 European Revolver Availability 39.7 Total 63.7

Note: Domestic revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings

Capital Structure ($ Mil., At Oct. 31, 2015)

Description Amount (%) Secured Debt $115 Mil. Revolving Credit Facility, September 2017 111.3 4.4 9.000% Senior Secured First Lien Notes, 2019 1,125.0a 44.9 6.125% Senior Secured First Lien Notes, 2020 210.0 8.4 8.875% Senior Secured Second Lien Notes, March 2019 450.0 18.0 Total Secured Debt 1,896.3 75.7

Unsecured Debt EUR35 Mil. Revolving Credit Facility, August 2017 10.3 0.4

7.750% Senior Notes, June 2020 320.0 12.8 10.500% Senior Subordinated Notes, June 2017 260.0 10.4 Total Unsecured Debt 590.3 23.6

Capital Leases and Other 17.0 0.7 Total Debt 2,503.6 100.0 aExcludes unamortized premium of $10 Mil. and European revolver of $50 Mil. Source: Company filings, Fitch Ratings.

Leveraged Finance


Claire’s value-priced offering of jewelry and accessories — the average transaction is about $15−$16 — is relatively broad, with no dependence on any one category or product. Merchandise ranges from hairgoods, handbags, cosmetics and belts, to earrings, bracelets and ear piercing services.

However, Fitch does not see much upside to Claire’s business, with total same-store sales expected to remain modestly negative given declining mall traffic in the U.S. and tough macroeconomic conditions in Europe. Jewelry sales — which account for 46% of total revenue — at approximately $650 million in the LTM period ended Oct. 31, 2015, declined 5.0% and 10.9% in 2014 and the LTM period, respectively, driving most of the decline in total revenue.

While accessories sales — which account for the remaining 54% — have held up better, sales declined 3.2% in the LTM period.

CEO Beatrice Lafon recently commented that while margin on jewelry had historically been significantly higher than the margin on accessories, the jewelry business over the last year or two has been extremely promotional. Therefore, on a net point of view, the margin is not that dissimilar to accessories, and the company does not expect that to change in the near future.

Approximately 38% of sales and 30% the company’s EBITDA base are derived outside North America. While margins are somewhat lower for the international segment and same-store sales have trailed the North American operations on average, the company’s geographic diversity remains a differentiating characteristic compared with most specialty retailers, which are focused in domestic markets.

EBITDA margin has steadily declined to about 15% from a peak 19% in 2012 on weak top-line. The cost of merchandise is relatively low, and about 88% is sourced from outside the U.S.

Revenue by Product Category

2009 2010 2011 2012 2013 2014

LTM 10/31/15

Accessories Sales ($ Mil.)

North America 409.4 453.6 459.2 459.3 419.2 416.9 412.4 Europe 310.1 323.8 347.0 351.9 346.5 367.6 348.4 Total 719.5 777.4 806.3 811.2 765.7 784.5 760.8 YoY Growth (%) North America 5.0 10.8 1.2 0.0 (8.7) (0.5) (1.4) Europe 5.5 4.4 7.2 1.4 (1.5) 6.1 (5.2) Total 5.2 8.0 3.7 0.6 (5.6) 2.5 (3.2) Contribution to Total Sales (%) North America 30.5 31.8 30.7 29.5 27.7 27.9 29.2 Europe 23.1 22.7 23.2 22.6 22.9 24.6 24.7 % of Total Sales 53.6 54.5 53.9 52.1 50.6 52.5 53.9 Jewelry Sales ($ Mil.)

North America 433.6 456.4 475.7 509.1 490.3 463.2 453.8 Europe 189.3 192.6 213.9 236.7 257.2 246.6 198.1 Total 622.9 649.0 689.6 745.8 747.5 709.8 651.9 YoY Growth (%) North America (14.8) 5.3 4.2 7.0 (3.7) (5.5) (3.0) Europe (14.1) 1.7 11.1 10.6 8.7 (4.2) (25.0) Total (14.6) 4.2 6.3 8.1 0.2 (5.0) (10.9) Contribution to Total Sales (%) North America 32.3 32.0 31.8 32.7 32.4 31.0 32.1 Europe 14.1 13.5 14.3 15.2 17.0 16.5 14.0 % of Total Sales 46.4 45.5 46.1 47.9 49.4 47.5 46.1

YoY – Year-over-year. Source: Company filings, Fitch Ratings.

Leveraged Finance


Moreover, more than 90% of merchandise is proprietary. However, merchandise is discretionary and carries a degree of fashion risk, which can make it susceptible to markdowns. The company is furthermore reliant on mall traffic and derives approximately 40% of its annual EBITDA from the fourth quarter.

Given the significant decline in EBITDA and weak liquidity, the company has significantly pulled back on its new store opening program, and is aggressively closing stores that are materially underperforming or as leases come up for renewal. Net store closings are expected to be 130 stores in 2015, relative to 116 closings in 2014 — prior to 2014, there were net store openings — and Fitch expects Claire’s will continue to close a net 100 stores in 2016. As of third-quarter 2015, 92%–93% of Claire’s stores were positive contributors on a four-wall EBITDA

Claire’s has started opening concession locations at various retailers, such as Toys ‘R’ Us, Inc., recently did tests with Tesco PLC, Carrefour SA and Galleries Lafayette, and is exploring franchising and wholesale opportunities to augment growth. The company operated 703 concession stores as of Oct. 31, 2015, of which 244 were located in the U.S. and Canada (North America segment), and 459 were located in Europe. Claire’s expects to add another 500 locations in 2016. Fitch estimates the concession business could grow into a $100 million–$120 million revenue generating business over the next 12–18 months, or 7%–9% of the total projected 2015 revenue base. EBITDA contribution from the concession stores could be in the $10 million–$15 million range, assuming margin contribution of 10%–13%. This could help offset some of the decline in top line and profitability in the mall-based business.

Leveraged Finance


Claire’s Segment Breakdowna

2008 2009 2010 2011 2012 2013 2014

LTM 10/31/15

Net Sales ($ Mil.)

North America 907.5 850.3 914.1 942.3 977.3 918.7 890.4 876.4

Europe 505.5 492.1 512.2 553.6 579.7 594.5 603.8 536.2 Total 1,413.0 1,342.4 1,426.4 1,495.9 1,557.0 1,513.2 1,494.3 1,412.7

% of Total Sales

North America 64.2 63.3 64.1 63.0 62.8 60.7 59.6 62.0

Europe 35.8 36.7 35.9 37.0 37.2 39.3 40.4 38.0

Same-Store Sales (%)b

North America (9.2) (3.2) 7.8 2.8 1.9 (4.6) (2.9) (0.4)

Europe (2.5) 1.1 4.3 (4.4) 1.7 (2.8) (1.2) (3.5) Consolidated Same-Store Sales (6.9) (1.7) 6.5 0.1 1.8 (3.9) (2.2) (1.6)

Gross Profit ($ Mil.)

North America 435.0 428.0 476.5 495.5 516.9 465.8 431.0 422.4

Europe 253.6 254.6 264.8 275.6 284.1 293.7 295.9 251.8 Total 692.6 682.6 741.3 771.1 801.0 759.5 726.8 674.2

Gross Margin (%)

North America 47.9 50.3 52.1 52.6 52.9 50.7 48.4 48.2

Europe 50.1 51.7 51.7 49.8 49.0 49.4 49.0 46.9 Total 49.0 50.9 52.0 51.6 51.4 50.2 48.6 47.7 EBIT

North America 63.5 88.9 124.6 153.1 173.6 120.7 98.0 106.3 Europe 30.3 57.3 52.9 46.1 65.4 56.2 56.8 39.6 EBITDA

North America 121.0 136.5 166.8 194.8 213.4 163.8 146.0 145.6 Europe 57.9 81.2 75.9 73.2 90.5 87.0 82.4 62.2

% of Total Segment EBITDA

North America 67.6 62.7 68.7 72.7 70.2 65.3 63.9 70.1

Europe 32.4 37.3 31.3 27.3 29.8 34.7 36.1 29.9

EBITDA Margin

North America 13.3 16.0 18.2 20.7 21.8 17.8 16.4 16.6

Europe 11.4 16.5 14.8 13.2 15.6 14.6 13.7 11.6

Store Count

North America 2,026 1,993 1,972 1,953 1,921 1,912 1,837 1,793

Europe 943 955 1,009 1,118 1,161 1,185 1,161 1,133 China

3 17 0 0

Subtotal Company-Owned 2,969 2,948 2,981 3,071 3,085 3,114 2,998 2,926 Joint Venture 214 211 0 0 0 0 0 0 Franchise and License 196 195 395 381 392 421 442 530 Total 3,379 3,354 3,376 3,452 3,477 3,535 3,440 3,456

Total Gross Square Footage 3,011 2,982 3,012 3,092 3,117 3,170 3,057 — Net Sales Per Store ($000) 461 454 481 494 506 488 489 — Net Sales Per Square Foot 453 448 476 490 502 481 480 —

Capex

New Stores and Remodels 38.2 17.1 40.1 63.7 64.4 86.1 38.6 —

Other 23.1 8.4 9.7 12.9 9.5 12.9 10.3 — Total 61.4 25.5 49.8 76.6 73.9 99.0 49.0 29.4

North America 42.6 13.7 20.5 33.8 41.9 68.8 35.8 — Europe 16.8 11.2 29.3 42.8 31.9 30.2 13.2 — Total 59.4 25.0 49.8 76.6 73.9 99.0 49.0 29.4 aSegment profit information has not been adjusted for any one-item items or stock-based compensation. bComparable store sales for the LTM reflect the performance for the nine months ended Oct. 31, 2015. Source: Company filings, Fitch Ratings.

Leveraged Finance


Recovery Analysis Fitch’s recovery analysis assumes a $185 million EBITDA under distressed conditions that drives an estimated enterprise value (EV) of approximately $1 billion. This is substantially greater than the $172 million liquidation value of its primary assets (primarily inventory and property, plant and equipment). Deducting 10% of the EV for administrative claims leaves approximately $916 million for creditors. This would provide good recovery prospects (51%–70%) for the first lien revolving facility and the senior secured first lien notes, which are assigned a ‘ccc–*/rr3*. The second lien notes and unsecured notes are expected to have poor recovery prospects (0%–10%) and are assigned a ‘c*/rr6*’.


Recovery Analysis — Claire’s Stores, Inc. ($ Mil., Except Where Noted; Credit Opinion: cc*)


Liquidation Value (LV)

Book Value

Advance Rate (%)

Avail. to Creditors

GG EBITDA 185 Cash 23.9 0 — GC EV Multiple (x) 5.5 A/R — 80 — EV on GC Basis 1,018 Inventory 192.0 70 134.4 Net PPE 186.2 20 37.2 Total LV 171.6


Greater of GC or LV 1,018 Less: Administrative Claims (10%) 102 Adjusted EV Available for Claims 916 Distribution of Value


Recovered Recovery


Credit Opinion

Sr. Secured Facilitya 115.0 72.1 63 rr3* +1 ccc-* Sr. Secured (First Lien)b 1,345.0 843.6 63 rr3* +1 ccc-* Second Lien Secured Notes 450.0 — — rr6* –1 c* Adjusted EV Available for Claims 915.8 Less Secured Debt Recovery 915.8 Remaining Recovery for Unsecured Claims


Value Recovered

Recovery (%)


Credit Opinion

Sr. Unsecuredc 401.1 0.0 rr6* –3 c* Unsecured 0.0 0.0 Sr. Subordinated 260.0 0.0 rr6* –3 c* aFitch notes the revolver was fully drawn as of Oct. 31, 2015. bThe senior secured first lien notes rank pari passu to the senior secured facility in payment priority. cIncludes $320 Mil. of 7.750% senior unsecured notes due 2020 and estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix A

Organizational Structure — Claire’s Stores, Inc.($ Mil., As of Oct. 31, 2015)

aExcludes unamortized premium of $10 Mil. CO – Credit Opinion. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions. Source: Company filings, Fitch Ratings.

Claire’s Inc.Delaware Holdings Corporation (Guarantor of Bank Debt)

Apollo Management and Others

98.0% 2.0%

Domestic SubsidiariesGuarantor of credit facility and notes

Claire’s Stores, Inc.CO — cc*

Debt Issue$115 Mil. Senior Secured Revolver due 9/20/17$1.125 Bil. 9.000% Senior Secured First Lien Notes due 3/15/19a

$210 Mil. 6.125% Senior Secured First Lien Notes due 3/15/20$450 Mil. 8.875% Second Lien Secured Notes due 3/15/19$320 Mil. 7.750% Senior Notes due 2020$335 Mil. 10.500% Senior Subordinated Notes due 6/1/17

Amount 111.3

1,125.0210.0450.0320.0260.0

Foreign SubsidiariesAmount

10.3EUR35 Mil. Revolving Credit Facility due August 2017

COa

ccc–*/rr3*ccc–*/rr3*ccc–*/rr3*c*/rr6*c*/rr6*c*/rr6*

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — Claire’s Stores, Inc. Overview Borrower Claire’s Stores, Inc. Document Date and Location Amended and Restated Credit Agreement dated as of Sept. 20, 2012 (exhibit 10.1 to 8-K filed 9/25/12)

First Amendment to the Amended and Restated Credit Agreement dated as of April 30, 2014 (exhibit 10.1 to 8-K filed 5/2/14) Second Amendment to the Amended and Restated Credit Agreement dated as of Sept. 10, 2015 (exhibit 10.2 to 10-Q filed 9/10/15)

Description of Debt Senior secured credit facility Maturity Date 9/20/17 Amount $115 Mil. Ranking Senior secured. Security Secured by first-priority perfected liens on all material owned assets of subsidiaries and all capital stock (65% of voting capital stock of

foreign subsidiaries). Guarantee Claire’s Inc., and direct and indirect wholly owned domestic subsidiaries. Debt Restrictions Debt Incurrence Coverage Debt Ratio: None.

Notable Permitted Debt: 1) Acquisition indebtedness shall not exceed the greater of $75 Mil. and 2.25% of consolidated total assets. 2) Capital leases permitted, when combined with the remaining present value of outstanding leases with respect to sale-leaseback, is limited to the greater of $150 Mil. and 5.0% of consolidated total assets; or such a combined amount shall not exceed the greater of $75 Mil. and 2.25% of consolidated total assets if pro forma net secured leverage ratio is greater than 5.0x. 3) Indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of consolidated total assets. 4) Indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures shall not exceed the greater of $25 Mil. and 1.0% of consolidated total assets. 5) Additional all-purpose debt not to exceed the greater of $100 Mil. and 3.0% of consolidated total assets, and pro forma net secured leverage shall not be greater than 5.0x if any of such indebtedness is secured.

Limitation on Liens 1) Aggregate principal amount of revolving facility commitments and senior secured first lien notes shall not exceed $1.45 Bil., or if such limit is exceeded, pro forma total net secured leverage ratio shall be less than or equal to 3.75x. 2) $30 Mil. for deposits securing swap agreements. 3) General carveout of $30 Mil.

Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) A CoC is an event of default that can result in the termination of the facility commitments. It is defined as the permitted holders failing

to control a majority of the board of directors or to own 100% of the capital stock. After an IPO, a CoC is defined as a person or group owning at least 35% of the voting power of the company.

M&A, Investments Restriction Total investments including net intercompany loans and guarantees of indebtedness made to restricted subsidiaries that are not loan parties shall not exceed the greater of $150 Mil. and 5.0% of consolidated total assets. Acquisitions and investments in assets that are not owned by the borrower and restricted subsidiaries or in equity interests of restricted subsidiaries that are not loan parties shall not exceed the greater of $150 Mil. and 4.5% of consolidated total assets. Investments in equity interests of newly formed entity not to exceed $30 Mil. Investments in joint ventures not in excess of the greater of $65 Mil. and 2.0% of consolidated total assets. General carveout not to exceed the greater of $150 Mil. and 5.0% of consolidated total assets.

Sale of Assets Restriction Asset sales shall not exceed the greater of $200 Mil. and 6.5% of consolidated total assets in any fiscal year. Exchange of assets for services and/or other assets of comparable or greater value shall not exceed the greater of $200 Mil. and 6.5% of consolidated total assets in any fiscal year, provided at least 90% of the consideration received by the transferor consists of assets that will be used in permitted business activity and subject to approvals at various levels.

Restricted Payments Restricted Payments (RP) RP Basket: i) $50 Mil. plus ii) 50% of consolidated net income starting Jan. 29, 2012, given the fixed-charge coverage ratio is ≥ 2.0x

and consolidated leverage ratio is < 6.0x plus iii) other customary items. Notable Permitted Restricted Payments: 1) Redemption of stock option up to the sum of $30 Mil. annually plus other minor items.

Other Cross-Default Yes, exceeding $30 Mil. Cross-Acceleration N.A. MAC Clause None Equity Cure None Covenant Suspension None

MAC − Material adverse change. N.A. − Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.




Leveraged Finance


Bank Agreement Covenant Summary — Claire’s Stores, Inc. (Continued) Financial Covenants Leverage (Maximum) When revolver borrowing and letters of credit outstanding exceed $15 Mil., net secured leverage ratio must be at or below the following: Fiscal Quarter (x) 3Q15 6.75 4Q15 6.35 1Q16 6.75 2Q16 6.75 3Q16 6.75 4Q16 6.35 1Q17 6.00 2Q17 6.00 Net secured leverage is defined as net senior secured debt minus the sum of (a) cash of borrower and subs and, prior to an IPO, (b)

lesser of (i) cash on unconsolidated balance sheet of the holding company and (ii) 25% of LTM EBITDA. Coverage (Minimum) None Current Ratio (Minimum) Net Worth (Minimum) Pricing Coupon Type/Index LIBOR + 450 or base rate + 350; facility fee of 0.50%.


Leveraged Finance


Appendix C

Senior Secured First Lien Notes Covenant Summary — Claire’s Stores, Inc. Overview Issuer Claire’s Stores, Inc. Document Date and Location Indenture dated Feb. 28, 2012

(exhibit 4.1 to 8-K filed March 5, 2012) First Supplemental Indenture dated March 2, 2012 (exhibit 4.2 to 8-K filed March 5, 2012) Second Supplemental Indenture dated March 12, 2012 (exhibit 4.1 to 8-K filed March 14, 2012) Third Supplemental Indenture dated Sept. 20, 2012, (exhibit 4.1 to 8-K filed Sept. 25, 2012)

Indenture dated March 15, 2013 (exhibit 4.1 to 8-K filed March 19, 2013)

Maturity Date March 15, 2019 March 15, 2020 Description of Debt 9.000% Senior Secured First Lien Notes 6.125% Senior Secured First Lien Notes Amount $1,125 Mil. $210 Mil. Ranking Senior secured. Senior secured. Security Secured by first-priority perfected liens on all material owned assets of subsidiaries and all capital stock (65% of voting capital stock

of foreign subsidiaries). Guarantee Each of the company’s direct and indirect wholly owned domestic subsidiaries that guarantee the credit facility. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x, on pro forma basis, including acquisition indebtedness.

Notable Permitted Debt Incurrence: 1) Additional Indebtedness to finance an acquisition not to exceed the greater of $75 Mil. and 2.25% of total assets. 2) Indebtedness to finance purchase, lease, construct or improve property or equipment permitted provided pro forma senior secured leverage shall not exceed 5.0x, or subject to limitation of the greater of $75 Mil. and 2.25% of total assets. 3) Indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of total assets. 4) Indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures of issuer not to exceed the greater of $25 Mil. and 1.0% of total assets. 5) Additional all-purpose debt equal to the greater of $100 Mil. and 3.0% of total assets.

Limitation on Liens Permitted provided senior secured leverage ratio shall not exceed 3.75x. General carveout of $30 Mil. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) Put Option at 101: CoC defined as (1) sale of all or substantially all assets other than the Permitted Holders and (2) 50% voting

rights trigger including by way of merger with a Permitted Holders carveout. Permitted Holders include Apollo Management, Affiliates and co-investment partnerships, and the Management Group.

M&A, Investments Restriction Investments in similar business not to exceed the greater of $50 Mil. and 1.5% of total assets. Additional investments in joint ventures not to exceed the greater of $65 Mil. and 2.0% of total assets at any one time in aggregate. General carveout not to exceed the greater of $100 Mil. and 3.0% of total assets.

Sale of Assets Restriction At least 75% of consideration received in cash. Any noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil.. When aggregate amount of excess proceeds exceeds $20 Mil., issuer must make offer to repurchase the notes.

Restricted Payments Restricted Payments (RP) RP Basket: i) 50% of consolidated net income (commencing 1/29/12 for the 9.000% notes and commencing 2/3/13 for the 6.125%

notes) plus ii) 100% of net proceeds from equity and debt issuances plus iii) $1.4 Mil. plus iv) other customary items. Subject to consolidated leverage ratio < 6.0x. Notable Permitted Restricted Payments: 1) Repurchase of employee stock limited to $30 Mil. annually plus an additional $30 Mil. in any calendar year (with unused amounts in any calendar year being permitted to be carried over to succeeding calendar years); 2) investments in unrestricted subsidiaries not to exceed the greater of $35 Mil. and 1.0% of total assets and on a pro forma basis the consolidated leverage ratio < 6.0x; 3) Additional all-purpose up to the greater of $50 Mil. and 1.50% of total assets.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $25 Mil. Callability Redeemable, at the company’s option, in whole or in part,

on and after March 15, 2015, at the applicable redemption price below. 2015 106.750% 2016 104.500% 2017 102.250% 2018+ 100.000%

Redeemable, at the company’s option, in whole or in part, on and after March 15, 2017, at the applicable redemption price below. 2017 103.063% 2018 101.531% 2019+ 100.000%

Covenant Suspension Covenants related to debt incurrence, restricted payments, asset sales and limitation on guarantees of debt by restricted subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.












Leveraged Finance


Appendix D

Senior Secured Second Lien Notes Covenant Summary — Claire’s Stores, Inc. Overview Issuer Claire’s Stores, Inc. Document Date and Location Indenture dated March 4, 2011 (exhibit 4.1 to 8-K filed March 9, 2011)

Supplemental Indenture dated March 4, 2011 (exhibit 4.2 to 8-K filed March 9, 2011) Maturity Date March 15, 2019 Description of Debt 8.875% Senior Secured Second Lien Notes Amount $450 Mil. Ranking Second lien senior secured. Security Secured by second-priority lien on all of the assets of the company and the guarantors that are pledged as collateral to secure the

senior secured credit facility and senior secured first lien notes. Guarantee Each of the issuer’s direct or indirect wholly owned restricted domestic subsidiaries that guarantee the credit facility. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x, including acquisition and merger debt.

Notable Permitted Debt Incurrence: 1) Additional merger and acquisition debt up to the greater of $75 Mil. and 2.25% of total assets. 3) Indebtedness to finance purchase, lease, construct or improve property or equipment if a) senior secured leverage shall not exceed 5.0x, or b) the total amount does not exceed the greater of $ Mil. and 2.25% of total assets. 4) Indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of total assets. 5) Indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures of issuer not to exceed the greater of $25 Mil. and 1.0% of total assets. 6) Additional all-purpose debt equal to the greater of $100 Mil. and 3.0% of total assets.

Limitation on Liens Permitted provided secured indebtedness leverage ratio shall not exceed 4.75x. General carveout of $30 Mil. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both

related covenants. Acquisitions/Divestitures Change of Control (CoC) Put Option at 101: CoC defined as 1) sale of all or substantially all assets other than the Permitted Holders and 2) 50% voting


M&A, Investments Restriction Investments in similar business not to exceed the greater of $50 Mil. and 1.5% of total assets. Additional investments in joint ventures not to exceed the greater of $65 Mil. and 2.0% of total assets at any one time in aggregate. General carveout not to exceed the greater of $ Mil. and 3.0% of total assets.

Sale of Assets Restriction At least 75% of consideration received in cash. Any noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil. When aggregate amount of excess proceeds exceeds $20 Mil., issuer must make offer to repurchase the notes.

Restricted Payments Restricted Payments (RP) RP Basket: Equals i) 50% of consolidated net income commencing 10/31/10 plus ii) 100% of net proceeds from equity and debt

issuances plus iii) other customary items. Subject to consolidated leverage ratio > 6.0x and fixed-charge coverage ratio > 2.0x. Notable Permitted Restricted Payments: 1) Repurchase of employee stock limited to $30 Mil. annually with unused amounts in any calendar year being permitted to be carried over to succeeding calendar years; 2) investments in unrestricted subsidiaries not to exceed the greater of $35 Mil. and 1.0% of total assets and subject to consolidated leverage ratio < 6.0x; 3) additional all-purpose up to the greater of $50 Mil. and 1.50% of total assets.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $25 Mil.. Callability Redeemable, at the company’s option, in whole or in part, on and after March 15, 2015, at the applicable redemption price below.

2015 104.438% 2016 102.219% 2017+ 100.000%

Equity Clawback Up to 35% @ 108.875% with proceeds from an IPO on or before 3/15/14. Covenant Suspension Covenants related to debt incurrence, restricted payments, asset sales, and limitation on guarantees of debt by restricted

subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.


http://www.sec.gov/Archives/edgar/data/34115/000095012311023285/g26386exv4w1.htm


Leveraged Finance


Appendix E

Senior Unsecured Notes Covenant Summary — Claire’s Stores, Inc. Overview Issuer Claire’s Stores, Inc. Document Date and Location Indenture dated May 14, 2013 (exhibit 4.1 to 8-K dated May 16, 2013) Maturity Date June 1, 2020 Description of Debt 7.75% Senior Notes Amount $320 Mil. Ranking Senior. Security Unsecured. Guarantee Each of the issuer’s direct or indirect wholly owned restricted domestic subsidiaries that guarantee the credit facility. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x, including acquisition and merger debt.

Notable Permitted Debt Incurrence: 1) Additional merger and acquisition debt up to the greater of $75 Mil. and 2.25% of total assets. 3) Indebtedness to finance purchase, lease, construct or improve property or equipment if a) senior secured leverage shall not exceed 5.0x, or b) the total amount does not exceed the greater of $75 Mil. and 2.25% of total assets. 4) Indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of total assets. 5) Indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures of issuer not to exceed the greater of $25 Mil. and 1.0% of total assets. 6) Additional all-purpose debt equal to the greater of $100 Mil. and 3.0% of total assets.

Limitation on Liens Secured indebtedness leverage ratio would not exceed 4.75x. General carveout of $30 Mil. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both

related covenants. Acquisitions/Divestitures Change of Control (CoC) Put Option at 101: CoC defined as (1) sale of all or substantially all assets other than the Permitted Holders and (2) 50% voting



Sale of Assets Restriction At least 75% of consideration received in cash. Any noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil. When aggregate amount of excess proceeds exceeds $20 Mil., issuer must make offer to repurchase the notes.



Other Cross-Default No. Cross-Acceleration Yes, exceeding $25 Mil. Callability Redeemable, at the company’s option, in whole or in part, on and after June 1, 2016 at the applicable redemption price below.

2016 103.875% 2017 101.938% 2018+ 100.000%

Equity Clawback Up to 100% @ 103 within 60 days of an IPO prior to 12/1/14, or if less than all of the notes are redeemed, 50% of principal amount must remain outstanding. Up to 35% @ 107.75 within 90 days of an equity offering other than an IPO prior to 6/1/16, provided that 65% of the original principal amount remains outstanding.

Covenant Suspension Covenants related to debt incurrence, restricted payments, asset sales, and limitation on guarantees of debt by restricted subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.



Leveraged Finance


Appendix F

Senior Subordinated Notes Covenant Summary — Claire’s Stores, Inc. Overview Issuer Claire’s Stores, Inc. Document Date and Location Indenture dated May 29, 2007 (exhibit 4.3 to S-4 filed Dec. 17, 2007) Maturity Date June 1, 2017 Description of Debt 10.500% Senior Subordinated Notes Amount $335 Mil. Ranking Senior. Security Subordinated. Guarantee Each of the issuer’s direct or indirect wholly owned restricted domestic subsidiaries that guarantee the credit facility. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x, including acquisition and merger debt.

Notable Permitted Debt Incurrence: 1) Additional merger and acquisition debt up to the greater of $75 Mil. and 2.25% of total assets. 3) Indebtedness to finance purchase, lease, construct or improve property or equipment if a) senior secured leverage shall not exceed 5.0x, or b) the total amount does not exceed the greater of $75 Mil. and 2.25% of total assets. 4) Indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of total assets. 5) Indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures of issuer not to exceed the greater of $25 Mil. and 1.0% of total assets. 6) Additional all-purpose debt equal to the greater of $100 Mil. and 3.0% of total assets.

Limitation on Liens Secured indebtedness leverage ratio would not exceed 4.75x. General carveout of other liens not to exceed $30 Mil.. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both

related covenants. Acquisitions/Divestitures Change of Control (CoC) Put option at 101. CoC defined as (1) sale of all or substantially all assets other than the Permitted Holders and (2) 50% voting



Sale of Assets Restriction At least 75% of consideration received in cash. Any noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil. When aggregate amount of excess proceeds exceeds $20 Mil., issuer must make offer to repurchase bonds.



Other Cross-Default No. Cross-Acceleration Yes, exceeding $25 Mil.. Callability Redeemable, at the company’s option, in whole or in part, on and after June 1, 2012 at the applicable redemption price below.

2013 103.500% 2014 101.750% 2015+ 100.000%

Equity Clawback None. Covenant Suspension Covenants related to debt incurrence, restricted payments, asset sales, and limitation on guarantees of debt by restricted

subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.


http://www.sec.gov/Archives/edgar/data/34115/000089109207005424/e29054_ex4-3.txt

Leveraged Finance


Appendix G

Financial Summary — Claire’s Stores, Inc.




LTM Ended


Operating EBITDAa 268.4 296.7 51.7 94.8 262.0 48.9 63.7 49.9 84.0 246.5 36.9 59.1 36.8 216.8 Operating EBITDA Margin (%) 17.9 19.1 14.5 21.8 17.3 13.8 16.9 14.2 20.4 16.5 11.5 17.0 11.1 15.3 FFO Return on Adjusted Capital (%)b 11.8 12.3 11.9 11.3 11.3 11.2 11.3 11.2 11.5 11.5 11.0 11.1 10.8 10.8 FCF Margin (%) 2.1 2.4 (23.6) 16.5 (6.6) (19.1) 4.5 (15.3) 18.7 (1.8) (23.4) 5.1 (20.6) (3.5)

Coverages (x) FFO Interest Coverage 1.5 1.4 0.8 1.8 1.1 0.6 1.0 0.8 1.5 1.0 0.3 1.1 0.5 0.9 Operating EBITDA/ Gross Interest Expense 1.5 1.4 1.0 1.7 1.2 0.9 1.2 0.9 1.5 1.1 0.7 1.1 0.7 1.0 FFO Fixed-Charge Coverage 1.2 1.2 0.9 1.4 1.0 0.8 1.0 0.9 1.2 1.0 0.7 1.1 0.8 0.9 FCF Debt Service Coverageb 1.2 1.2 0.6 0.6 0.6 0.5 0.7 0.6 0.9 0.9 0.6 0.6 0.5 0.5 Cash Flow from Operations/Capex 1.4 1.6 (2.0) 3.6 (0.0) (2.6) 2.4 (4.1) 12.0 0.4 (11.1) 3.2 (7.5) (0.7)

Leverage (x)b Long-Term Secured Debt/ Operating EBITDA 6.0 5.3 6.1 6.9 6.8 6.9 6.9 6.9 7.2 7.2 7.6 7.8 8.2 8.2 Long-Term Secured Debt/FFO 17.5 20.5 45.5 117.3 116.4 171.6 120.2 131.4 (2,321.2) (2,321.2) (104.0) (166.7) (62.8) (62.8) Total Debt with Equity Credit/ Operating EBITDA 9.0 8.0 8.3 9.1 9.1 9.3 9.3 9.5 9.7 9.7 10.4 10.8 11.5 11.5 FFO-Adjusted Leverage 8.5 8.1 8.6 9.0 9.0 9.2 9.2 9.3 9.4 9.4 9.9 9.9 10.3 10.3 Total Adjusted Debt/ Operating EBITDAR 8.5 8.0 8.2 8.6 8.6 8.7 8.7 8.8 8.8 8.8 9.2 9.4 9.7 9.7 FCF/Total Adjusted Debt (%) 0.8 0.9 (1.5) (2.3) (2.3) (2.3) (1.4) (0.7) (0.6) (0.6) (0.8) (0.8) (1.1) (1.1)

Balance Sheet Short-Term Debt — — 33.0 — — 34.6 19.5 74.7 — — 67.5 111.3 121.6 121.6

Long-Term Senior Secured Debt 1,604.3 1,575.0 1,799.7 1,799.2 1,785.0 1,785.0 1,785.0 1,785.0 1,785.0 1,785.0 1,785.0 1,785.0 1,785.0 1,785.0 Long-Term Senior Unsecured Debt 799.4 539.7 337.3 337.1 337.1 337.1 337.0 337.0 337.0 337.0 336.9 336.8 336.8 336.8 Long-Term Subordinated Debt — 260.0 259.6 259.6 260.0 260.0 260.0 260.0 260.0 260.0 260.0 260.0 260.0 260.0 Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 2,403.7 2,374.7 2,429.6 2,395.9 2,382.1 2,416.7 2,401.5 2,456.7 2,382.0 2,382.0 2,449.4 2,493.1 2,503.4 2,503.4 Off-Balance Sheet Debtc 1,816.2 1,842.5 1,950.4 1,950.4 1,950.4 1,947.1 1,947.1 1,947.1 1,947.1 1,947.1 1,947.1 1,947.1 1,947.1 1,947.1 Total Adjusted Debt with Equity Credit 4,219.9 4,217.2 4,380.0 4,346.3 4,332.5 4,363.8 4,348.7 4,403.8 4,329.1 4,329.1 4,396.5 4,440.3 4,450.5 4,450.5

Cash Flow Funds From Operations 91.6 77.0 (8.5) 42.0 15.3 (19.3) 0.6 (9.7) 27.7 (0.8) (35.7) 7.1 (27.5) (28.4)

Change in Working Capital 10.9 29.7 (47.7) 57.4 (18.5) (29.3) 28.2 (33.4) 56.3 21.8 (32.9) 18.8 (33.2) 8.9 Cash Flow from Operations 102.6 106.7 (56.2) 99.4 (3.2) (48.6) 28.9 (43.1) 83.9 21.1 (68.6) 25.8 (60.7) (19.5) Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (70.9) (68.8) (27.9) (27.6) (96.2) (19.0) (12.0) (10.4) (7.0) (48.4) (6.2) (8.2) (8.0) (29.4) Common Dividends — — — — — — — — — — — — — — FCF 31.7 37.9 (84.1) 71.8 (99.4) (67.6) 16.9 (53.6) 76.9 (27.3) (74.8) 17.7 (68.7) (48.9) Net Acquisitions and Divestitures (4.9) (5.0) (0.5) (0.7) (2.8) (0.4) (0.1) 0.0 (0.1) (0.6) (0.0) (0.1) (0.0) (0.2) Net Debt Proceeds (121.9) (12.2) 33.0 (33.0) 6.3 34.6 (15.1) 55.4 (74.9) (0.1) 67.5 43.8 10.1 46.4 Net Equity Proceeds — — — — — — — — — — — — — — Other (Investing and Financing) 9.3 (23.7) (0.9) (1.2) (12.8) (0.6) 1.1 (1.0) (2.4) (2.9) 0.5 0.8 (0.1) (1.2) Total Change in Cash (85.9) (3.1) (52.4) 37.0 (108.6) (34.0) 2.7 0.8 (0.5) (31.0) (6.9) 62.2 (58.7) (4.0) Ending Cash and Securities Balance 174.4 167.0 21.4 58.3 58.3 26.9 27.1 27.9 29.4 29.4 22.5 83.0 23.9 23.9 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — Claire’s Stores, Inc. (Continued)




LTM Ended

($ Mil.) 1/28/12 2/2/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Income Statement Revenue 1,495.9 1,557.0 356.9 435.5 1,513.2 353.3 377.8 350.7 412.4 1,494.3 320.0 347.6 332.7 1,412.7 Revenue Growth (%) 4.9 4.1 (1.8) (11.7) (2.8) (0.2) 3.0 (1.8) (5.3) (1.3) (9.4) (8.0) (5.1) (6.9) Operating EBIT 199.7 231.8 33.3 71.0 188.0 25.4 45.9 33.8 67.8 172.9 22.3 43.5 21.4 154.9 Gross Interest Expense 176.9 211.0 53.2 54.2 223.4 54.8 54.6 53.6 54.3 217.2 54.4 55.0 55.3 219.0 Sector-Specific Data Same-Store Sales (%)d 0.1 1.8 (5.2) (10.7) (3.9) (4.4) (0.6) (1.4) (2.3) (2.2) (2.5) (1.7) (0.6) (1.6) No. of Stores 3,071 3,085 3,118 3,114 3,114 3,071 3,052 3,038 2,998 2,998 2,983 2,954 2,926 2,926 Gross Margin (%) 51.5 51.4 48.9 51.4 50.2 47.1 49.8 47.7 49.8 48.6 46.0 48.5 46.0 47.7 SG&A/Revenues (%) 38.2 36.6 39.5 35.1 37.8 39.9 37.6 38.1 33.3 37.1 39.0 36.0 39.6 36.7 Operating EBIT Margin (%) 13.3 14.9 9.3 16.3 12.4 7.2 12.2 9.6 16.4 11.6 7.0 12.5 6.4 11.0 Operating EBITDAR 495.4 527.0 112.7 155.7 505.8 109.8 124.6 110.7 144.8 489.9 97.7 119.9 97.7 460.2 Operating EBITDAR Margin (%) 33.1 33.8 31.6 35.8 33.4 31.1 33.0 31.6 35.1 32.8 30.5 34.5 29.4 32.6 Operating EBITDAR/ (Interest + Rent) (x)b 1.2 1.2 1.0 1.4 1.1 0.9 1.1 1.0 1.3 1.1 0.8 1.0 0.8 1.0 Inventory Turnover (x)b 5.2 5.0 3.8 4.5 4.5 4.6 4.5 4.0 4.7 4.7 4.5 4.3 4.0 4.0 Accounts Payable Turnover (x)b 12.6 11.3 9.8 9.6 9.6 10.8 10.8 9.6 10.0 10.0 9.6 9.9 8.5 8.5 Return on Invested Capital (%)b 10.2 11.0 10.9 10.1 10.1 9.9 9.9 9.9 10.4 10.4 10.2 10.1 9.9 9.9 Return on Assets (%)b 0.4 0.0 (1.1) (2.4) (2.4) (2.8) (2.9) (2.9) (8.6) (8.6) (8.5) (8.3) (8.7) (8.7) Capex/Depreciation (%)b 103.1 106.0 152.0 115.8 130.1 80.9 67.3 64.9 43.3 65.8 42.6 52.3 52.0 47.6 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

Dollar Tree, Inc. Credit Profile

Credit Profile Summary Family Dollar Acquisition Complementary: Dollar Tree, Inc. (Dollar Tree) completed its acquisition of Family Dollar Stores, Inc. (Family Dollar) on July 6, 2015, for $9.1 billion, including net debt, or roughly 11.0x EBITDA. Fitch Ratings views the acquisition as complementary given Family Dollar’s multiprice strategy versus Dollar Tree’s primarily fixed or single price points.

Deleveraging Toward 4.5x Anticipated: Dollar Tree’s debt increased to $8.3 billion from $757 million as a result of financing the purchase of Family Dollar. Pro forma total adjusted debt/EBITDAR, based on $2 billion of combined EBITDA at May 2, 2015, is 5.5x, versus 2.8x at the fiscal year ended Jan. 31, 2015. Fitch projects Dollar Tree can generate over $500 million FCF yearly for debt repayment, and is forecasting leverage to decline to about 4.5x by 2017. Dollar Tree’s goal is to reduce total adjusted debt/EBITDAR to below 3.5x within five years with debt reduction and EBITDA growth.

Strong Share, Mixed Comps: Dollar Tree is the biggest discount retailer in North America, with approximately $20 billion of annualized sales and roughly 14,000 stores. Comparable store sales (comps) for Dollar Tree have grown for 31 straight quarters through Oct. 31, 2015, but comps for Family Dollar fell 2.1% in 2014. Fitch projects 3% comps for the Dollar Tree banner and sales trends at Family Dollar to be flat in 2015 and grow 2% in 2016.

Dollar Tree’s Leading Margins: Dollar Tree’s profitability has consistently led dollar store peers, with a gross margin and EBITDA margin of 35.3% and 14.9%, respectively, in 2014. Fitch attributes this to strong comps, effective sourcing, having a merchandise mix that is less geared toward lower margin consumable items, and efficient cost and inventory management. The Family Dollar acquisition was dilutive, but margins should improve from a pro forma 11% over time on improved comps and store-level profitability at Family Dollar and from synergies.

Improving Family Dollar, Synergies: Family Dollar’s EBITDA margin contracted from nearly 10% in 2012 to 7.6% in 2014. Margins were pressured by weak comps, negative mix shift and price investments to improve its value proposition. Fitch believes there is upside to profitability as comps improve and synergies are realized. Dollar Tree’s three-year $300 million synergy goal should be achievable, given it is only 3% of transaction value. Sources of synergies include format optimization, procurement, distribution and overhead expenses.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include 2%–4% comps growth at both the Dollar Tree and Family Dollar brands, improved profitability at Family Dollar stores and realization of synergies. FCF that enables debt reduction such that total adjusted debt/EBITDA declines below mid-4x would result in an improved credit profile.

Negative Drivers: Negative credit profile drivers include the inability to sustainably turnaround comps and improve margins at Family Dollar, and/or deteriorating performance at Dollar Tree. Total adjusted debt/EBITDAR sustained above 5.0x beyond 24 months would indicate a deteriorating credit profile, as deleveraging is currently factored into Fitch’s forecasts.



Credit Opinion Dollar Tree, Inc. carries a ‘bb–*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data Dollar Tree, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15a Total Revenue 8,602.2 12,608.7 EBITDA 1,284.4 1,419.1 EBITDA Margin (%) 14.9 11.3 FCF 601.2 79.7 Total Debt 757.0 8,343.5 Total Adjusted Debt 5,063.4 12,649.9 Total Adj. Debt/ EBITDAR (x) 2.8 6.5 EBITDAR/ (Interest + Rent) (x) 2.9 1.8 Comps (%)b 4.3 2.8 No. of Stores 5,367 14,038 aOnly includes results of Family Dollar from July 6, 2015 through Oct. 31, 2015. bComps are only reflective of Dollar Tree stores open for at least 15 months. Comps – Comparable store sales.




Leveraged Finance


Business Profile Assessment Dollar Tree is a leading operator of discount variety stores offering merchandise at the fixed price of $1.00. Primary competitors include Dollar General; 99 Cents Only Stores, LLC; Big Lots Inc.; Fred’s, Inc. and Family Dollar prior to the acquisition. Dollar Tree operated 5,367 retail stores at the fiscal year ended Jan. 31, 2015. The majority of these stores operate under the Dollar Tree banner, while others include Deals (219 stores at fiscal year-end), Dollar Tree Deals, Dollar Tree Canada, Dollar Giant and Dollar Bills. About 95%, or 5,157, of Dollar Tree’s stores are in the U.S. and 4%, or 210, are in Canada as Dollar Tree Canada or Dollar Giant stores. Dollar Tree intends to rebanner the vast majority of its Deals stores under the Dollar Tree banner and a small number to the Family Dollar banner by the end of July 2016 to focus on its two primary banners.

Fitch Base Case Assumptions — Dollar Tree, Inc.a ($ Mil.) 2014 2015F 2016F 2017F Comments Revenue 8,602 15,500 20,800 21,900 Full year of Family Dollar in 2016. Revenue Growth (%) 9.7 81.0 34.0 5.0 Impact of acquisition in 2015/2016. Comps Growth (%) — Dollar Tree 4.3 3.0 3.0 3.0 Comps stay strong at Dollar Tree. Comps Growth (%) — Family Dollarb (2.9) — 2.0 3.0 Family Dollar gradually improves. EBITDA 1,284 1,650 2,430 2,600 Sales growth and lower SG&A

margin. EBITDA Margin (%) 14.9 10.7 11.7 11.9 — Working Capital Change 36 (1,270) (300) (50) Improvements post 2015. Cash Flow from Operations 927 (450) 1,300 1,670 — Capex (326) (520) (740) (800) Ranges from 3.5% to 3.7% of sales. Dividends — — — — Assumes no policy change. FCF 601 (970) 560 870 — Share Repurchases — — — (200) Starts to return cash by year two. Total Debt 757 8,500 7,860 7,240 FCF applied to debt reduction. Total Adjusted Debt 5,063 16,280 18,260 18,180 — Adjusted Debt/EBITDAR (x) 2.8 6.2 4.9 4.6 — aFamily Dollar acquisition closed in July 2015. bCompany will not report Family Dollar comparable store sales until they are in the system for 15 months. F – Forecast. Comps – Comparable store sales. SG&A – Selling, general and administrative. Source: Fitch Ratings.

Primary Competitors ($ Mil., Latest Fiscal Year-End) Dollar General Family Dollar Dollar Tree Big Lots Fred’s

99 Cents Only Stores

Net Sales 18,910 10,489 8,602 5,177 1,970 1,927 EBITDA 2,149 802 1,284 341 73 130 EBITDA Margin (%) 11.4 7.6 14.9 6.6 3.7 6.8 Number of Stores 11,789 8,042 5,367 1,460 641 383 Average Revenue Per Store 1.6 1.3 1.6 3.5 3.1 5.4 Average Selling Square Footage 7,400 7,150 8,064 21,900 14,743 16,000 Net Sales/Selling Square Foot 223 180 192 162 208 328 Pricing Strategy Multiple;

$10 or less Multiple; $10 or less

Dollar Tree — USD1 Dollar Tree Canada — CAD1.25 Deals, Dollar Tree Deals, Dollar Giant, and Dollar Bills — Multiprice

Includes brand name closeouts

Everyday low pricing

Primary 99 cents

Consumables as % of Salesa 76 73 49 18 31 68 Private Label as % of Sales N.A. 29 35–40 N.A. 9 N.A. Geographic Focus National; rural, urban

and suburban National; urban and rural

National; suburban

National Southeast; small to medium towns

West and southwest

aConsumables for 99 Cents Only Stores includes Food and Grocery, Health and Beauty, and Stationary and Party items. Excludes Pharmacy at Fred’s. N.A. – Not available. Source: Company filings, Fitch Ratings.

Leveraged Finance


Acquisition of Family Dollar Dollar Tree’s acquisition of Family Dollar catapults the company to No. 1 from No. 3 among U.S. dollar stores, with approximately $20 billion of revenue and 14,000 stores. Fitch views the transaction as transformational, given it more than doubled the size of the company’s revenue and store base. The merchandise mix of the two companies is complementary and the combined company is more diversified in terms of pricing strategy.

The merger consideration was 80% cash/20% stock. The purchase price represented about 11.0x of Family Dollar’s $815 million of EBITDA for the 12 months ended May 31, 2014 (definitive merger agreement announced July 28, 2014), and was in line with past deals in the dollar store sector. The outlook for the dollar store channel remains favorable as consumers continue to desire both value and a convenient shopping experience. Past transactions in the sector include KKR Corp.’s 2007 purchase of Dollar General for 12.3x EBITDA and a consortium’s buyout of 99 Cents Only Stores for 7.9x EBITDA in 2012.

Comparable Store Sales Comparison Comps at Dollar Tree have been increasing at a low to midsingle-digit rate annually since 2006 due to growth in transactions and transaction size. The number of transactions and average ticket have contributed an average of 3.6% and 0.9%, respectively, to comps since 2010. Expanding the form of payment accepted by its stores to include debit cards and benefits under the government Supplemental Nutrition Assistance Program (SNAP), and the continued rollout of freezers and refrigerated coolers have helped drive sales. Fitch forecasts assume 3% comps over the intermediate term. Sales should be supported by modest improvement in discretionary income for lower income consumers due to rising hourly wages and reduced unemployment, but competition from big box retailers, grocery chains and drug stores remains intense.

Consumable49%

VarietyCategories

47%

Seasonal4%

Complementary Operations — Merchandise Mix (At Latest Fiscal Year End)

Dollar Tree

Source: Company filings.

Home Products

10%

Family Dollar

Consumable73%

Seasonal and Electronics

10%Apparel and Accessories

7%

Leveraged Finance


In contrast, comps for Family Dollar slowed in fiscal 2013 and declined 2.1% in fiscal 2014, with performance being driven by reduced customer transactions. Transactions declined due to execution issues around the seasonal merchandise transition and the company’s value perception with consumers. Family Dollar changed its pricing strategy from everyday low prices (EDLP) to high-low pricing in 2013, and then back to EDLP in 2014 as the high-low pricing confused customers. Expanding outside its core urban market into suburban locations was also a driver of the weak comps performance.

Consequently, the brand began a strategic initiative to strengthen its value proposition in the second half of the fiscal year ended Aug. 30, 2014, and began investing in price to increase competitiveness. Family Dollar’s merchandising strategy prior to being purchased by Dollar Tree included having a national brand focus while increasing private brand sales, expanding tobacco and wine offerings, and having better transitional timing for promoting seasonal products.

The brand is in the early stages of its turnaround. Fitch anticipates gradual improvement in comps performance for Family Dollar, assuming flat comps for fiscal 2015 and 1% growth in fiscal 2016. Dollar Tree will not report comps for Family Dollar until the October 2016 quarter, after the stores have been in the system for one year, but indicated the stores delivered low to midsingle-digit comps each month during the quarter ended October 2015. The ability for Dollar Tree to fully realize its five-year goal of deleveraging the balance sheet to 3.5x will be in large part contingent

(4)

(2)

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014

Dollar Tree Family Dollar Dollar General

Fiscal Year Annual Comparable Store Sales

Note: Fiscal year ends at the end of January for Dollar Tree and Dollar General, and the end of August for Family Dollar.Source: Company filings.

(%)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15


Quarterly Comparable Sales

Note: Family Dollar comparable sales will not enter Dollar Tree comp base until October 2016.Source: Company filings.

(%)

Comps Decomposition — Dollar Tree

(%) Comps Transactions Average

Ticket 2010 6.3 5.0 1.3 2011 6.0 4.8 1.2 2012 3.4 2.8 0.6 2013 2.4 1.9 0.5 2014 4.3 3.4 0.9

Comps – Comparable store sales. Note: Fiscal years end the Saturday closest to Jan. 31. Source: Company filings.

Comps Decomposition — Family Dollar

(%) Comps Transactions Average

Ticket 2010 4.8 4.3 0.5 2011 5.5 4.0 1.5 2012 4.7 2.7 2.0 2013 3.0 1.7 1.3 2014 (2.1) (2.6) 0.5

Comps – Comparable store sales. Note: Fiscal years end the Saturday closest to Aug. 31. Source: Company filings.

Leveraged Finance


on improving Family Dollar’s comps to be in line with Dollar Tree’s 2%–4% range, strengthening the profitability of Family Dollar stores, and the company using FCF toward debt reduction.

Margins Lead the Dollar Store Sector Dollar Tree’s profitability has historically led dollar store peers. Fitch believes this is due to a combination of robust sales growth, a merchandise mix that contains a smaller percentage of lower margin consumable products, and effective cost and inventory management. Dollar Tree’s gross margin has experienced modest compression in recent periods due to higher freight costs, but has been maintained at around 35% over the past six years. Selling, general and administrative expenses have declined by 160 bps since 2010 to 23.2% of sales for the year ended Jan. 31, 2015. Operating margin, as reported, improved from 10.7% in fiscal 2010 to approximately 12% prior to the acquisition of Family Dollar.

The acquisition of Family Dollar is dilutive to Dollar Tree’s margins given Family Dollar’s meaningfully lower profitability. Family Dollar had an EBITDA margin of 7.6% in fiscal 2014, over 700 bps lower than Dollar Tree. Pro forma EBITDA margin as of May 2, 2015 is approximately 11%. Fitch forecasts moderate improvement over the intermediate term as cost synergies are realized and Family Dollar’s operating performance gradually improves as consumers recognize strategic initiatives focused on improving its value perception and seasonal transition.

Family Dollar’s gross margin declined to 33.7% in fiscal 2014 from a high of 35.7% in fiscal 2010. EBITDA margin fell from 9.8% to 7.1% during the same period. Family Dollar’s margins were pressured by weak comp trends, negative mix shift as lower margin consumable products became a growing percentage of sales, and more recent price investments to improve the company’s value proposition. As part of a strategic initiative to increase operating efficiency and increase financial performance, Family Dollar closed approximately 380 underperforming stores and implemented headcount reductions in 2014.

Comparability of gross margins across the dollar sector may be affected by where store occupancy and distribution costs are classified. Dollar Tree includes these items in cost of sales, whereas Family Dollar historically classified them in selling, general and administrative expenses. Dollar Tree reclassified these costs in Family Dollar’s previous four quarters to conform to Dollar Tree’s calculation of gross profit, widening the gross margin gap as a result. For instance, gross margin for the Family Dollar segment during the first full quarter following the acquisition was 23.5%, compared with 34% for Dollar Tree’s operation.

02468

1012141618

2012 2013 2014


Dollar Store EBITDA Margins

Note: Fiscal years.Source: Company filings, Fitch Ratings, Bloomberg.

(%)

28

30

32

34

36

38

2012 2013 2014


Dollar Store Gross Margins

Note: Fiscal years.Source: Company filings, Fitch Ratings, Bloomberg.

(%)

Leveraged Finance


Business Strategy Dollar Tree has successfully executed its business strategy. The company’s revenue prior to the acquisition of Family Dollar has grown at a 10% CAGR since 2009 to $8.6 billion in 2014, while operating income has increased at a 15% CAGR over the same period. However, Fitch expects integrating Family Dollar and enhancing the brand’s performance to be management’s primary focus in the near term.

Fitch’s Assessment of Dollar Tree’s Business Strategy Strategic Goals Fitch’s Assessment of Progress to Date and Prospects Integrating Family Dollar Dollar Tree expects to realize an annual run rate of $300 Mil. in cost-related synergies by the end of year three post transaction

closing. Sources include procurement, rebannering Family Dollar stores to achieve optimization of formats, distribution, logistics and overhead. Fitch views the target, which represents roughly 3% of the deal price, as low and therefore achievable.

Driving Top-Line Growth Fitch projects revenue will grow at a midsingle-digit rate annually due to 3% comps growth at Dollar Tree, improving sales performance at Family Dollar and new store openings. Dollar Tree has opened stores at a 6%–7% rate annually and believes the market can support up to 7,000 of its stores in the U.S. and up to 1,000 stores in Canada, representing a near 50% increase in its store base. Fitch does not expect significant new store growth at Family Dollar as Dollar Tree is currently focused on fixing productivity of existing stores. Dollar Tree is expected to open about 300 stores annually. Effective merchandising, benefits from an improved pricing and promotional strategy at Family Dollar and increased consumer discretionary income should support low single-digit comps growth. Merchandising efforts include the continued rollout of frozen and refrigerated items in more stores; maintaining seasonal relevance; and an increased emphasis on an expanded assortment of categories, such as pet supplies, healthcare, beauty and home/household products. Fitch anticipates a higher mix of consumable items and expanded offerings could increase Dollar Tree’s traffic and relevance with consumers, but is concerned that mix shift toward lower margin consumables could have an adverse effect on margins, even though EBITDA would grow.

Improving Store Profitability Dollar Tree plans to rebanner a number of low-margin Family Dollar locations as Dollar Tree locations, particular for suburban stores, as this is not the company’s core market. The company believes Dollar Tree’s fixed price point will better match the needs of customers and improve the profitability of lower margin stores. In October 2015, the company also announced it will rebanner all 220 Deals locations (a chain Dollar Tree acquired in March 2006) with 217 Deals stores to be converted to Dollar Tree stores, and the remaining five to be converted to Family Dollar. Dollar Tree has not disclosed the exact number of stores to be rebannered, but views the opportunity to be in the hundreds. Dollar Tree is also rationalizing SKUs and engaging in markdowns to rid Family Dollar stores of dated merchandise. The markdowns are only expected to have a temporary impact on Family Dollar’s gross margin. Fitch also expects purchasing synergies, improved inventory management and reduced shrink to help profitability.

Attaining an Investment-Grade Credit Rating Within Five Years

Dollar Tree had an investment-grade credit profile prior to the acquisition of Family Dollar, as total adjusted debt/EBITDAR was less than 3.0x and lease-adjusted interest coverage approximated 3.0x. The company’s goal is to lower total adjusted debt/EBITDAR to below 3.5x within five years of the transaction closing. Fitch currently views this goal as aggressive, as it would require Dollar Tree to maintain the current momentum in its base business (2%–4% comps growth at the Dollar Tree banners, 6%–7% square footage growth and EBITDA margin in the mid-teens), return Family Dollar to positive 2%–4% comps growth and improve its EBITDA margin from 7.6% at the end of 2014 to its historical range of nearly 10%. It would also require the company to remain committed to applying all discretionary cash toward debt reduction. In November 2015, Dollar Tree completed the sale of 330 stores to Sycamore Partners, which operates Dollar Express, to address FTC concerns related to the acquisition of Family Dollar. The sales price was not disclosed, but using a multiple of 9x and an estimated $56 Mil. of EBITDA generated by these units, Fitch estimates proceeds of approximately $500 Mil. could be available for debt reduction.

Comps – Comparable store sales. Source: Fitch Ratings.

Leveraged Finance


Liquidity and Debt Structure Liquidity was composed of $1.1 billion of cash at the end of Oct. 31, 2015 and $1.19 billion available under a $1.25 billion revolver that expires in July 2020. Fitch expects Dollar Tree to have significant FCF over the next few years, to be applied toward debt reduction. The company does not intend to pay a common dividend in the foreseeable future.

Dollar Tree’s capital structure reflects the financing related to the acquisition of Family Dollar. Acquisition financing included $8.2 billion of debt, consisting of $4.95 billion of secured term loans and $3.25 billion of senior unsecured notes. Approximately 62% of the company’s debt in its pro forma capital structure is secured and 38% is unsecured. Secured debt includes $300 million of Family Dollar legacy notes due 2021. The terms of Family Dollar’s $300 million 2021 notes include a Change of Control Triggering Event clause that may require the company to repurchase the notes at a price equal to 101% of principal plus accrued and unpaid interest. The notes currently remain outstanding and are secured equally and ratably with Dollar Tree’s secured bank facility.

Capital Structure ($ Mil., At of Oct. 31, 2015) Description Amount (%) Secured $1.25 Bil. Secured Revolving Credit Facility due 3/6/20 0.0 0 $1.00 Bil. Secured Term Loan A due 3/6/20 987.5 8 $3.95 Bil. Secured Term Loan B due 7/6/22a 3,941.7 31 Family Dollar 5.00% Senior Notes due 2/1/21b 300.0 2 Total Secured Debt 5,229.2 41 Unsecured 5.250% Senior Notes due 3/1/20 750.0 6 5.750% Senior Notes due 3/1/23 2,500.0 20 Other Debt (Various Maturities) 7.0 Less than 1 Total Unsecured Debt 3,257.0 26 Total Debtc 8,486.2 67 Shareholders’ Equity 4,142.2 33 Total Capitalization 12,628.4 100 aTerm Loan B consist of a $3.3 Bil. variable and a $650 Mil. 4.250% fixed-rate portion. bTo the extent Family Dollar’s 2021 notes remain outstanding at closing, they are expected to be secured equally and ratably with Dollar Tree’s secured bank facilities. cIncludes approximately $142 Mil. of unamortized discount and debt issuance costs. Source: Company filings, Fitch Ratings.


Cash and Short-Term Investments 1,110.9 Revolver Availability 1,186.8 Total 2,297.7


Scheduled Debt Maturitiesa ($ Mil., At Oct. 31, 2015) 2016 89.5 2017 139.5 2018 189.5 2019 189.5 2020 189.5 Thereafter 7,871.2 aCalendar year; excludes Other Debt. Source: Company filings, Fitch Ratings.

Leveraged Finance



Fitch has assigned a ‘bb+*/rr1*’ to the senior secured revolver and term loans at Dollar Tree, Inc. and the 5% legacy notes at Family Dollar Stores, Inc., indicating outstanding recovery prospects (91%–100%) in the event of default. Unsecured debt will typically achieve average recovery (31%–50%) and has been assigned ‘bb-*/rr4*’.


Leveraged Finance


Appendix A

Organizational Structure — Dollar Tree, Inc. ($ Mil., As of Oct. 31, 2015)

aTerm Loan B consists of a $3.3 Bil. variable and a $650 Mil. 4.25% fixed-rate portion. bTo the extent Family Dollar’s 2021 notes remain outstanding at closing, they are expected to be secured equally and ratably with Dollar Tree’s secured bank facilities. CO – Credit opinion. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions.Source: Company filings, Fitch Ratings.

Dollar Tree Stores, Inc.(Guarantor)

Dollar Tree, Inc.(Parent)

CO — bb–*/Stable

Amount—

987.53,941.7

750.02,500.0

7.08,186.2

Debt Issue$1.25 Bil. Secured Revolver Due 3/9/20 Secured Term Loan A Due 3/9/20Secured Term Loan B Due 7/6/22a

5.250% Senior Unsecured Notes Due 3/1/205.750% Senior Unsecured Notes Due 3/1/23Other DebtTotal

Dollar Tree Distribution, Inc.Distribution Company

100% Owned

CObb+*/rr1*bb+*/rr1*bb+*/rr1*bb–*/rr4*bb–*/rr4*

Dollar Tree Management, Inc.Servicing Company

Subsidiaries(Guarantor)

Greenbrier International, Inc.Sourcing Company

Dollar Tree Stores Canada, Inc.

Family Dollar Stores, Inc.(Guarantor)

Amount3005.000% Sr. Notes Due 2/1/21b

CObb+*/rr1

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary Dollar Tree, Inc. Overview Borrower Dollar Tree, Inc. Document Date and Location March 9, 2015

Exhibit 10.1 to 8-K filed March 9, 2015

Maturity Date Revolver and Term Loan A: Five years after the closing date of the Family Dollar acquisition, unless any of the 2020 5.250% senior notes remain outstanding as of 91 days prior to their stated maturity, in which case the revolver will mature at such time. Term Loan B: Seven years after the closing date of the Family Dollar acquisition.

Description of Debt $1,250 Mil. senior secured revolver, $1,000 Mil. senior secured Term Loan A tranche and $3,950 Mil. Term Loan B tranche. Amount ($ Mil.) $6,200 Mil., with incremental commitments than can be both first lien and second lien. The total amount of incremental commitments is

firstly $1 Bil. and then up to a 3x total first lien leverage ratio. Ranking Senior secured. Security Secured by substantially all of the assets of Dollar Tree, including its mortgaged properties, and assets of the guarantors.

Certain securities are excluded, including equity interests or indebtedness agreed by the collateral agent and borrower to be excluded, equity interests of wholly owned subsidiaries to the extent that organizational documents do not permit commercial tort claims with a value less than $15 Mil., and motor vehicles and other assets subject to certificates of title. Collateral Suspension: If the revolver is outstanding during a collateral suspension period (rated at least Baa3 by Moody’s and at least BBB– by S&P), with respect to the revolver only, total net leverage ratio cannot exceed 2.25x.

Guarantee Subject to exceptions, the facility is guaranteed on an unsecured basis by all wholly owned material domestic subsidiaries of Dollar Tree.


Ratio Debt: Allowed as long as total net leverage ratio < 5x. Notable Permitted Debt: 1) Additional all-purpose debt up to the greater of $425 Mil. and 3% of consolidated total assets; 2) assumed acquisition debt as long as total net leverage ratio < 5x; 3) qualified receivables facilities up to the greater of $100 Mil. and 0.75% of consolidated total assets.

Limitation on Liens Additional liens (first and second) on the same collateral is allowed up to the greater of $500 Mil. and 3.5% of consolidated total assets.

Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as 35% voting control or the board of directors cease to consist of a majority of existing directors, and constitutes an

event of default. M&A, Investments Restriction Investments in aggregate outstanding amount not to exceed the sum of: 1) The greater of $1.4 Bil. and 10% of consolidated total

assets; and 2) the amount equates to any returns actually received in respect of any such investment (excluding any returns in excess of the amount originally invested). Any additional investment as long as after giving effect to the investment, total net leverage ratio does not exceed 3.5x.

Sale of Assets Restriction Sale lease-back transactions with respect to one distribution center property per fiscal year with net proceeds limited to $75 Mil.; Asset sales at fair market value with at least 75% of proceeds in cash and any non-cash consideration received cannot exceed the greater of $300 Mil. and 2% of consolidated total assets. Proceeds are subject to prepayment requirements.

Restricted Payments Restricted Payments (RP) RP Basket: $150 Mil. plus 50% of net income starting in February 2015 and conditioned upon total net leverage ratio being less

than 4.5x. Notable Permitted Payments: Additional all-purpose payments up the greater of $500 Mil. and 3.5% of consolidated total assets. Special Situation: No restriction on payments as long as total leverage ratio is less than 3.5x.

Other Cross-Default Yes, for any amount $75 Mil. or greater. Cross Acceleration N.A. MAC Clause MAC clause is only a condition for executing the agreement. Equity Cure N.A. Covenant Suspension No. Required Lenders/Voting Rights Lenders holding more than 50% of the aggregate commitments.

M&A – Mergers and acquisitions. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/935703/000093570315000029/exhibit101termloanbcredita.htm

http://www.sec.gov/Archives/edgar/data/935703/000093570315000029/exhibit101termloanbcredita.htm

Leveraged Finance


Bank Agreement Covenant Summary — Dollar Tree, Inc. (Continued) Financial Covenants First Lien Secured Net Leverage (Maximum) Consolidated Net Leverage On or before the one-year anniversary of the closing date of Family Dollar acquisition. 4.00x After the one-year anniversary of the closing date and on or before the two-year anniversary. 3.75x After the two-year anniversary of the closing date. 3.50x Coverage (Minimum) — Current Ratio (Minimum) — Excess Availability (Minimum) — Net Worth (Minimum) — Principal Repayments

Mandatory/Tax Prepayment 50% of excess cash flow; 100% of asset sale net proceeds Amortization Schedule Term Loan A amortizes at a quarterly installment of 1.25% (5% annually) of the principal amount in the first year

following the closing of the Family Dollar acquisition, 2.5% (10% annually) of the principal amount in the second year following the acquisition, and 3.75% (15% annually) of the original principal amount thereafter. Term Loan B amortizes at a quarterly installment of 0.25% (1.00% annually) of the original principal amount following the closing of the acquisition of Family Dollar.

Callability/Optional Prepayment Optional prepayment in whole or in part without premium or penalty; Term Loan B tranche requires a 1% prepayment fee if the loans are repriced before March 9, 2016.

Pricing

Coupon Type/Index Revolving Credit Facility and Term Loan A: L + 2.25% Term Loan B: $3.3 Bil., seven-year at L + 2.75%, subject to a 0.75% floor and $650 Mil., seven-year fixed at 4.25%

Source: Fitch Ratings.

Leveraged Finance


Appendix C

Bond Covenant Summary — Dollar Tree, Inc. Overview Issuer Dollar Tree, Inc. Document Date and Location Indenture, Dated as of Feb. 23, 2015 (Exhibit 4.2 to 8-K filed Feb. 23, 2015)

Maturity Date February 2023 Description of Debt 5.750% Senior Notes Amount ($ Mil.) and OID (%) $2.5 Bil. Ranking Payment pari passu with bank debt. Security Unsecured debt. Guarantee Subject to exceptions, guaranteed on an unsecured basis by all wholly owned material domestic subsidiaries of Dollar Tree. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Allowed as long as fixed-charge coverage ratio > 2.0x, with sublimit of $500 Mil. or 3.5% of total assets for

nonguarantor subsidiaries debt. Notable Permitted Debt: 1) capital lease obligations up to the greater of $300 Mil. and 2.25% of total assets; 2) assumed acquisition debt as long as fixed-charge coverage ratio > 2.0x and the ratio does not go down as result of the acquisition; 3) additional all-purpose debt up to the greater of $750 Mil. and 5.5% of total assets.

Limitation on Liens New lien is allowed as long as secured leverage ratio is less than 3x. Limitation on Guarantees Guarantees are treated as indebtedness and are limited by Limitation on Indebtedness. Acquisitions/Divestitures Change of Control (CoC) CoC includes sale of substantially all assets or acquisition of more than 50% voting stock by outsiders. When this occurs, there’s a

call option at 101%. M&A, Investments Restriction Not to exceed the sum of the greater of $1,750 Mil. and 13% of total assets plus amount of any returns with respect to the

investments. Joint venture and unrestricted subsidiary investments also limited. Sale of Assets Restriction Asset sales must be done in the form of 75% as cash equivalents. The proceeds from the asset sale needs to be reinvested within

a year or repay the first lien bank debt. Restricted Payments Restricted Payments (RP) RP Basket: 1) $250 Mil. plus 2) 50% of cumulative net income from February 2015 plus 3) 100% of proceeds from new debt

issuance and new equity issuance. Subject to fixed-charge coverage ratio > 2.0x. Other Notable Permitted Restricted Payments: 1) Additional all-purpose payments up to the greater of 750 Mil. and 5.5% of total assets. Note: no limitation on restricted payments if total leverage ratio <3.5x.

Other Cross Default N.A. Cross Acceleration Yes, if total accelerated debt is more than $100 Mil. MAC Clause No MAC clause. Equity Clawback No. Covenant Suspension If both Moody’s and S&P rate the notes above investment grade, covenants are suspended

OID – Original Issue Discount. M&A – Mergers and acquisitions. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/935703/000093570315000016/ex422023notes.htm

Leveraged Finance


Appendix D

Bond Covenant Summary Dollar Tree, Inc. Overview Issuer Dollar Tree, Inc. Document Date and Location Indenture, Dated as of Feb. 23, 2015 (Exhibit 4.1 to 8-K filed Feb. 23, 2015)

Maturity Date February 2020 Description of Debt 5.250% Senior Notes Amount ($ Mil.) and OID (%) $750 Mil. Ranking Payment pari passu with bank debt. Security Unsecured debt. Guarantee Subject to exceptions, guaranteed on an unsecured basis by all wholly owned material domestic subsidiaries of Dollar Tree. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Allowed as long as fixed-charge coverage ratio > 2.0x, with sublimit of $500 Mil. or 3.5% of total assets for

nonguarantor subsidiaries debt. Notable Permitted Debt: Debt to finance acquisitions, due to sale/leaseback transactions, and in connection with securitization financing.

Limitation on Liens New lien is allowed as long as secured leverage ratio is less than 3x. Limitation on Guarantees Guarantees are treated as indebtedness and are limited by Limitation on Indebtedness. Acquisitions/Divestitures Change of Control (CoC) CoC includes sale of substantially all assets or acquisition of more than 50% voting stock by outsiders. When this occurs, there’s a

call option at 101%. M&A, Investments Restriction Not to exceed the sum of the greater of $1,750 Mil. and 13% of total assets plus amount of any returns with respect to the

investments. Joint venture and unrestricted subsidiary investments also limited. Sale of Assets Restriction Asset sales must be done in the form of 75% as cash equivalents. The proceeds from the asset sale need to be reinvested within a

year or repay the first lien bank debt. Restricted Payments Restricted Payments (RP) RP Basket: 1) $500 Mil. plus 2) 3.5% of Total Assets. Subject to fixed-charge coverage ratio > 2.0x.

Other Notable Permitted Restricted Payments: 1) Additional all-purpose payments up to the greater of 750 Mil. and 5.5% of total assets. Note: no limitation on restricted payments if total net leverage ratio <3.5x.

Other Cross Default N.A. Cross Acceleration Yes, if total accelerated debt is more than $100 Mil. MAC Clause No MAC clause. Equity Clawback No. Covenant Suspension If both Moody’s and S&P rate the notes above investment grade, covenants are suspended

OID – Original Issue Discount. M&A – Mergers and acquisitions. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/935703/000093570315000016/ex412020notes.htm

Leveraged Finance


Appendix E

Bond Covenant Summary Family Dollar Stores, Inc. Overview Issuer Family Dollar Stores, Inc. Document Date and Location Indenture, Dated as of Jan. 28, 2011 (Exhibit 4.1 to 8-K filed Jan. 28, 2011)

Maturity Date February 2021 Description of Debt 5.000% Senior Notes Amount ($ Mil.) and OID (%) $300 Mil. Ranking Payment pari passu with bank debt. Security Same as credit facility. Guarantee Guaranteed by all Family Dollar’s existing subsidiaries. Debt Restrictions Debt Incurrence N.A. Limitation on Liens Incurring, assuming or guaranteeing certain secured debt without securing the notes on an equal and ratable basis is not allowed. Limitation on Guarantees N.A. Acquisitions/Divestitures Change of Control (CoC) Change of Control Triggering Event clause. CoC includes sale of substantially all assets or acquisition of more than 50% voting stock

by outsiders. When this occurs, there’s a call option at 101%. M&A, Investments Restriction N.A. Sale of Assets Restriction Limitation on sale/leaseback transaction where the sale of assets must be at least equal to their fair market value, entitled to incur

debt secured by a lien on property being leased without equally and ratably securing the notes, or the amounts must be applied to debt reduction or the purchase of assets. Restriction does not apply if value of sale/leasebacks and other secured debt does not exceed 15% of Consolidated Net Tangible Assets.

Restricted Payments Restricted Payments (RP) N.A. Other Cross Default N.A. Cross Acceleration N.A. MAC Clause None. Equity Clawback N.A. Covenant Suspension N.A.

OID – Original Issue Discount. N.A. – Not applicable. M&A – Mergers and acquisitions. MAC – Material adverse change. Source: Company filings, Fitch Ratings.


Leveraged Finance


Appendix F

Financial Summary — Dollar Tree, Inc. 12 Months Three Months



LTM Ended

($ Mil.) 1/28/12 2/2/13 8/3/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Profitability Operating EBITDAa 977.6 1,130.9 247.9 252.9 435.3 1,197.8 282.6 254.9 270.6 476.3 1,284.4 304.5 222.1 416.2 1,419.1 Operating EBITDA Margin (%) 0.1 15.3 13.4 13.4 19.5 15.3 14.1 12.6 12.9 19.2 14.9 14.0 7.4 8.4 11.3 FFO Return on Adjusted Capital (%)b 0.2 21.1 21.3 21.4 22.4 22.4 21.6 20.3 20.7 22.0 22.0 11.4 9.3 8.4 8.4 FCF Margin (%) 0.1 4.9 4.0 (1.0) 17.0 5.9 6.3 3.9 (3.4) 18.9 7.0 2.9 (9.2) (3.5) 0.6 Coverages (x) FFO Interest Coverage 250.7 259.0 295.2 35.2 35.8 53.9 19.9 16.6 25.0 8.1 12.1 2.1 0.3 1.0 1.6 Operating EBITDA/ Gross Interest Expense 337.1 403.9 354.1 48.6 48.9 77.8 34.9 30.3 29.1 8.8 16.0 2.5 0.8 4.2 2.6 FFO Fixed-Charge Coverage 2.7 2.6 2.6 2.4 3.3 2.6 2.1 1.9 2.6 3.0 2.4 1.5 0.6 1.0 1.3 FCF Debt-Service Coverage (LTM)b 23.9 21.5 21.5 19.2 17.0 17.0 25.6 19.6 15.8 8.5 8.5 3.8 1.2 1.0 1.0 Cash Flow from Operations/Capex (x) 2.7 2.2 1.7 0.8 9.3 2.4 2.8 1.9 0.2 7.6 2.8 1.9 (1.7) (0.0) 1.2 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA — — — — — — — — — — — 3.0 — — — Long-Term Secured Debt/ FFO — — — — — — — — — — — 4.5 — — — Total Debt with Equity Credit/ Operating EBITDA 0.3 0.2 0.2 0.8 0.6 0.6 0.6 0.6 0.6 0.6 0.6 6.0 6.6 5.9 5.9 FFO-Adjusted Leverage 3.2 3.3 3.2 3.9 3.6 3.6 3.7 3.8 3.7 3.4 3.4 7.6 8.2 9.0 9.0 Total Adjusted Debt/ Operating EBITDAR 2.6 2.5 2.5 2.9 2.8 2.8 2.9 2.9 2.9 2.8 2.8 6.6 7.0 6.5 6.5 FCF/Total Adjusted Debt (%) 11.9 9.3 7.7 7.4 9.7 9.7 11.1 11.2 10.2 11.9 11.9 4.4 1.4 0.6 0.6 Balance Sheet Short-Term Debt 15.5 14.3 12.8 12.8 12.8 12.8 — — — — — — 83.0 95.5 95.5 Long-Term Senior Secured Debt — — — — — — — — — — — 3,870.9 — — — Long-Term Senior Unsecured Debt 250.0 257.0 257.0 1,007.0 757.0 757.0 757.0 757.0 757.0 757.0 757.0 3,948.8 8,265.5 8,248.0 8,248.0 Long-Term Subordinated Debt — — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — — Total Debt with Equity Credit 265.5 271.3 269.8 1,019.8 769.8 769.8 757.0 757.0 757.0 757.0 757.0 7,819.7 8,348.5 8,343.5 8,343.5 Off-Balance Sheet Debtc 3,388.8 3,660.0 3,971.2 3,971.2 3,985.6 3,985.6 4,306.4 4,306.4 4,306.4 4,306.4 4,306.4 4,306.4 4,306.4 4,306.4 4,306.4 Total Adjusted Debt with Equity Credit 3,654.3 3,931.3 4,241.0 4,991.0 4,755.4 4,755.4 5,063.4 5,063.4 5,063.4 5,063.4 5,063.4 12,126.1 12,654.9 12,649.9 12,649.9 Cash Flow Funds From Operations 724.1 722.4 206.0 177.9 309.3 814.2 152.7 131.0 223.3 383.9 890.9 129.8 (175.5) (4.8) 333.4 Change in Working Capital (37.6) (44.7) (35.0) (111.5) 117.4 (20.8) 45.5 36.1 (200.1) 154.4 35.9 — — — 154.4 Cash Flow from Operations 686.5 677.7 171.0 66.4 426.7 793.4 198.2 167.1 23.2 538.3 926.8 129.8 (175.5) (4.8) 487.8 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — — Capex (250.1) (312.2) (96.4) (84.5) (46.0) (330.1) (71.9) (88.3) (94.2) (71.2) (325.6) (66.9) (100.4) (169.6) (408.1) Dividends — — — — — — — — — — — — — — — FCF 436.4 365.5 74.6 (18.1) 380.7 463.3 126.3 78.8 (71.0) 467.1 601.2 62.9 (275.9) (174.4) 79.7 Net Acquisitions and Divestitures — — — — (0.3) (0.3) 0.3 — 1.4 (1.7) — — (6,525.6) (2.1) (6,529.4) Net Debt Proceeds (2.0) 5.5 (1.5) 750.0 (250.0) 498.5 (12.8) — — — (12.8) 7,180.2 84.6 (20.8) 7,244.0 Net Equity Proceeds (635.0) (330.2) (42.2) (998.5) 1.0 (1,106.1) 1.9 1.4 1.1 1.1 5.5 2.6 1.3 2.3 7.3 Other (Investing and Financing) 177.7 70.8 (0.5) — (10.8) 12.4 3.7 0.4 8.4 (10.0) 2.5 (7,239.4) 7,147.7 (0.6) (102.3) Total Change in Cash (22.9) 111.6 30.4 (266.6) 120.6 (132.2) 119.4 80.6 (60.1) 456.5 596.4 6.3 432.1 (195.6) 699.3 Ending Cash and Securities Balance 288.3 399.9 413.7 147.1 267.7 267.7 387.1 467.7 407.6 864.1 864.1 870.4 1,302.5 1,106.9 1,106.9 Short-Term Marketable Securities — — — — — — — — — — — — 4.0 4.0 4.0 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — Dollar Tree, Inc. (Continued) 12 Months Three Months



LTM Ended

($ Mil.) 1/28/12 2/2/13 8/3/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Income Statement Revenue 6,630.5 7,394.5 1,854.9 1,884.7 2,234.9 7,840.3 2,000.3 2,031.1 2,095.2 2,475.6 8,602.2 2,176.7 3,011.2 4,945.2 12,608.7 Revenue Growth (%) 0.1 11.5 8.8 9.5 (0.5) 6.0 7.2 9.5 11.2 10.8 9.7 8.8 48.3 136.0 50.8 Operating EBIT 813.7 955.6 201.3 204.3 385.1 1,007.3 231.9 205.0 219.7 421.9 1,078.5 251.7 132.6 246.0 1,052.2 Gross Interest Expense 2.9 2.8 0.7 5.2 8.9 15.4 8.1 8.4 9.3 54.3 80.1 122.2 263.9 98.4 538.8 Sector-Specific Data Comparable Store Sales (%)d 6.0 3.4 3.7 3.1 1.2 2.4 1.9 4.4 5.9 5.6 4.3 3.1 2.7 2.1 2.8 No. of Stores 4,351 4,671 4,842 4,953 4,992 4,992 5,080 5,166 5,282 5,367 5,367 5,454 13,864 14,038 14,038 Gross Margin (%) 35.9 35.9 35.0 35.0 36.9 35.6 34.8 34.2 34.6 37.1 35.3 34.4 28.4 28.3 31.1 SG&A/Revenues (%) 23.6 23.0 24.1 24.2 19.7 22.7 23.2 24.1 24.1 20.0 22.7 22.8 24.0 23.3 22.8 Operating EBIT Margin (%) 12.3 12.9 10.9 10.8 17.2 12.8 11.6 10.1 10.5 17.0 12.5 11.6 4.4 5.0 8.3 Operating EBITDAR Margin (%) 21.1 21.5 20.1 20.0 25.1 21.6 20.9 19.2 19.3 24.7 21.2 20.2 11.8 11.1 15.5 Operating EBITDAR/ (Interest + Rent) (x)b 3.3 3.5 3.0 2.9 4.2 3.3 2.9 2.7 2.8 3.2 2.9 1.7 0.9 2.4 1.8 Inventory Turnover (x)b 5.1 5.2 5.2 4.2 5.0 5.0 5.0 5.0 4.3 5.4 5.4 5.3 3.3 3.9 3.9 Accounts Payable Turnover (x)b 15.5 15.0 12.8 10.6 13.6 13.6 12.3 11.2 10.1 13.5 13.5 11.8 7.8 9.6 9.6 Return on Invested Capital (%)b 24.8 25.2 24.4 25.3 25.4 25.4 24.0 23.7 23.6 23.6 23.6 11.7 9.4 9.5 9.5 Return on Assets (%)b 21.0 22.5 22.1 21.2 21.5 21.5 20.3 19.0 18.0 16.8 16.8 4.9 1.9 1.6 1.6 Capex/Depreciation (%)b 152.6 178.1 206.9 173.9 91.6 173.3 141.8 177.0 185.1 130.9 158.1 126.7 112.2 99.6 99.6 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

GNC Holdings, Inc. Credit Profile

Credit Profile Summary Leading Share of Strong Category: GNC Holdings, Inc. (GNC) is a leading specialty retailer of health and wellness products, including vitamins, minerals and herbal supplements (VMHS), and sports nutrition and diet products. GNC’s retail strategy is supported by its broad store footprint, brand leadership, and focus on the sports nutrition and vitamin categories. GNC has benefited from historically stable growth in the VMHS segment, which has produced a 15-year CAGR of approximately 6%.

Near-Term Sales Deceleration: GNC’s sales have been soft since 2014, due to share loss to alternative channels (including discount/online), reduced promotions and negative media surrounding key segments of the VMHS industry. Same-store sales fell 2.8% in 2014 and approximately 1.7% in 2015, compared with 4.3% and 11.5% growth in 2013 and 2012, respectively. Fitch Ratings expects same-store sales to improve to 0%–1% over the next two years given a focus on wellness categories, new loyalty offerings and lapping promotional reductions.

Limiting Promotions to Support Margins: GNC’s EBITDA margins have narrowed to a still-healthy 18.5% in the LTM period ended Oct. 31, 2015 from 20.2% in 2013, with declines stemming from sales deleverage and product mix. Fitch expects margins to stabilize at current levels as the company reduces promotional activity and sales growth resumes. Fitch expects GNC’s EBITDA to trough at $486 million in 2015, down 9% from the 2013 peak of $532 million, and improve modestly toward $517 million by 2018, primarily driven by revenue growth.

Increased Leverage: GNC’s leverage (adjusted debt/EBITDAR) increased from 4.3x in 2012 to 4.6x in 2014 on flattish EBITDA and higher debt. Year-end 2015 leverage is expected to increase to 5.0x on a modest EBITDA decline and debt issuance to fund share buybacks. Given expectations of slight EBITDA growth over the next 24–36 months, leverage is projected to remain around 5.0x, versus prior forecasts of leverage in the 4.6–4.7x range. However, leverage may increase further should management continue issuing debt to finance share buybacks.

Comfortable Liquidity and Maturities: GNC had $164 million in cash on hand and $129 million of availability under its revolver as of Sept. 30, 2015. Fitch expects GNC to generate FCF after dividends in the $160 million–$180 million range over the next two years, and to deploy FCF toward share buybacks. GNC has no material debt maturities until a $1.2 billion term loan maturity in 2019.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers are centered on the resumption of midsingle-digit growth in EBITDA and FCF, and an improvement in leverage to the mid-4.0x range.

Negative Drivers: Negative credit profile drivers include further deterioration in top-line and EBITDA, and/or aggressive shareholder-friendly activity, including debt-financed share buybacks, resulting in sustained leverage above 5.0x.



Credit Opinion GNC Holdings, Inc. carries a ‘bb–*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data GNC Holdings, Inc.

($ Mil.) FYE

12/31/14 LTM

9/30/15 Total Revenue 2,613.2 2,625.3 EBITDA 499.6 484.9 EBITDA Margin (%) 19.1 18.5 FCF 175.8 234.8 Total Adjusted Debt 3,627.9 3,748.4 Total Adjusted Debt/EBITDAR (x) 4.6 4.9 EBITDAR/(Interest + Rent) (x) 2.4 2.3 Same-Store Sales (%)a (2.8) (2.5) Real Estate Owned (%) 0 0 No. of Storesb 8,976 9,042 aSame-store sales for the LTM reflect the performance for the nine months ended Sept. 30, 2015. bNo. of stores included all store formats including company-owned, franchise stores, and Rite Aid store-in-stores.





Leveraged Finance



Leading Player in Historically Strong Category GNC is a leading specialty retailer of health and wellness products, including VMHS, and sports nutrition and diet products. At $2.6 billion in 2014 revenue, GNC has an estimated 7% share of the approximately $37 billion U.S. industry. The company derives almost three-quarters of its revenue from company-owned stores and e-commerce, and the rest from global franchise activities and third-party contract manufacturing, which allow GNC to leverage its embedded manufacturing capacity. The company has a loyal customer base through its Gold Card program, which has approximately 7 million customers, generating 80% of retail revenue.

The company sells both GNC-branded products and third-party products. GNC-branded products (e.g. Mega Men, Ultra Mega, GNC Total Lean, Pro Performance and Pro Performance AMP) accounted for more than $1.2 billion (46%) of total sales in 2014, and are sold in GNC outlets and Rite Aid store-within-a-store locations. GNC’s current strategy is to evolve its sales mix toward wellness and natural/protein-based products, broadening reach into the faster-growth segments within VMHS.

GNC had 9,042 locations as of Sept. 30, 2015, which include 6,937 in the U.S. (3,556 company-owned, 1,062 franchised and 2,319 locations within Rite Aid stores), and franchise operations in over 50 countries. The company will expand its retail footprint beginning in fourth-quarter 2015, primarily via franchising, reducing capital intensity and improving cash flow consistency. Refranchising of existing company stores is also expected, as the company expects a more balanced portfolio of owned and franchised locations, versus the approximately 25% of locations that are franchised today. Fitch anticipates 2%–3% total store growth beginning in 2016 following midsingle-digit growth in recent years.

Segment Trends As GNC transitions square footage expansion to franchised locations, it plans to grow sales in its retail/e-commerce segment (74% of total revenue and 60% of EBITDA) by improving in-store

Fitch Base Case Assumptions — GNC Holdings, Inc. ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 2,613.2 2,639.8 2,692.2 2,746.2 — Revenue Growth (%) (0.7) 1.0 2.0 2.0 — Same-Store Sales (%) (2.8) (1.7) 0.9 0.9 2016 assumes rebound on easier

comparisons and loyalty card enhancements.

EBITDA 500 486 498 508 — EBITDA Margin (%) 19.1 18.4 18.5 18.5 Margins assumed flat as price

investments mitigate sales leverage. Working Capital Change (49) (2) (4) (5) — Cash Flow From Operations 304 316 313 319 — Capex (71) (40) (54) (55) — Dividends (57) (57) (57) (57) — FCF 176 219 202 207 — Share Repurchases (284) (480) (200) (200) — Total Debt 1,342 1,551 1,546 1,542 — Total Adjusted Debta 3,628 3,950 3,994 4,039 — Total Adjusted Debt/ EBITDAR (x)

4.6 5.0 4.9 4.9 Company target equates to around 4.5x Fitch-defined leverage, but indicated 2015 will end above target due to debt-financed buybacks.

aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


sales productivity and investing in its various Web sites, including GNC.com, Lucky Vitamin and Discount Supplements. Retail sales for the LTM period ended Sept. 30, 2015 were flat at $1.9 billion, as store count growth was mitigated by negative same-stores sales.

Despite continued industry growth, GNC’s same-store sales have declined since 2014 due to planned reductions in promotions, market share loss to faster growing retail competitors and other channels, and an industry shift toward natural/wellness products, where GNC has historically had less presence. Fitch expects same-store and total retail sales growth to turn modestly positive in 2016, as the company cycles through promotional reductions and refocuses its assortment toward natural/wellness products. The company also plans to introduce a loyalty component to its Gold Card discount program in 2016, which could drive improved pricing perception and repeat purchases.

Segment Financial Data and Store Count ($ Mil.) 2010 2011 2012 2013 2014

LTM 9/30/15

Revenue

Retail 1,344.4 1,518.5 1,785.0 1,926.8 1,939.2 1,937.2 Franchise 293.5 334.8 408.1 440.5 432.8 456.6 Manufacturing/Wholesale 184.3 218.9 236.9 263.1 241.2 231.5 Total Net Sales 1,822.2 2,072.2 2,430.0 2,630.3 2,613.2 2,625.3 Revenue Growth (%)

Retail 7.0 13.0 17.6 7.9 0.6 (0.1) Franchise 11.1 14.1 21.9 7.9 (1.7) 5.3 Manufacturing/Wholesale (1.2) 18.8 8.2 11.1 (8.3) (7.4) Total Net Sales 6.7 13.7 17.3 8.2 (0.7) 0.1 Revenue Contribution by Segment (%)

Retail 73.8 73.3 73.5 73.3 74.2 73.8 Franchise 16.1 16.2 16.8 16.7 16.6 17.4 Manufacturing/Wholesale 10.1 10.6 9.7 10.0 9.2 8.8 Total Net Sales 100.0 100.0 100.0 100.0 100.0 100.0 EBIT (Before Warehouse/Distribution and Corporate Overhead Expenses) Retail 181.9 243.5 346.4 360.2 349.0 315.8 Franchise 94.2 111.3 136.5 156.0 157.3 188.1 Manufacturing/Wholesale 69.4 82.2 95.5 104.7 89.9 87.2 Total EBIT 345.5 437.0 578.3 620.9 596.2 591.1 EBITDA (Before Warehouse/Distribution and Corporate Overhead Expenses) Retail 208.1 269.5 374.7 390.9 383.6 — Franchise 97.2 114.2 139.5 159.0 160.4 — Manufacturing/Wholesale 80.8 93.8 107.0 115.7 100.6 — Total EBITDA 386.2 477.4 621.2 665.7 644.6 — EBITDA Growth (%)

Retail 17.4 29.5 39.1 4.3 (1.9) — Franchise 14.6 17.4 22.2 14.0 0.8 — Manufacturing/Wholesale (4.3) 16.1 14.0 8.2 (13.0) — Total EBITDA 11.5 23.6 30.1 7.2 (3.2) — EBITDA Margin (%) Retail 15.5 17.7 21.0 20.3 19.8 — Franchise 33.1 34.1 34.2 36.1 37.0 — Manufacturing/Wholesale 43.8 42.8 45.2 44.0 41.7 — EBITDA Contribution by Segment (%)

Retail 59.2 60.8 64.1 62.3 59.5 — Franchise 27.6 25.8 23.9 25.3 24.9 — Manufacturing/Wholesale 23.0 21.2 18.3 18.4 15.6 —


Leveraged Finance


Franchise sales (17% of total revenue and 25% of EBITDA) consist of wholesale product revenues to franchisees (83%), royalties (14%) and franchise fees. Franchise sales grew 5.9% on an LTM basis, primarily due to higher product sales, as franchisees increase their proportion of inventory purchases from GNC to leverage the franchisor’s buying leverage and scale. Fitch expects franchise growth to remain in the midsingle digits due to the company’s focus on franchised unit expansion.

The manufacturing/wholesale segment — 9% of total revenue and 16% of EBITDA — includes sales from third-party manufacturing contracts and sales to Rite Aid store-within-a-store locations, Sam’s Club, PetSmart and www.drugstore.com. GNC stores within Rite Aid locations are typically 400 sq ft–900 sq ft versus 1,000 sq ft–2,000 sq ft for GNC stand-alone locations. Manufacturing/wholesale segment sales for the LTM period ending Sept. 30, 2015 declined 7.4% compared with a 2.0% decline in the prior year period. The decline is mainly due to a third-party contract manufacturing sales decrease, as some wholesale partners have de-emphasized the VMHS category. Given improving trends in recent quarters, Fitch forecasts flat to slightly positive wholesale revenue growth over the next two to three years.

Industry Fundamentals and Secular Trends The approximately $37 billion VMHS industry, according to the Nutrition Business Journal, has proven to be recession resistant by growing at a midsingle-digit percentage rate through economic cycles. The consumable nature of the products and high frequency of usage as part of regular dietary regimens drive the stability and defensibility of the business. Given an aging U.S. population and increased consumer focus on personal health and wellness, Fitch expects the VMHS industry to continue midsingle-digit growth over the next several years, making it one of the faster growing segments within retail.

Some segments of the industry have been affected in recent years by negative media around FDA recalls, studies regarding the efficacy of certain product categories, and legal action taken by the Department of Justice and state authorities against product manufacturers and retailers. GNC has recalled or removed several products from its shelves in response to legal mandate and/or negative publicity. Fitch believes these actions have affected customer sentiment regarding VMHS, particularly in categories to which GNC is exposed. The risk of additional negative media and legal action is somewhat unique to this segment.

Sales for VMHS pure-play retailers have been somewhat resilient to competition from mass merchandisers and online players, due to the elevated service component of the industry and company-specific loyalty programs, which are highly valuable, especially in a recurring purchase model. However, recent same-store sales weakness may indicate strengthened

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0

10

20

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1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15

(%)Domestic Same-Store Sales Growth YoY Growth in Franchise RevenueYoY Change in EBITDA Margin

Historical Revenue and Margin Growth Trend — GNC

YoY – Year-over-year.Source: Company filings, Fitch Ratings.

Leveraged Finance


competition from alternate channels, due to promotional activity and an increased ability to research products online. Pure-play retailers will need to rely on enhanced service offerings and loyalty programs to maintain market share. While Fitch expects same-store sales to turn slightly positive beginning in 2016, low single-digit sales growth reflects continued share loss to these alternative channels.

Well Positioned Versus Competition GNC is well positioned in a highly fragmented and competitive industry. GNC’s retail strategy is supported by its broad store footprint (significantly larger than Vitamin Shoppe, Inc.’s 748 company-owned stores that generate $1.3 billion in revenue and Vitamin World, Inc., which operates approximately 385 stores), brand leadership and focus on the sports category. Approximately 80% of sales are generated from members of GNC’s Gold Card discount program, illustrating strong relationships with GNC’s customer base.

GNC has also established a relatively strong position in its GNC branded label, e-commerce and international franchise businesses. The acquisitions of LuckyVitamin.com, Discount-Supplements.co.uk, and The Health Store give GNC leeway to compete in the lower price point third-party branded vitamin category, and therefore serves as a defense against increasing competition from online retailers and potential consumer trade-down.

GNC has partnered with dunnhumby, a firm specializing in customer-relation management, to assist in enhancing the aim of its direct-marketing program. With data from 7 million Gold Card members, GNC has built and will continue to build a database of consumer purchasing habits that can be mined to provide more customization in the company’s direct marketing. Fitch views this as a potential competitive advantage for GNC over time.

Total Sales By Geography ($ Mil.) 2010 2011 2012 2013 2014 Revenue U.S. 1,727.5 1,972.1 2,311.8 2,490.1 2,440.8 Foreign 94.7 100.1 118.2 140.2 172.3 Total Net Sales 1,822.2 2,072.2 2,430.0 2,630.3 2,613.2

Revenue Growth (%)

U.S. 6.7 14.2 17.2 7.7 (2.0) Foreign 6.9 5.7 18.1 18.7 22.9 Total Net Sales 6.7 13.7 17.3 8.2 (0.7)

Revenue Contribution by Geography (%)

U.S. 94.8 95.2 95.1 94.7 93.4 Foreign 5.2 4.8 4.9 5.3 6.6


Leveraged Finance


2016 Outlook Fitch expects GNC’s total sales to improve from flattish in 2014–2015 to low single-digit growth over the next two to three years. Same-store sales are expected to turn positive in the 1% range for 2016 as the industry stabilizes. Sales growth is mainly dependent on the positive secular industry drivers, which include the aging population and continued interest in the VMHS category, partially offset from growing online competition and the continued shift toward natural products. GNC plans to introduce a loyalty component to its Gold Card discount program beginning 2016, which could generate additional growth if successful.

GNC’s EBITDA fell from a peak of $532 million in 2013 (20.2% of sales) to an estimated $486 million in 2015 (18.4% of sales). Given slightly positive same-store sales and modest square-footage expansion, Fitch expects EBITDA to trough in 2015 and improve modestly toward $517 million over 2016–2018.

FCF after dividends has improved as a percentage of revenue to the 5%–6% range from less than 2% in 2008. Fitch expects GNC to generate FCF in the $160 million–$170 million range over the next two years, given a manageable interest bill of $40 million–$45 million, relatively modest capex needs in the $50 million–$60 million range and annual dividends of approximately $50 million–$60 million.

GNC’s leverage (adjusted debt/EBITDAR) was 4.9x as of Sept. 30, 2015, slightly up from 4.6x at year-end 2014, primarily due to operating weakness in the first three quarters of 2015. The company targets net debt/EBITDAR leverage at 3.2x–3.4x, capitalizing rent at 5.0x, which equates to Fitch-defined leverage in the mid-4.0x range. However, following a share price decline after GNC reported third-quarter 2015 earnings, the company announced an additional $200 million buyback that Fitch believes will be partially debt financed, yielding a year-end adjusted leverage projection of 5.0x. Though prompted by perceived equity price weakness, this debt issuance may signal a change in management’s approach to leverage. Fitch currently projects modest EBITDA expansion and immaterial debt paydown will yield leverage of 4.9x over the next 2–3 years, though any further debt-financed buybacks may place upward pressure on leverage.

U.S. Segment Sales By Product ($ Mil.) 2010 2011 2012 2013 2014 U.S. Retail Revenue by Product VMHS 496.1 542.6 624.6 663.6 649.1 Sports Nutrition 531.3 621.8 686.2 764.9 759.8 Diet 122.3 139.6 192.3 198.8 193.8 Other Wellness 93.5 99.7 105.9 92.1 110.6 Total Net Sales — U.S. 1,243.2 1,403.7 1,609.0 1,719.4 1,713.4

U.S. Retail Revenue Growth by Product (%)

VMHS (0.1) 9.4 15.1 6.2 (2.2) Sports Nutrition 19.8 17.0 10.4 11.5 (0.7) Diet (4.5) 14.1 37.8 3.4 (2.5) Other Wellness (0.8) 6.6 6.2 (13.0) 20.1 Total Net Sales — U.S. 7.0 12.9 14.6 6.9 (0.4)

U.S. Retail Revenue Contribution by Product (%)

VMHS 39.9 38.7 38.8 38.6 37.9 Sports Nutrition 42.7 44.3 42.6 44.5 44.3 Diet 9.8 9.9 12.0 11.6 11.3 Other Wellness 7.5 7.1 6.6 5.4 6.5 Total Net Sales — U.S. 100.0 100.0 100.0 100.0 100.0

VMHS – Vitamin, mineral and herbal supplement. Source: Company filings, Fitch Ratings.

Leveraged Finance


Capital Structure GNC’s capital structure consists of a $130 million revolver due March 2017, a $1.34 billion term loan due March 2019 and $287.5 million of 1.5% convertible senior notes due August 2020.

GNC had $164 million of cash on hand and $129 million available under its revolver as of Sept. 30, 2015. Fitch expects GNC will remain in compliance with its required covenant levels. Following GNC’s third-quarter earnings report, the company announced it will be buying back $200 million of stock through year-end 2015. Fitch estimates the company will need to draw $85 million from its revolver to execute this buyback.

GNC was owned by Apollo Management starting in 2003. The company was sold to Ontario Teachers’ Pension Plan and Ares Management (the sponsors) in 2007, when it was leveraged around 7.4x based on lease-adjusted debt/EBITDAR. The sponsors have fully exited their investments since the IPO in April 2011.

Capital Structure ($ Mil., At Sept. 30, 2015) Description Amount (%) Secured Debt $130 Mil. Revolver due 3/3/17 — — Senior Secured Term Loan due 3/4/19 1,175.3 80.3 Total Secured Debt 1,175.3 80.3 Unsecured Debt 1.500% Convertible Senior Notes due 8/15/20 287.5 19.7 Total Unsecured Debt 287.5 19.7 Total Debt 1,462.8 100.0


Scheduled Debt Maturities ($ Mil., Sept. 30, 2015)

2016 4.6 2017 4.6 2018 4.6 2019 1,157.1 2020 287.5 Thereafter 0.0

Note: Excludes borrowings under credit facility, mortgages, and capital leases. Source: Company filings, Fitch Ratings.

Liquidity ($ Mil., At Sept. 30, 2015) Cash 164.1 Revolver Availability 128.9 Total 293.0


Leveraged Finance





Leveraged Finance


Appendix A

Organizational Structure — General Nutrition Centers, Inc. ($ Mil., As of Sept. 30, 2015)

CO – Credit Opinion. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions.Source: Company filings, Fitch Ratings.

General Nutrition Centers, Inc.

GNC Holdings, Inc.CO — bb–*/Stable

GNC Corporation (ParentCo)CO — bb–*/Stable

Subsidiary Guarantors Nonguarantor Subsidiaries

Upstream guarantee of credit facilitieson senior secured basis.

Downstream guaranteeof credit facilities

Debt Issue Amount CO$130 Mil. Revolver due 3/3/17 — bb+*/rr1*$1.35 Bil. Term Loan Facility due 3/4/19 1,175.3 bb+*/rr1*1.500% Convertible Senior Notes due 8/15/20 287.5 —Total 1,462.8 —

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — General Nutrition Centers, Inc. Overview Borrower General Nutrition Centers, Inc. Document Date and Location Amending and restated Credit Agreement dated 11/26/13 (Exhibit 10.1 to 8-K filed 12/2/13)

First Amendment dated 12/9/13 (Exhibit 10.1 to 8-K filed 12/10/13) Description of Debt Revolving Credit Facility Term Loan Facility Maturity Date March 3, 2017 March 4, 2019 Amount $130 Mil. $1,350 Mil. Ranking Senior secured Security Secured by first-priority pledges (subject to permitted liens) of the borrower’s equity interests and the equity interests of the borrower’s

domestic subsidiaries. Guarantee Guaranteed by GNC Corporation (ParentCo) and the borrower’s existing and future domestic subsidiaries. Financial Covenants Consolidated Senior Secured Leverage Ratio

If borrowings outstanding under the revolver exceed $25 Mil., consolidated senior secured leverage ratio shall be less than4.25x.

None.

Debt Restrictions Debt Incurrence Coverage Ratio Debt: None.

Notable Permitted Indebtedness: 1) Debt secured by permitted liens (listed in Limitation on Lien) not to exceed $25 Mil.; 2) indebtedness for excluded subs not to exceed $20 Mil.; 3) unsecured indebtedness as long as amount of debt of restricted subs which are not loan parties does not exceed $10 Mil. and pro forma Consolidated Total Leverage Ratio is ≤ 5.0 and still be in compliance with the financial covenant, pro forma; 4) foreign sub debt not to exceed $75 Mil.; 5) general purpose debt not to exceed $75 Mil.; 5) permitted Term Loan refinancing; 6) indebtedness of LOC issued to finance inventory as long as it is unsecured and does not exceed $5 Mil.

Limitation on Liens 1) General purpose of $50 Mil.; 2) liens on property acquired from a new restricted subsidiary up to $60 Mil; 30 Liens securing new indebtedness permitted under debt incurrence covenant.

Limitation on Guarantees Guarantee obligations are defined as debt and investments and hence governed by the debt and investment restrictions. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 35% of voting stock by nonpermitted holders, board of directors cease to consist of a

majority of continuing directors, Parent ceases to own and control directly 100% of each class of capital stock of GNC free and clear of all liens (other than permitted liens), or Holdings ceases to beneficially own 100% of capital stock of Parent. CoC constitutes an event of default.

M&A, Investments Restriction 1) Loans and advances to employees, officers, directors, managers and consultants not to exceed $5 Mil.; 2) notes payables by franchisees to the borrower or any subsidiary guarantor up to $35 Mil.; 3) purchase or acquisition of property and assets or businesses to become wholly owned sub or a foreign sub as long as pro forma financial covenants (if in effect) are in compliance and the investments do not exceed $50 Mil.; 4) investment in foreign subsidiary not to exceed sum of $75 Mil., plus up to an additional $75 Mil.(as long as pro forma Consolidated Net Senior Secured Leverage Ratio ≤3.0x),plus mandatory prepayments of term loan; 5) promissory notes and other deferred payment obligations and noncash consideration to purchase permitted disposition up to $20 Mil.; 6) general purpose up to $50 Mil.

Sale of Assets Restriction General disposition of assets not to exceed $50 Mil. Restricted Payments Restricted Payments (RP) RP Basket: None.

Notable Permitted RPs: 1) Dividend to parent companies to purchase capital stock up to $5 Mil. in any fiscal year and $20 Mil. in the aggregate; 2) dividend to parent companies to pay cash dividends up to $50 Mil. plus any amount over $50 Mil. given pro forma consolidated total leverage shall not exceed 2.75x; 3) dividend to parent companies to pay cash dividends in amount up to the Available Basket (see definition below), as long as pro forma consolidated net total leverage ratio not to exceed 4.0x.

Other Cross-Default Yes for material debt (> $20 Mil.) of any loan party. Cross-Acceleration Same as above. Equity Cure Yes — Provided in each four fiscal quarter period, there shall exist a period of at

least two consecutive quarters in respect of which no cure contribution shall have been made, and the amount of any contribution included in the calculation of consolidated EBITDA shall be limited to the amount required to effect compliance with the financial covenant.

None.

Key Definition Excluded Subsidiaries: Including primarily any foreign subsidiary, any domestic subsidiary that is a subsidiary of a foreign subsidiary, any restricted subsidiary which is a limited partnership of which the borrower or a guarantor does not constitute the limited partner, any unrestricted subsidiary, any subsidiary which is not a wholly owned subsidiary of ParentCo. Available Basket: Cumulative excess cash flow (net of sweep for term loan) plus equity contributions (net of equity cure contributions) plus amount equal to aggregate amount of all returns, repayments, interest, profits, distributions and income received in cash from investments permitted by the Available Basket, as defined minus cash dividends made by GNC in reliance on the Available Basket minus investments made permitted by the Available Basket minus any optional prepayment of junior material debt.

Pricing Revolving Credit Facility: ABR: 1.25%; LIBOR: 2.25% Term Loan Facility: ABR: 1.50%; LIBOR: 2.50%

ABR – Alternate base rate. Source: Company filings, Fitch Ratings.



Leveraged Finance


Appendix C

Financial Summary — GNC Holdings, Inc.

12 Months Three Months 12

Months Three Months 12

Months Three Months LTM

Ended ($ Mil.) 12/31/11 12/31/12 9/30/13 12/31/13 12/31/13 3/31/14 6/30/14 9/30/14 12/31/14 12/31/14 3/31/15 6/30/15 9/30/15 9/30/15 Profitability Operating EBITDAa 350.4 483.7 140.7 114.5 532.3 136.9 133.0 128.1 101.6 499.6 125.4 132.2 125.6 484.9 Operating EBITDA Margin (%) 16.9 19.9 20.8 18.7 20.2 20.2 19.7 19.5 16.8 19.1 18.7 19.5 18.7 18.5 FFO Return on Adjusted Capital (%)b 13.9 15.4 15.9 14.8 14.8 15.1 15.3 15.4 15.6 15.6 14.8 15.6 15.4 15.4 FCF Margin (%) 6.3 5.5 9.2 (1.3) 5.0 14.1 (1.1) 7.8 6.0 6.7 14.0 5.8 9.7 8.9 Coverages (x) FFO Interest Coverage 3.7 7.7 9.8 3.5 7.0 11.9 6.5 9.6 6.3 8.6 8.6 8.8 7.7 7.8 Operating EBITDA/ Gross Interest Expense 4.6 10.2 12.5 5.8 10.0 11.9 11.4 10.9 8.7 10.7 10.9 11.4 9.1 10.0 FFO Fixed-Charge Coverage 1.7 2.0 2.2 1.6 2.0 2.5 1.8 2.2 1.8 2.1 2.1 2.1 2.1 2.0 FCF Debt Service Coverageb 2.7 3.5 4.8 3.1 3.1 3.6 3.3 3.1 4.3 4.3 4.3 5.2 5.3 5.3 Cash Flow from Operations/Capex 4.0 5.3 7.3 1.4 4.7 9.6 1.3 4.4 4.3 4.3 15.6 5.3 8.8 7.5 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA 2.6 2.3 2.1 2.5 2.5 2.5 2.6 2.6 2.7 2.7 2.7 2.7 2.4 2.4 Long-Term Secured Debt/FFO 4.3 3.5 3.3 4.2 4.2 4.1 4.0 3.9 3.8 3.8 4.2 3.9 3.5 3.5 Total Debt with Equity Credit/ Operating EBITDA 2.6 2.3 2.1 2.5 2.5 2.5 2.6 2.6 2.7 2.7 2.7 2.8 3.0 3.0 FFO Adjusted Leverage 5.2 5.1 5.0 5.5 5.5 5.5 5.4 5.4 5.3 5.3 5.6 5.4 5.6 5.6 Total Adjusted Debt/Operating EBITDAR 4.6 4.3 4.2 4.4 4.4 4.5 4.5 4.6 4.6 4.6 4.7 4.7 4.9 4.9 FCF/Total Adjusted Debt (%) 5.1 4.3 6.0 3.7 3.7 4.3 3.9 3.6 4.8 4.8 4.8 6.1 6.3 6.3 Balance Sheet Short-Term Debt 1.6 3.8 3.1 5.4 5.4 4.9 4.8 4.8 4.7 4.7 4.7 4.6 4.6 4.6 Long-Term Senior Secured Debt 899.9 1,094.7 1,093.0 1,340.5 1,340.5 1,340.1 1,339.2 1,338.3 1,337.4 1,337.4 1,336.5 1,335.6 1,170.8 1,170.8 Long-Term Senior Unsecured Debt — — — — — — — — — — — — 287.5 287.5 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — 1.1 1.1 0.6 0.4 0.3 0.2 0.2 0.1 0.1 — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 901.5 1,098.6 1,096.1 1,347.1 1,347.1 1,345.6 1,344.4 1,343.4 1,342.4 1,342.4 1,341.4 1,340.3 1,462.9 1,462.9 Off-Balance Sheet Debtc 1,654.1 2,049.0 2,169.8 2,169.8 2,169.8 2,285.6 2,285.6 2,285.6 2,285.6 2,285.6 2,285.6 2,285.6 2,285.6 2,285.6 Total Adjusted Debt with Equity Credit 2,555.7 3,147.6 3,265.9 3,516.9 3,516.9 3,631.2 3,630.0 3,629.0 3,627.9 3,627.9 3,626.9 3,625.9 3,748.4 3,748.4 Cash Flow Funds From Operations 209.2 317.2 98.7 48.8 317.8 125.4 63.7 101.3 62.6 353.0 87.2 90.6 92.4 332.8 Change in Working Capital (34.5) (96.0) (10.1) (26.1) (79.6) (2.3) (33.5) (16.6) 3.1 (49.2) 29.7 (23.3) (1.9) 7.7 Cash Flow from Operations 174.7 221.2 88.6 22.7 238.1 123.1 30.2 84.7 65.8 303.8 116.9 67.3 90.5 340.5 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (43.8) (41.9) (12.2) (16.6) (50.2) (12.8) (23.3) (19.1) (15.2) (70.5) (7.5) (12.6) (10.3) (45.7) Common Dividends — (45.2) (14.2) (14.1) (57.4) (14.6) (14.4) (14.3) (14.2) (57.5) (15.8) (15.3) (14.9) (60.1) FCF 130.9 134.1 62.2 (8.0) 130.4 95.7 (7.5) 51.2 36.3 175.8 93.7 39.4 65.4 234.8 Net Acquisitions and Divestitures (19.8) — — (27.6) (27.6) — (6.4) — — (6.4) — — — — Net Debt Proceeds (159.8) 196.3 (1.0) 249.0 246.2 (1.7) (1.4) (1.2) (1.2) (5.4) (1.2) (1.2) 122.0 118.4 Net Equity Proceeds (18.9) (334.0) (53.1) (67.9) (296.0) (148.5) (39.7) (21.9) (51.7) (261.8) (59.9) (104.3) (114.4) (330.2) Other (Investing and Financing) 2.2 33.7 5.5 3.0 14.6 0.9 0.9 1.6 2.1 5.4 0.5 (0.1) (9.6) (7.1) Total Change in Cash (65.5) 30.1 13.7 148.5 67.7 (53.6) (54.1) 29.7 (14.4) (92.4) 33.1 (66.1) 63.3 15.8 Ending Cash and Securities Balance 128.4 158.5 77.7 226.2 226.2 172.7 118.5 148.2 133.8 133.8 166.9 100.8 164.1 164.1 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company reports.

Leveraged Finance


Financial Summary — GNC Holdings, Inc. (Continued)




Ended ($ Mil.) 12/31/11 12/31/12 9/30/13 12/31/13 12/31/13 3/31/14 6/30/14 9/30/14 12/31/14 12/31/14 3/31/15 6/30/15 9/30/15 9/30/15 Income Statement Revenue 2,072.2 2,430.0 675.6 613.7 2,630.3 677.3 675.2 656.3 604.3 2,613.2 670.2 678.5 672.2 2,625.3 Revenue Growth (%) 13.7 17.3 8.6 8.7 8.2 1.9 (0.2) (2.9) (1.5) (0.7) (1.0) 0.5 2.4 0.1 Operating EBIT 303.6 434.5 127.9 100.6 480.5 123.5 119.0 114.1 86.7 443.2 111.0 118.0 111.2 426.8 Gross Interest Expense 76.0 47.6 11.2 19.7 53.0 11.5 11.7 11.8 11.7 46.7 11.5 11.6 13.8 48.6 Sector-Specific Data Same-Store Sales (%)d 10.1 11.5 6.7 5.0 4.3 (0.7) (1.7) (5.8) (3.0) (2.8) (4.1) (2.8) (0.3) (2.5) No. of Stores 3,046.0 3,188.0 3,299.0 3,324.0 3,342.0 3,378.0 3,423.0 3,459.0 3,497.0 3,497.0 3,516.0 3,540.0 3,556.0 3,556.0 Gross Margin (%) 36.4 38.3 37.6 37.0 37.8 37.8 38.3 37.7 36.1 37.5 37.2 37.8 37.3 37.1 SG&A/Revenues (%) 21.7 20.4 18.7 20.6 19.5 19.6 20.7 20.4 21.7 20.6 20.7 20.4 20.8 20.9 Operating EBIT Margin (%) 14.7 17.9 18.9 16.4 18.3 18.2 17.6 17.4 14.3 17.0 16.6 17.4 16.5 16.3 Operating EBITDAR 557.1 739.9 208.5 182.3 803.6 208.3 204.4 199.5 173.0 785.3 196.8 203.6 197.1 770.5 Operating EBITDAR Margin (%) 26.9 30.4 30.9 29.7 30.5 30.8 30.3 30.4 28.6 30.1 29.4 30.0 29.3 29.4 Operating EBITDAR/ (Interest + Rent) (x)b 2.0 2.4 2.6 2.1 2.5 2.5 2.5 2.4 2.1 2.4 2.4 2.5 2.3 2.3 Inventory Turnover (x)b 3.3 3.3 3.1 3.2 3.2 3.1 2.9 2.9 2.9 2.9 2.9 2.8 2.9 2.9 Accounts Payable Turnover (x)b 11.8 12.0 11.5 12.6 12.6 11.2 10.7 10.6 12.4 12.4 10.5 11.1 11.4 11.4 Return on Invested Capital (%)b 14.4 17.1 17.9 17.4 17.4 17.3 17.1 16.8 16.6 16.6 16.4 16.6 16.5 16.5 Return on Assets (%)b 5.4 9.4 10.4 9.7 9.7 9.7 9.7 9.3 9.5 9.6 9.2 9.3 8.5 8.5 Capex/Depreciation (%)b 93.6 85.1 95.0 119.6 97.0 95.7 166.4 136.5 102.0 125.1 52.1 88.8 71.2 78.7 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company reports.

Leveraged Finance


Retailing / U.S.A.

The Gymboree Corporation Credit Profile

Credit Profile Summary Top-Line Deterioration: The Gymboree Corporation’s (Gymboree) comparable store sales (comps) trends have been negative for the last few years, with particular weakness at its core Gymboree brand, which accounts for approximately 64% of domestic retail sales. Fitch Ratings attributes the decline to weak merchandising execution, what are likely perceived as high price points in an increasingly competitive and overcrowded mid-tier space, and cannibalization from Crazy 8, the company’s own value concept.

Modest Sales Expectations: Fitch expects 2015 comps to be flat and in the negative 1%–positive 1% range in 2016/2017. Given the significant decline in store-level sales productivity and the need to preserve liquidity, Fitch expects Gymboree may have to accelerate store closings from the net 20 store closings expected in 2015, limiting sales growth. Fitch consequently projects slightly negative sales growth over the next 24–36 months.

Stagnant EBITDA: Fitch expects 2015 EBITDA to be around $85 million, and be range-bound at $80 million–$90 million, assuming gross margins are relatively flat and selling, general and administrative (SG&A) expenses are flat to lower as the company pulls back on store openings. Gymboree faces significant challenges in terms of rightsizing its store footprint and addressing issues around having the right product assortment at competitive prices, which could add margin pressure.

FCF Negative/Adequate Liquidity: Gymboree had approximately $167 million of liquidity as of Oct. 31, 2015, made up of $25 million of cash and approximately $142 million in revolver availability. Fitch expects FCF to be negative $15 million–negative $20 million annually between 2015 and 2017, assuming annual capex of $20 million–$25 million. Gymboree has sufficient liquidity to fund operations over the next 24 months, with its next debt maturity being the $768 million term loan in February 2018.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a sustained trend of positive comps, substantial gross margin improvement, and EBITDA growth to a level where it can continue to fund its operations and meet its fixed obligations with internally generated cash flow.

Negative Drivers: Negative credit profile drivers would include further deterioration in comps and EBITDA, leading to concerns about the company’s liquidity position.



Credit Opinion The Gymboree Corporation carries a ‘ccc*’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data The Gymboree Corporation

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 1,228.7 1,230.6 EBITDA 79.6 79.3 EBITDA Margin (%) 6.5 6.4 FCF (53.9) (21.9) Total Adjusted Debt 2,455.1 2,472.0 Total Adjusted Debt/EBITDAR (x) 10.1 10.2 EBITDAR/(Interest + Rent) (x) 1.0 1.0 Comparable Store Sales (%)a (3.0) — Real Estate Owned (%) — — No. of Stores 1,326 1,315 aComparable store sales for the LTM reflect the performance for the nine months ended Oct. 31, 2015.




Leveraged Finance


Business Profile Assessment Gymboree operates more than 1,300 stores across three retail brands, each at a distinct price point. Gymboree is the anchor brand (549 stores and 175 outlets as of Oct. 31, 2015); Janie and Jack (152 stores) is the premium price point offering (30%−40% higher than Gymboree); while Crazy 8 (390 stores) is positioned as the value brand (at initial price points 25%−30% lower than Gymboree). The company’s brand positioning is centered on cute, wholesome, age-appropriate fashion featuring head-to-toe outfitting. While the core product offering is for children ages four to five years, the assortment spans from newborn to 14 years old, depending on the store brand.

Fitch estimates online penetration as a percent of total sales via its three websites (www.gymboree.com, www.janieandjack.com and www.crazy8.com) is somewhere in the mid to high teens given it has typically contributed 100 bps–200 bps to total annual comps over the last few years.

The company also offers directed parent-child developmental play programs under the Gymboree Play & Music brand, with 720 primarily franchised locations.

Modestly Negative Comps Trends Gymboree’s comps trends have been mostly negative for the last few years. Fitch attributes the decline to weak merchandising execution and what are likely perceived as high price points in an increasingly competitive and overcrowded mid-tier space. Crazy 8, the company’s value concept, has also seen erratic comps performance, although recent trends have improved.

Fitch expects comps to be flat to modestly negative in 2015. Janie and Jack, which accounts for 13% of sales, has been trending positive for the last eight quarters — in the high single-digit range for the first nine months of 2015 — and Crazy 8, which accounts for 24% of sales has been positive in the low to midsingle-digit range for the last five quarters. However, comps at the company’s core Gymboree brand, which accounted for 63% of total retail sales in the first nine months of 2015, remain soft.

Fitch Base Case Assumptions — The Gymboree Corporation ($ Mil., Year Ended January) 2014A 2015F 2016F 2017F Revenue 1,229 1,240 1,236 1,232 Revenue Growth (%) (1.3) 0.9 (0.3) (0.3) Comparable Store Sales (%) (3.0) 0.3 — — EBITDA 80 86 86 85 EBITDA Margin (%) 6.5 6.9 6.9 6.9 Working Capital Change (44) (1) (7) (7) Cash Flow From Operations (22) 10 4 3 Capex (32) (23) (20) (20) Dividends (0) — — — FCF (54) (12) (16) (17) Share Repurchases — — — — Total Debt 1,150 1,151 1,161 1,172 Total Adjusted Debta 2,455 2,455 2,465 2,477 Total Adjusted Debt/EBITDAR (x) 10.1 9.9 9.9 10.0 aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


Given the persistently negative comps trend, sales productivity has declined materially to $430 annual sales per square foot in 2014 from $530 in 2009, mainly due to the comps declines at Gymboree branded stores and dilution from the Crazy 8 format, which Fitch estimates generates sales per square foot in the low $300 range. As a result of negative comps, top-line growth has primarily been due to new store openings, with approximately 375 net new stores added between 2009 and 2014.

The growth in Crazy 8 accounts for some of the decline in comps at Gymboree stores given there is a significant amount of overlap between store locations, with two-thirds of Crazy 8 stores overlapping with Gymboree, and a similar demographic profile. Crazy 8 has also been dilutive to profitability ratios given lower margins, although the gap to core Gymboree has likely narrowed given the significant comps deterioration in the Gymboree stores.

Fitch Estimates of Comps by Brand

1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15 Sales by Brand ($ Mil.) a

Janie and Jack 31.0 30.0 32.2 43.2 136.4 33.1 33.3 33.6 Crazy 8 60.9 59.4 68.4 82.8 271.5 64.5 61.0 67.8 Gymboree 165.6 163.2 202.6 234.0 765.3 162.3 161.0 186.4 Total Retail Sales 257.9 251.8 303.2 360.0 1,172.6 259.9 255.3 287.8

Comments on Comps Trends on Earnings Calls Janie and Jack — LSD + MSD + HSD + — MSD + LDD + MSD + Crazy 8 — MSD – LSD – MSD + — MSD + LSD + LSD + Gymboree — LDD – Flat MSD + — LSD – Flat MSD –

Estimated Comps (%) Janie and Jack 2 1 5 8 4 4 12 5

Crazy 8 (6) (6) (1) 5 (1) 4 2 1 Gymboree (13) (13) 0 5 (4) (2) 0 (6) Total Comps (9) (10) 1 5 (3) 0 2 (3) aGymboree broke out sales by brand for the first time in 3Q15 (reflected 3Q14 sales as well) so the other quarters are roughly estimated. Comps – Comparable store sales. LSD – Low single-digit. MSD – Midsingle-digit. LDD – Low double-digit. HSD – High single-digit. + – Positive. – – Negative. Source: Company filings, Fitch Ratings estimates.

Sales and Store Growth Trends ($ Mil.) 2009 2010 2011 2012 2013 2014

YTD 10/31/15

Retail Sales 1,001.5 1,059.2 1,164.2 1,233.0 1,191.5 1,172.6 803.1 YoY Growth (%) 1.4 5.8 9.9 5.9 (3.4) (1.6) (1.2)

Comparable Store Sales (%)

Including Comparable Online Sales (4.0) (2.0) 4.0 (2.0) (6.0) (3.0) — Excluding Comparable Online Sales (6.0) (3.0) 3.0 (4.0) (8.0) (4.0) 1.0

Total Number of Stores

Gymboree Stores 593 593 587 588 576 554 549 Gymboree Outlet Stores 139 150 153 158 167 169 175 Janie and Jack Shops 119 123 127 133 140 147 152 Crazy 8 Stores 65 157 237 332 390 402 390 International Gymboree Locations 37 42 45 51 50 54 49 Total 953 1,065 1,149 1,262 1,323 1,326 1,315

Contribution of Store Growth to Top Line (%) 5.4 7.8 5.9 7.9 2.6 1.4 (1.2) Annual Sales per Gross Square Foot ($) 529 493 499 476 434 425 — Net Sales per Average Store ($000) 1,043 990 1,012 976 899 883 —


Leveraged Finance


Gymboree expects to open approximately 13 new stores in 2015, distributed fairly evenly across its brands, but will more than offset these openings through 30–40 store closings. Fitch expects store openings beyond 2015 to be modest given cash flow constraints and expects the company to potentially accelerate store closings. Gymboree has 100–150 lease expirations annually, and another 100–150 stores have kick-out clauses. The company has stated that although around 7% of its fleet is four-wall EBITDA negative, closures of these stores would not have a material impact on EBITDA.

Gymboree’s competitive differentiation has historically centered on its high-quality, branded apparel. However, consumers have many retail choices to outfit kids and infants, with competition from pure-play competitors, including BabyGap, GapKids, Old Navy, The Children’s Place and Carter’s, as well as department stores, off-price retailers, local specialty stores and mail-order/Internet players. The significant growth in retail outlets relative to what Fitch estimates has been a relatively stagnant demand for kids’ and infant apparel over the past few years has put significant promotional pressure on the category. Gymboree has underperformed retailers such as Carter’s, which has seen average comps growth of 3.4% between 2009 and 2014. The Children’s Place’s comps have declined at an average rate of 1.3%, but have still outperformed Gymboree.

Gymboree faces significant challenges in terms of rightsizing its store count and continuing to address issues around having the right product assortment at competitive prices, in a market that has become ever more competitive. Therefore, Fitch believes it will be difficult to post consistently positive comps in light of competition and mall traffic decline.

2016 Outlook Fitch expects 2015 comps to be flat and in the negative 1%–positive 1% range in 2016/2017. Historical top-line growth has mainly come from new store openings. However, given the significant decline in store-level sales productivity, particularly at the Gymboree branded stores, and the need to preserve liquidity, Fitch expects Gymboree may have to accelerate store closings from the net 20 store closings expected in 2015. Crazy 8, which accounts for approximately 24% of total sales and has grown to a 400-store chain from only 65 units in 2009, has cannibalized sales at Gymboree and has been dilutive to profitability on lower sales productivity and lower margins.

Fitch expects 2015 EBITDA to be around $85 million, modestly better than 2014, but almost 50% lower than 2011 levels and an even more material drop from $235 million in 2010. Fitch expects EBITDA to be range-bound at $80 million–$90 million over the next few years, assuming gross margins are relatively flat and SG&A expenses are flat to lower as the company pulls back on store openings. Price reductions to address competitive incursion could further pressure merchandise margins from current levels.

Lease-adjusted LTM leverage has climbed to 10.2x from 7.8x at the end of 2012, and four turns from 6.2x after its 2010 LBO transaction — Bain Capital acquired Gymboree in late 2010 at a purchase multiple of approximately 7.0x, prior to which the company was not leveraged. Leverage is expected to remain at approximately 10.0x over the next 24 months.

Leveraged Finance



Liquidity Is Adequate Gymboree had approximately $167 million of liquidity as of Oct. 31, 2015, made up of $25 million of cash and approximately $142 million in revolver availability, net of $50 million in outstanding borrowings and $32.7 million of letters of credit outstanding.

On May 5, 2015, Gymboree entered into an agreement to sell its distribution center in Dixon, CA, for gross proceeds of $26.8 million less closing costs of $0.9 million, or net proceeds of $25.9 million, and entered into a leaseback of the property from the purchaser for a period of 15 years.

Fitch expects FCF to be negative $15 million–negative $20 million annually between 2015 and 2017, assuming annual capex of $20 million–$25 million. Gymboree has sufficient liquidity to fund operations over the next 24 months, with its next debt maturity being the $768 million term loan in February 2018.

The company amended its revolver in September 2015 and extended the maturity date to September 2020.

Capital Structure Gymboree’s capital structure consisted of a $225 million asset-based loan (ABL) revolver (September 2020), a sizable $768 million secured term loan (February 2018) and a $346 million senior unsecured note issue (December 2018) as of Oct. 31, 2015. The $225 million ABL revolver has a first lien on receivables and inventory while holding a second lien on virtually all other assets, and is subject to customary borrowing base limitations. The term loan has standard 0.25% quarterly amortization payments on the original $820 million issue, with the balance due at maturity. Gymboree voluntarily prepaid $25 million of the outstanding principal of its $768 million term loan in November 2012. Gymboree may consequently apply a portion or all of this prepayment toward its quarterly amortization payments payable in fiscal 2014–2016.

Gymboree ABL Availability Facility Borrowing Revolver Total LTM ($ Mil.) Cash Size Inventory Receivables Base Borrowings LOC Availability Liquidity EBITDA CFO Capex FCF 4Q13 39.4 225.0 175.5 21.9 158.8 0.0 31.2 127.6 167.0 102.9 74.9 (52.6) 14.7 1Q14 24.8 225.0 170.4 22.4 160.6 10.0 32.6 118.0 142.8 88.5 40.5 (51.3) (18.2) 2Q14 24.9 225.0 223.7 21.1 184.8 64.0 25.3 95.5 120.4 73.7 1.8 (45.9) (51.5) 3Q14 20.8 225.0 259.3 23.4 217.6 42.0 29.6 146.0 166.8 71.7 15.1 (41.8) (26.9) 4Q14 18.5 225.0 198.3 25.2 165.5 33.0 29.2 103.3 121.8 79.6 (21.8) (32.0) (53.9) 1Q15 22.4 225.0 208.9 25.5 170.9 42.0 38.1 90.8 113.2 75.6 (9.7) (25.8) (35.6) 2Q15 23.5 225.0 243.0 24.7 196.1 70.0 30.4 95.7 119.2 79.8 (1.3) (23.0) (24.4) 3Q15 24.3 225.0 265.4 22.5 225.0 50.0 32.7 142.3 166.6 79.3 (1.6) (20.2) (21.9)


Leveraged Finance


Recovery Analysis Fitch’s analysis of Gymboree’s recovery is based on a going concern EBITDA of approximately $120 million, using a valuation multiple of 5.5x. This yields an enterprise value (EV) of $660 million, substantially greater than the estimated $220 million liquidation value of its primary assets — primarily inventory, with minimal value coming from receivables and property, plant and equipment. After deducting 10% of the EV for administrative claims, approximately $590 million is left for creditors. The ABL is expected to have outstanding recovery prospects (91%–100%) and is assigned a ‘b*/rr1*’. The term loan is expected to have good recovery prospects (51%–70%) and is assigned a ‘ccc+/rr3*’. The senior unsecured notes are expected to have poor recovery prospects (0%–10%) and are assigned a ‘cc*/rr6*’.

Capital Structure ($ Mil., At Oct. 31, 2015) Description Amount (%) Secured Debt $225 Mil. ABL Revolver due September 2020 50.0 4.3 Senior Secured Term Loan due February 2018a 768.3 66.0 Total Secured Debt 818.3 70.3 Unsecured Debt 9.125% Sr. Unsecured Notes due December 2018 346.0 29.7 Total Unsecured Debt 346.0 29.7 Total Debt 1,164.3 100.0 aReflects the voluntary prepayment of $25 Mil. of the outstanding principal in November 2012. ABL – Asset-based lending. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturitiesa ($ Mil., At Oct. 31, 2015)

2016 — 2017 8.2 2018 1,160.1 2019 — 2020 — Thereafter — aGymboree voluntarily prepaid $25 Mil. of the outstanding principal of its $792 Mil. term loan in November 2012. As a result, Gymboree may apply a portion or all of this prepayment towards its quarterly amortization payments payable in fiscal 2014–2016. Note: Excludes borrowings under the asset-based loan. Source: Company filings, Fitch Ratings.



Leveraged Finance



Recovery Analysis Gymboree Corporation ($ Mil., Except Where Noted; Credit Opinion: ccc*)

Distressed Enterprise Value (EV) as a Going Concern (GC) Liquidation Value (LV) Book Value

Advance Rate (%)


Going Concern EBITDA 120 Cash 24.3 0 — GC EV Multiple (x) 5.5 A/R 22.5 80 18.0 EV on GC Basis 660 Inventory 265.4 70 185.9 Net PPE 166.7 10 16.7 Total LV 220.4


Greater of GC or LV 660

Less: Administrative Claims (10%) 66 Adjusted EV Available for Claims 594



Recovered Recovery


Credit Opinion

Sr. Secured ABLa 157.5 157.5 100 rr1* +3 b* Sr. Secured Term Loan 768.2 436.5 57 rr3* +1 ccc+*

Concession Payment Availability Table Adjusted EV Available for Claims 594.0 Less Secured Debt Recovery 594.0 Remaining Recovery for Unsecured Claims


Value Recovered

Recovery (%)


Credit Opinion

Sr. Unsecuredb 400.4 0.0 rr6* –2 cc* Unsecured 0.0 0.0 Sr. Subordinated 0.0 0.0 aFitch assumes the $225 Mil. credit facility is 70% drawn in a distressed scenario. bIncludes estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. ABL – Asset-based loan. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Fitch Ratings.

Leveraged Finance


Appendix A

Organizational Structure — The Gymboree Corporation ($ Mil., As of Oct. 31, 2015)

aInvestment funds sponsored by Bain Capital and co-investors that acquired Gymboree in November 2010 at an approximately 7.0x multiple. bReflects the voluntary prepayment of $25 Mil. of the outstanding principal in November 2012. cGymboree, Inc. (New Brunswick)/Gymboree Canada, Inc. (a Delaware corporation), a dual status entity — not a domestic subsidiary. CO – Credit Opinion. ABL – Asset-based lending. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions.Source: Company filings, Fitch Ratings.

Baina

Gymboree Retail Stores, Inc.

Gym Card, LLC

Gymboree Manufacturing, Inc.

Gymboree Operations, Inc.

Gym-Mark, Inc.

Gymboree Play Programs, Inc.

S.C.C. Wholesale, Inc.

The Gymboree CorporationCO — ccc*

Debt Issue$225 Mil. Sr. Secured ABL Revolver Sr. Secured Term Loanb

9.125% Senior NotesTotal Debt

MaturitySeptember 2020February 2018December 2018

Amount50.0

768.3346.0

1,164.3

100%

Giraffe Holding, Inc.

Giraffe Intermediate A, Inc.

Giraffe Intermediate B, Inc.

Gymboree, Inc.c(Canadian and Delaware Corp.)

Gymboree Australia Pty, Ltd.(Australia Ltd. Co.)

Gymboree Island, LLC(Puerto Rico LLC)

COb*/rr1*ccc+*/rr3*cc*/rr6*

Gymboree Hong Kong Services Ltd.(Hong Kong Co.)

Gymboree Korea Ltd.(Korea Co.)

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — The Gymboree Corporation Overview Borrower(s) The Gymboree Corporation (Lead Borrower) and the other Borrowers identified therein. Description of Debt Senior secured asset based lending facility of up to $225 Mil. Tranche A subject to a borrowing base equal to (i) 90% of eligible credit

card receivables and (ii) 90.0%–92.5%, depending on the season, (For FILO borrowings: 92.5%–95.0% of cost of eligible inventory (net of inventory reserve) multiplied by the appraised value of eligible inventory plus (iii) 85% of face amount of eligible trade receivables, minus (iv) 100% of the then amount of availability reserves.

Document Date Original Credit Agreement dated 11/23/10 (Exhibit 10.10 to S-4 filed 5/16/11) Amended and Restated dated 3/30/12 (Exhibit 10.1 to 8-K filed 4/5/12) First Amendment to Amended and Restated Credit Agreement dated 9/24/15 (Exhibit 10.2 to 8-K filed 9/28/15)

Amount • Tranche A: $219.0 Mil. (Additional commitments of $125 Mil. may be requested; minus the initial aggregate principal amount of the ABL Term Loan if any).

• FILO Commitment: $6.0 Mil. • The company may at a future date incur ABL Term Loan in an amount not to exceed $75 Mil., subject to a borrowing base.

Maturity Date The earlier of (i) Sept. 24, 2020 and (ii) the date that is 60 days before the scheduled final maturity date of any tranche of the Term Loan, or Notes, unless such tranches are cumulatively equal to or less than$25.0 Mil. in the aggregate and a reserve against the borrowing base is imposed equal to the amount of such tranches.

Ranking Senior secured. Security Secured by a (i) first-priority perfected security interest in the ABL Priority Collateral, including: cash, inventory, accounts receivable

and credit card receivables of the loan parties. Loan parties include both borrowers as well as facility guarantors, (ii) second-priority security interest in substantially all other tangible and intangible assets, including real property and intellectual property and all capital stock held by Holdings.

Guarantee Guaranteed by Giraffe Intermediate B, Inc. (Holdings) and the subsidiary facility guarantors (including the material wholly owned domestic subsidiaries of the lead borrower).

Financial Covenants Fixed-Charge Coverage Consolidated FCCR, to be equal to or greater than 1.0x during the continuance of a FCCR trigger event (means availability less than

the higher of: (i) 10% of the lower of then FILO borrowing base and revolving credit ceiling, and (ii) $20 Mil.) Debt Restrictions Debt Incurrence Coverage Debt Ratio: None.

Notable Permitted Debt Incurrence: Term loan facility debt not to exceed $820 Mil. plus $200 Mil. less any commitment increases under ABL (Tranche A); Senior Notes capped at $400 Mil. • Attributable debt in respect of capitalized leases provided the payment conditions are satisfied (please refer to definition at the

bottom of this page); General carveout of $25 Mil. without satisfaction of the payment conditions. • No cap on subordinated debt and other unsecured non-amortizing loans provided payment conditions are met. • Debt carveout for the lead borrower and restricted subsidiaries of $90 Mil. • Debt carveout for restricted subsidiaries that are not loan parties is $40 Mil.

Limitation on Liens The lead borrower and restricted subsidiaries are not permitted to create liens except permitted encumbrances, which include: existing liens on debt and refinancings thereof; liens securing certain new indebtedness permitted under debt incurrence covenant; and liens on property of any foreign subsidiary; general carveout of $60 Mil. for liens securing debt.

Limitation on Guarantees Guarantees are defined as debt and hence governed by debt restriction. Also see investment section below. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as occupancy of majority of board seats or acquisition of more than 50% voting stock by nonpermitted holder prior to a

qualifying IPO (and 35% following a qualifying IPO), or if Holdings fails to own 100% of the capital stock of the lead borrower. A CoC constitutes an event of default.

Investments Restriction No specified limit provided the Payment Conditions (defined at the bottom of this page) are satisfied. Carveouts: Guarantees constituting permitted debt; permitted acquisitions; general carveout of $60 Mil. in aggregate (provided no event of default exists).

Sale of Assets Restriction Dispositions of assets and equity (including sale and leaseback) are permitted provided no event of default. Dispositions of noncore subsidiaries/business-segments and of inventory related to store closures require application of the net proceeds towards repayment of the loans.


Notable Permitted RPs: Gymboree Corp. and its restricted subsidiaries may make RP to the holders of their respective capital stock • As long as the RP conditions are satisfied; • As long as (i) the pro forma availability condition is satisfied and (ii) no event of default then exists or arise therefrom; and, (iii)

Gymboree Corp. and its restricted subsidiaries may make additional RP to the holders of their respective capital stock, in an aggregate amount, which when added to the aggregate amount of voluntary prepayments/redemptions of debt as described below, do not exceed $40 Mil.

Prepayment of Debt As long as payment conditions are satisfied, voluntary prepayments, purchases, redemptions and defeasances of the senior notes, the term loan facility or any other permitted indebtedness, is permitted. As long as the pro forma availability condition is satisfied and no event of default then exists or would arise therefrom, an aggregate amount of $40 Mil. in voluntary prepayments is permitted, subject to reduction by any applicable RP amounts availed under the related carveout above.

FILO – First in, last out. ABL – Asset-based lending. FCCR – Fixed-charge coverage ratio. MAC – Material adverse change. ACH – Automated clearing house. Continued on next page. Source: Company filings, Fitch Ratings.




Leveraged Finance


Bank Agreement Covenant Summary — The Gymboree Corporation (Continued) Other Cross-Default Yes, exceeding $25 Mil. Cross-Acceleration No. MAC Clause As a representation and warranty; and under affirmative covenants Equity Cure Yes Provided (a) the lead borrower identifies such cash equity contribution as a specified equity contribution; (b) in each period

of four consecutive fiscal quarters, there shall be at least two fiscal quarters in which no specified equity contribution is made (c) no more than five specified equity contributions will be made in the aggregate (d) the amount of any contribution included in the calculation of consolidated EBITDA shall be limited to the amount required to effect compliance with fixed-charge coverage ratio of 1.0x.

Cash Dominion Event The company’s funds will be swept daily via ACH/wire into concentration accounts (maintained by the administrative agent and under the sole dominion of the collateral agent) to reduce the borrowings outstanding under the credit facility upon occurrence of a cash dominion event. Means either (i) the occurrence and continuance of any specified default, or (ii) the borrowers’ failure to maintain availability of at least the greater of $25 Mil. or 12.5% of the lesser of the then FILO borrowing base and the then revolving credit ceiling loan cap for five consecutive days.

Key Definitions • Payment conditions: with respect to a specified payment (a) no event of default exists or would arise therefrom; (b) pro forma availability condition is met (see below); and (c) the consolidated fixed charge coverage ratio, on a pro forma basis, is not less than 1.0x. Clause (c) is not applicable when pro forma availability is greater than 25% of lesser of FILO borrowing base and revolving credit ceiling.

• RP payment conditions: with respect to a specified payment (a) no event of default exists or would arise therefrom; (b) pro forma availability condition is met (see below); and (c) the consolidated fixed-charge coverage ratio, on a pro forma basis, is not less than 1.1x. Not applicable when pro forma availability is greater than 25% of lesser of FILO borrowing base and revolving credit ceiling.

• Pro forma availability condition: with respect to any specified payment, availability (on a pro forma basis) after giving effect to the specified payment and projected availability as of the end of each of the subsequent six fiscal months will, in each case, be equal to or greater than the greater of (a) $35 Mil. and (b) 15% of the lesser of FILO borrowing base and the revolving credit ceiling.

Pricing Level Average Daily Availability LIBOR (%) Prime Rate (%) Tranche A I Greater than 66% 1.50 0.50 II Less than or equal to 66%, but greater than or equal to 33% 1.75 0.75 III Less than 33% 2.00 1.00 FILO I Greater than 66% 3.00 2.00 II Less than or equal to 66%, but greater than or equal to 33% 3.25 2.25 III Less than 33% 3.50 2.50

FILO – First in, last out. ABL – Asset-based lending. FCCR – Fixed-charge coverage ratio. MAC – Material adverse change. ACH – Automated clearing house. Source: Company filings, Fitch Ratings.

Leveraged Finance


Term Loan Agreement Covenant Summary — The Gymboree Corporation Overview Borrower(s) The Gymboree Corporation Description of Debt Senior secured term loan Document Date Amended and Restated Credit Agreement dated 2/11/11 (Exhibit 10.9 to S-4 filed 5/16/11);

Refinancing Amendment dated 2/11/11 (Ex.10.8) Original Size/Outstanding $820 Mil./$768 Mil. Maturity Date 2/23/18 Ranking Senior secured. Security Secured by a first-priority perfected security interest in substantially all tangible and intangible assets (other than ABL priority

collateral) of the borrower and each restricted subsidiary that is a loan party (including capital stock and intercompany debt, equipment, investment property, contract rights, IP Rights, other general intangibles and material real estate) and a second-priority perfected security interest in the ABL priority collateral.

Guarantee Guaranteed by Giraffe Intermediate B, Inc. (Holdings) and the subsidiary facility guarantors (namely, the material wholly owned domestic subsidiaries of the Gymboree Corp.). Any subsidiary of the Gymboree Corp. that guarantees the ABL facility, any senior notes, or any refinancings thereof, or that is a co-borrower under the ABL facility shall also be a guarantor under the term loan.

Financial Covenants Maintenance Covenants None. Incurrence Covenants Pro Forma Compliance with the Financial Ratios defined as compliance with both ratios described below in events leading toward

new designation of restricted subsidiaries (and the incurrence or repayment of any indebtedness in connection therewith). (a) Total Leverage Ratio 2/1/15–1/30/16 4.75x

1/31/16–10/29/16 4.50x 10/30/16–4/29/17 4.25x Thereafter 4.00x

(b) Interest Coverage Ratio 2/1/15–1/30/16 2.00x Thereafter 2.25x


Coverage Debt Ratio: None. Notable Permitted Debt Incurrence: 1) Indebtedness incurred for any Permitted Acquisition and any Permitted Refinancing not to exceed $50 Mil. provided no event of default and Total Leverage Ratio < 4.0 on a pro forma basis; 2) general indebtedness for the lead borrower and restricted subsidiaries not to exceed $90 Mil.; 3) indebtedness of the Loan Parties constituting the Senior Notes not to exceed $400 Mil.; 4) ABL Facility borrowings not to exceed a) $225 Mil. plus b) $75 Mil. minus c) the excess of i) incremental term loans borrowed under the term loan facility over ii) $125 Mil., as well as permitted refinancing; 5) indebtedness for restricted subsidiaries that are not loan parties not to exceed $40 Mil.; 5) subordinated debt incurrence by loan parties is permitted provided no default and if Gymboree Corp. and its restricted subsidiaries are in pro forma compliance with the financial ratios as described in financial covenants section above; 6) capital lease indebtedness not to exceed $25 Mil.

Limitation on Liens Loan parties not permitted to create liens except for permitted liens, which include: existing liens on debt and refinancings thereof; liens securing certain new indebtedness permitted under debt incurrence covenant; liens on property of any foreign subsidiary; general carveout of $60 Mil. for liens securing debt.

Limitation on Guarantees Guarantees are defined as debt and hence governed by debt restriction. Also see investment section below. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as more than 50% voting stock ceasing to be held by permitted holders prior to a qualifying IPO (and following a

qualifying IPO the acquisition of a majority of board seats or 35% of voting stock by nonpermitted holders), or if Holdings fails to own 100% of the capital stock of the lead borrower. A CoC constitutes an event of default.

Investments Restriction Carveouts: Loans and advances to officers/employees up to $18 Mil; permitted acquisitions provided pro forma compliance with financial ratios; General carveout of an amount capped at the greater of $90 Mil. and 2.75% of total assets provided no event of default exists or will result therefrom.

Sale of Assets Restriction Asset dispositions of $250 Mil. permitted provided at least 75% of consideration is in form of cash and subject to no event of default. Additional carveout of $40 Mil. in sale-leasebacks.

Restricted Payments Restricted Payments (RP) RP Basket: Gymboree Corp. may make RP to Holdings (the proceeds of which may be utilized by Holdings to make additional

RP) up to an aggregate amount equal to the sum of $40 Mil. plus the portion, if any, of the cumulative credit that it elects to apply, provided that no event of default exists or would result therefrom. Cumulative credit is determined (on a cumulative basis) as the sum of 50% of excess cash flow commencing from the closing date (provided that such amount shall be available to make an RP only if total leverage ratio at the time of such RP is less than or equal to 4.0x), subject to certain adjustments.

Other Cross-Default Yes, exceeding $25 Mil. Cross-Acceleration No. MAC Clause As a representation and warranty. Equity Cure N.A. Key Definitions Cumulative credit - determined (on a cumulative basis) as the sum of 50% of excess cash flow commencing from the closing date

(provided that such amount shall be available to make an RP only if total leverage ratio at the time of such RP is less than or equal to 4.0x), subject to certain adjustments

Pricing (a) Eurodollar Term Loan — LIBOR + 3.50% per annum (1.5% LIBOR floor) and (b) ABR Term Loan — Base rate + 2.50% per annum.

ABL – Asset-based loan. MAC – Material adverse change. N.A. – Not applicable. Source: Company filings, Fitch Ratings.



Leveraged Finance


Appendix C

Bond Covenant Summary — The Gymboree Corporation Overview Issuer The Gymboree Corporation (initial issuer was Giraffe Acquisition Corporation) Description of Debt 9.125% Senior Notes Due 2018 Document Date and Location Indenture dated 11/23/10 filed as Exhibit 4.1 to S-4 dated 5/16/11 Maturity Date 12/1/18 Original Issue/Outstanding $400 Mil./$346 Mil. Ranking Senior unsecured obligations of the issuer ranking pari passu in right of payment to its senior indebtedness (including the credit

facilities). Security None. Guarantee Guaranteed on a senior unsecured basis by each direct/indirect domestic subsidiary of the Gymboree Corp. that is a guarantor

or obligor under the senior credit facilities. Each guarantee of the notes will be effectively subordinated to the secured guarantees of the senior credit facilities to the extent of the value of the assets available.

Debt Restrictions Debt Incurrence Coverage Debt Ratio: Fixed-charge coverage ratio (FCCR, pro forma) is ≥ 2.0x.; indebtedness incurred by Restricted

Subsidiaries that are not Guarantors must be ≤ $75.0 Mil. Notable Permitted Indebtedness: 1) i) Indebtedness incurred pursuant to the Revolving Credit Facility not to exceed the greater of a) $300 Mil. and b) the borrowing base and ii) indebtedness incurred pursuant to the Term Loan Facility does not exceed $1,020 Mil.; 2) indebtedness to finance the purchase, lease or improvement of property or equipment < $50 Mil.; 3) indebtedness to finance an acquisition given the issuer is above the FCCR pro forma; 4) foreign subsidiaries debt not to exceed greater of a) $50 Mil. and b) 2.35% of total assets of the foreign subsidiaries; 5) indebtedness of the issuer and its restricted subsidiaries not to exceed $100 Mil.

Limitation on Liens Liens (other than permitted liens) on any debt issued by the issuer or any guarantor are not permitted without equally and ratable securing the notes contemporaneously. Carveouts: • Standard carveouts for existing liens and refinancings thereof; • Liens incurred to secure obligations permitted under the debt incurrence covenant provided that consolidated secured debt

ratio does not exceed 3.50x. • General carveout of $15 Mil.

Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as sale of substantially all assets of Gymboree Corp. and its subsidiaries, or acquisition of 50% or more of the

voting stock of the issuer or any of its direct/indirect parents. There is a CoC put at 101. Investments Restriction See Restricted Payments section Sale of Assets Restriction Standard restrictions on asset sales above $15 Mil. threshold; in the event that sales proceeds exceed $25 Mil. and are not

applied to repay loans or reinvest in additional assets within 365 days, they shall be applied to repay the notes subject to an offer.

Restricted Payments Restricted Payments (RP) RP Basket: The sum of a) 50% of Consolidated Net Income since closing plus b) 100% of net cash proceeds of equity

issuances as long as on a pro forma basis the FCCR ≥ 2.0. Notable Permitted RPs: General RPs not to exceed the greater of $60 Mil. and 2.85% of total assets.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $25 Mil. Callability Redeemable, at the company’s option, in whole or in part, on and after Dec. 1, 2014 at the applicable redemption price below.

Period Redemption Price 12 months after Dec 1, 2014 — 104.563% 12 months after Dec 1, 2015 — 102.281% 12 months after Dec 1, 2016+ — 100.000%

Equity Clawback N.A. Covenant Suspension Covenants related to debt incurrence, restricted payments, disposition of assets, limitation on guarantees of debt by restricted

subsidiaries and offer to repurchase upon a change of control (but except the lien restrictions) will be suspended if (a) the notes have investment grade ratings by two rating agencies and (b) there is no event of default. If notes are subsequently downgraded below investment grade, the covenants shall be reinstated on that later date.

N.A. – Not applicable. Source: Company filings, Fitch Ratings.


Leveraged Finance


Appendix D

Financial Summary — The Gymboree Corporation




LTM Ended


Operating EBITDAa 155.2 143.0 29.6 19.9 102.9 18.1 6.1 27.7 27.8 79.6 14.1 10.3 27.1 79.3 Operating EBITDA Margin (%) 13.1 11.2 9.6 5.7 8.3 6.6 2.3 8.7 7.4 6.5 5.1 3.8 8.9 6.4 FFO Return on Adjusted Capital (%)b 11.5 10.6 9.8 10.1 10.1 9.5 8.9 11.1 12.6 12.6 11.7 11.7 12.4 12.4 FCF Margin (%) 3.6 1.8 (2.1) 9.7 1.2 (8.8) (20.8) 5.7 1.9 (4.4) (2.1) (16.0) 6.7 (1.8)

Coverages (x) FFO Interest Coverage 2.0 1.7 1.6 1.0 1.3 1.0 0.3 1.4 2.2 1.3 (0.0) 0.4 1.8 1.1

Operating EBITDA/ Gross Interest Expense 1.7 1.7 1.4 1.0 1.3 0.9 0.3 1.3 1.3 1.0 0.7 0.5 1.2 0.9 FFO Fixed-Charge Coverage 1.4 1.3 1.2 1.0 1.1 1.0 0.8 1.1 1.4 1.1 0.7 0.8 1.3 1.0 FCF Debt Service Coverageb 1.2 1.3 1.3 1.2 1.2 0.8 0.2 0.4 0.2 0.2 0.4 0.4 0.5 0.5 Cash Flow from Operations/Capex 2.5 1.5 1.1 3.0 1.4 (1.6) (6.7) 3.3 1.9 (0.7) (0.8) (9.0) 5.1 (0.1)


Operating EBITDA 5.1 5.4 6.2 7.5 7.5 8.7 10.4 10.7 9.7 9.7 10.2 9.6 9.7 9.7 Long-Term Secured Debt/FFO 8.9 13.1 20.6 27.5 27.5 60.6 (678.4) (191.6) 34.0 34.0 1,342.9 1,521.2 79.5 79.5 Total Debt with Equity Credit/ Operating EBITDA 7.8 8.0 9.1 10.9 10.9 12.6 16.0 16.2 14.5 14.5 15.3 14.9 14.7 14.7 FFO-Adjusted Leverage 7.3 7.9 8.7 8.9 8.9 9.6 10.4 10.3 9.2 9.2 10.0 10.1 9.6 9.6 Total Adjusted Debt/ Operating EBITDAR 7.9 8.0 8.6 9.1 9.1 9.9 10.7 10.6 10.1 10.1 10.3 10.3 10.2 10.2 FCF/Total Adjusted Debt (%) 1.8 1.0 1.0 0.6 0.6 (0.8) (2.1) (1.1) (2.2) (2.2) (1.4) (1.0) (0.9) (0.9)

Balance Sheet Short-Term Debt 17.7 — 0.5 0.5 0.5 0.5 64.5 42.5 33.6 33.6 42.6 70.6 50.6 50.6

Long-Term Senior Secured Debt 792.2 767.5 767.7 767.7 767.7 767.8 767.9 768.0 768.0 768.0 768.1 768.2 768.3 768.3 Long-Term Senior Unsecured Debt 400.0 371.0 349.5 349.4 349.4 349.3 349.1 349.0 348.9 348.9 348.7 348.6 348.4 348.4 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 1,209.9 1,138.5 1,117.7 1,117.6 1,117.6 1,117.6 1,181.6 1,159.5 1,150.5 1,150.5 1,159.4 1,187.3 1,167.3 1,167.3 Off-Balance Sheet Debtc 1,106.4 1,165.6 1,244.0 1,244.0 1,244.0 1,304.7 1,304.7 1,304.7 1,304.7 1,304.7 1,304.7 1,304.7 1,304.7 1,304.7 Total Adjusted Debt with Equity Credit 2,316.3 2,304.1 2,361.7 2,361.6 2,361.6 2,422.3 2,486.2 2,464.2 2,455.1 2,455.1 2,464.1 2,492.0 2,472.0 2,472.0

Cash Flow Funds From Operations 89.4 58.8 12.1 (0.8) 27.9 0.8 (13.3) 9.2 25.9 22.6 (21.2) (13.3) 18.4 9.7

Change in Working Capital 2.2 15.0 0.6 52.3 47.0 (15.5) (34.5) 16.7 (11.1) (44.4) 18.6 (26.0) 7.3 (11.3) Cash Flow from Operations 91.5 73.8 12.7 51.6 74.9 (14.7) (47.8) 26.0 14.7 (21.8) (2.6) (39.3) 25.6 (1.6) Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (36.6) (47.9) (12.0) (17.4) (52.6) (9.4) (7.2) (7.8) (7.6) (32.0) (3.1) (4.4) (5.1) (20.2) Common Dividends (12.2) (3.3) (7.3) (0.1) (7.6) — — (0.1) (0.1) (0.2) — (0.0) — (0.1) FCF 42.8 22.7 (6.6) 34.1 14.7 (24.0) (54.9) 18.0 7.1 (53.9) (5.8) (43.7) 20.6 (21.9) Net Acquisitions and Divestitures (1.4) — — — — — — — — — 0.4 — — 0.4 Net Debt Proceeds (8.2) (69.3) (0.8) (24.1) (25.0) 9.9 53.9 (22.1) (9.1) 32.5 8.9 27.8 (20.2) 7.4 Net Equity Proceeds — — — — — — — — — — — — — — Other (Investing and Financing) 12.6 2.1 (0.4) 10.4 16.4 (0.5) 1.2 0.1 (0.2) 0.5 0.4 17.0 0.4 17.6 Total Change in Cash 45.8 (44.6) (7.8) 20.4 6.1 (14.7) 0.1 (4.1) (2.3) (20.9) 3.8 1.1 0.8 3.4 Ending Cash and Securities Balance 77.9 33.3 19.1 39.4 39.4 24.8 24.9 20.8 18.5 18.5 22.4 23.5 24.3 24.3 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — The Gymboree Corporation (Continued)




LTM Ended


Revenue 1,188.3 1,275.7 309.8 351.0 1,244.6 272.0 264.3 316.8 375.6 1,228.7 276.1 273.5 305.4 1,230.6 Revenue Growth (%) 10.6 7.4 (0.5) (11.7) (2.4) (7.1) (9.1) 2.3 7.0 (1.3) 1.5 3.5 (3.6) 2.2 Operating EBIT 97.2 84.1 18.5 8.3 56.4 6.9 (5.3) 16.7 16.8 35.2 3.4 0.1 17.2 37.5 Gross Interest Expense 89.8 85.6 20.5 20.2 81.6 20.4 20.5 20.8 20.8 82.4 21.1 21.6 21.9 85.4

Sector-Specific Data Comparable Store Sales (%)d 4.0 (2.0) (4.0) — (6.0) (10.0) (10.0) 1.0 5.0 (3.0) — 2.0 (3.0) —

No. of Stores 1,149 1,262 1,319 1,323 1,323 1,337 1,344 1,355 1,326 1,326 1,322 1,317 1,315 1,315 Gross Margin (%) 38.7 37.7 39.8 35.5 38.2 39.8 36.5 39.7 36.7 38.1 38.2 36.8 40.2 37.9 SG&A/Revenues (%) 30.5 31.1 33.9 33.1 33.7 37.3 38.5 34.5 32.2 35.3 36.9 36.8 34.6 34.9 Operating EBIT Margin (%) 8.2 6.6 6.0 2.4 4.5 2.5 (2.0) 5.3 4.5 2.9 1.2 0.0 5.6 3.0 Operating EBITDAR 293.5 288.7 68.5 58.8 258.4 58.8 46.9 68.4 68.5 242.7 54.8 51.1 67.9 242.4 Operating EBITDAR Margin (%) 24.7 22.6 22.1 16.7 20.8 21.6 17.7 21.6 18.2 19.7 19.9 18.7 22.2 19.7 Operating EBITDAR/ (Interest + Rent) (x)b 1.3 1.2 1.2 1.0 1.1 1.0 0.8 1.1 1.1 1.0 0.9 0.8 1.1 1.0 Inventory Turnover (x)b 3.7 3.9 3.3 4.1 4.1 4.3 3.4 3.1 4.1 4.1 4.0 3.3 2.9 2.9 Accounts Payable Turnover (x)b 10.9 9.4 9.0 8.0 8.0 11.6 7.0 6.4 8.0 8.0 8.6 6.5 5.5 5.5 Return on Invested Capital (%)b 8.5 8.4 8.1 8.1 8.1 7.5 6.9 8.7 9.3 9.3 9.2 9.4 9.6 9.6 Return on Assets (%)b (2.1) (0.4) (2.5) (11.2) (11.0) (11.8) (12.7) (57.2) (48.3) (48.3) (48.4) (46.6) (5.4) (5.4) Capex/Depreciation (%)b 63.1 81.3 107.6 150.3 113.4 83.7 63.1 71.8 69.6 72.0 29.3 42.8 50.8 48.3 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

Hanesbrands Inc. Credit Profile

Credit Profile Summary Leading Brands and Market Share: Hanesbrands Inc. (Hanes) has strong brand recognition and leading market share in the basic apparel industry. Hanes’ value-priced product offering, deep innovation capability and strong relationships with its top retail customers have enabled it to maintain and gain market share and drive improved profitability. Hanes’ acquisitions of DBApparel of France (DBA) in June 2014 and Maidenform Brands, Inc. (MFB) in October 2013 have complemented its existing product portfolio and strengthened leading market positions.

Acquisitions Augment Growth: The acquisitions are examples of the company’s focus on using M&A to supplement slow (low single-digit) organic sales growth and better leverage its supply chain infrastructure. With a full year of DBA results, sales are expected to reach $6 billion in 2015. Given the company’s healthy FCF after dividends of over $450 million annually, it can accommodate moderately sized acquisitions within its current credit profile.

Continued Margin Improvement: The EBITDA margin has increased from 11.8% in 2010 to 16.8% in the LTM period ending Oct. 3, 2015. Fitch Ratings believes there is modest additional upside to margins from further supply chain efficiencies, a gradual mix change toward higher priced products and the integration of DBA. Upside in reported margins will be somewhat constrained in the near term due to high industry inventory levels and transactional pressure from the strong U.S. dollar.

Improved Financial Flexibility: Relatively steady debt levels and healthy growth in EBITDA have driven adjusted debt/EBITDAR to 3.3x as of Oct. 3, 2015, from 4.6x in 2010. Adjusted leverage is expected to remain in the low- to mid-3.0x range over the next two years — in line with Hanes’ long-term target for net debt to EBITDA of 2.0x–3.0x, or approximately 3.0x–4.0x on a lease-adjusted basis — absent any major debt-financed acquisition .

Solid Liquidity: Hanes had $285 million of cash and $830 million of unused availability under its U.S. revolver as of Oct. 3, 2015. Liquidity will be supported by projected FCF of around $400 million annually, which will likely be dedicated to dividends, acquisitions and share repurchases. The company repurchased $350 million of equity in 2015, and Fitch expects management could execute debt-financed share buybacks in the absence of acquisition opportunities while managing leverage within its publicly stated target.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a sustained trend of positive sales and EBITDA growth, coupled with commitment to maintaining leverage below 2.5x, or 3.0x on an adjusted debt/EBITDAR basis.

Negative Drivers: Negative credit profile drivers include significant deterioration in the retail environment and operating trends, or large debt-financed dividends/share repurchases that result in adjusted leverage increasing to around 4.0x on a sustained basis.



Credit Opinion Hanesbrands Inc. carries a ‘bb+*/Positive’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data Hanesbrands Inc.

($ Mil.) FYE

1/3/15 LTM

10/3/15 Total Revenue 5,324.7 5,844.6 EBITDA 891.7 982.3 EBITDA Margin (%) 16.7 16.8 FCF 324.2 (37.6) Total Adjusted Debt 2,700.3 3,495.9 Total Adjusted Debt/EBITDAR (x) 2.8 3.3 EBITDAR/ (Interest + Rent) (x) 5.2 5.2 Comparable Store Sales (%) (2.0) N.A. Real Estate Owned (%) 45 N.A.

N.A. – Not available.





Leveraged Finance


Business Profile Assessment Hanes manufactures, sources and sells basic apparel under the brand names of Hanes, Champion (C9 by Champion exclusively at Target Corp. [Target]), Playtex, Bali, L’eggs, Just My Size (Wal-Mart Stores, Inc. [Wal-Mart] exclusive), Barely There, Maidenform and Wonderbra. The company also sells licensed collegiate logo apparel through its recent acquisition of Knights Apparel. The basic apparel industry is characterized by products sold with frequent replenishment, and is not primarily driven by fashion. Many of the products Hanes sells are purchased as frequently as health/beauty and other consumer products.

The company has concentrated distribution through mass merchants (48% of 2014 sales). Other distribution channels include mid-tier domestic department stores and national chains (15%); embellishers, specialty retailers, wholesale clubs and sporting goods stores (14% in aggregate); international markets such as Canada, Japan, Mexico, Europe and Brazil (15%); and direct to consumers via its outlets and online (8%). The sales mix by channel has been relatively stable, though mass merchants have contributed more sales (48% of net sales in 2014 versus 41% in 2011), given tighter inventory control and continued promotional pressure at the national chains/department stores and further consolidation of smaller specialty retailers.

Hanes’ top 10 customers account for 59% of sales. The top three customers are Wal-Mart (24% of 2014 sales), Target (17%), and Kohl’s Corporation (5%). Hanes’ strong relationships with its top customers and deep innovation capability have enabled it to maintain and gain market share, in a slow-growth environment.

Acquisitions Drive Growth Hanes is focused on acquisitions to drive growth and supply chain efficiencies. Management’s acquisition criteria focus on companies in its core categories that provide complementary revenue growth and cost synergy opportunities, and are quickly accretive to earnings.

Fitch Base Case Assumptions — Hanesbrands Inc. ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 5,324 5,876 5,998 6,122 2014/2015 benefit from recent

acquisitions. Revenue Growth (%) 15.1 10.4 2.1 2.1 — EBITDA 892 993 1,018 1,039 — EBITDA Margin (%) 16.7 16.9 17.0 17.0 — Working Capital Change (35) (296) (27) (29) — Cash Flow From Operations 508 513 720 733 — Capex (64) (95) (100) (100) — Dividends (120) (163) (184) (187) — FCF 324 255 437 446 — Share Repurchases — (350) (200) (200) — Total Debt 1,984 2,897 2,992 3,087 $850 Mil. term loan issued

April 2015. Upsized by $300 Mil. in October 2015 to partially repay revolver, repurchase shares, and for general corporate purposes.

Total Adjusted Debta 2,700 3,253 3,461 3,670 — Total Adjusted Debt/EBITDAR (x) 2.8 3.0 3.1 3.3 — aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

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The company completed its all-cash acquisition of Knights Apparel for $200 million in total enterprise value, or approximately 8.0x the company’s EBITDA, on April 6, 2015. Knights Apparel is a sports apparel manufacturer, holding licenses from approximately 400 U.S. universities to produce and sell t-shirts, sweatshirts and other apparel bearing their logos into the mass retail channel. Hanes expects to drive approximately $20 million in synergies from the approximately $24 million EBITDA base.

Hanes completed its acquisition of DBA on Aug. 29, 2014, paying EUR297 million, or approximately 7.5x DBA’s EBITDA. DBA is a leading marketer of intimate apparel, hosiery and underwear in Europe, and has over $875 million net sales and a midsingle-digit operating margin. The company’s brand portfolio includes DIM, Playtex, Nur Die, Lovable, Abanderado and Wonderbra, which are top-tier brands in their markets and sold across a wide range of retail channels.

Hanes completed its acquisition of MFB on Oct. 7, 2013, for $581 million, or approximately 9.5x 2012 EBITDA. MFB has sales of around $500 million, and sells bras, shapewear and panties under brands such as Maidenform, Flexees, Lilyette, Self Expressions and Sweet Nothings, as well as Donna Karan and DKNY intimate apparel under license. MFB has a particularly strong position in the shapewear business, which complements Hanes’ existing product portfolio and helps increase scale to serve retail customers.

Operating Segments — Management Strategy and Trends

Segment % of Revenues/ Operating Profita Primary Products Primary Brands Competitive Position Management Strategy

Sales and Margin Trends

Innerwear 41.9/65.7 Intimate apparel, such as bras, panties, shapewear and hosiery; men’s underwear and kids’ underwear; socks.

Hanes, Playtex, Bali, Barely There, Just My Size, Wonderbra; Polo Ralph Lauren (licensed), Champion; L’eggs, Maidenform, Flexees, Lilyette, Self Expressions, Sweet Nothings, Donna Karen (licensed), DKNY (licensed).

Dominant share in dollar stores and mass merchants; 40% share in hosiery category as the sector starts to stabilize after secular decline for a decade.

Grow fast-growing categories such as men’s underwear via product innovation.

Flat to low single-digit organic sales growth boosted by MFB acquisition; operating margin improved to high teens.

Outerwear 32.5/46.7 Activewear, such as performance T-shirts and shorts, fleece, sports bras and thermals; casualwear, such as T-shirts, fleece, and sport shirts.

Champion, Duofold, Gear for Sports, Hanes, Just My Size, Outer Banks, Champion, Hanes Beefy-T, various collegiate brands (licensed).

Exclusive brands at WMT and TGT; Champion grew by double digits in past five years.

Improve margins and grow units of higher margin products through supply chain initiatives and bolt-on acquisitions.

Flat to low single-digit sales growth; operating margin improved to low teens.

Direct to Consumer

6.7/5.6 Activewear, men’s underwear, kids’ underwear, intimate apparel, socks, hosiery and casualwear.

Bali, Hanes, Playtex, Champion, Barely There, L’eggs, Just My Size.

Growth slows down following double-digit CAGR by leading brands at early expansion stage.

Operate 268 outlet stores, as well as Web sites and catalogs.

Flat sales for five years to 2013; operating margin improved to high single digits given increased focus on profitable sales.

International 18.9/16.7 Activewear, men’s underwear, kids’ underwear, intimate apparel, socks, hosiery and casualwear.

Hanes, Champion, Wonderbra, Playtex, Stedman, Zorba, Rinbros, Kendall, Sol y Oro, Bali, Ritmo, DIM, Abanderado.

No. 1 in France, Germany, Spain, Italy; Canada (No. 2 in intimates and men’s underwear, No. 3 in socks), Mexico (No. 1 in intimates and men’s underwear), Brazil (No. 1 in men’s underwear), Japan.

Increased presence with DBA acquisition, with significant cost-saving opportunities.

Sales declines reversed by DBA acquisition; operating margin projected to recover to over 10%.

aBased on LTM ended Oct. 3, 2015; operating profit before general corporate expenses. MFB – Maidenform Brands, Inc. WMT – Wal-Mart. TGT – Target. DBA – DBApparel of France. Source: Company filings, Fitch Ratings.

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Leading Brands and Share in a Competitive Sector Since its spinoff from Sara Lee in 2006, Hanes has grown to be the leading player in innerwear categories, including bras, panties, men’s underwear, fleece, socks and hosiery. The company has also improved its market position in the large T-shirts and activewear categories, through acquisitions and product innovations.

The basic apparel market is highly competitive and evolving rapidly. Competition is generally based on brand-name recognition, price, product quality, selection, service and purchasing convenience. The majority of Hanes’ core styles continue from year to year, with variations only in color, fabric or design details. However, products such as intimate apparel, activewear and sheer hosiery have more of an emphasis on style and innovation.

Hanes’ key competition in branded products includes Fruit of the Loom (owned by Berkshire Hathaway Inc.); Victoria’s Secret (owned by L Brands, Inc.); and Jockey International, Inc. in the innerwear segment. Hanes competes against Gildan Activewear Inc. and The Gap Inc. in the outerwear segment.

Hanes also competes with the private labels marketed and sold by department stores, specialty stores and other retailers. National brands have gained share at the expense of private labels since 2008, as consumers’ pursuit of value has focused more on getting brand names for less rather than lowest prices. This change in consumer behavior has generally benefited value brands such as Hanes in gaining market share.

2016 Outlook After recent acquisitions, sales are expected to reach $5.9 billion in 2015, versus $4.6 billion in 2013. Fitch believes there is moderate additional upside to margins from further supply chain efficiencies, a gradual mix change toward higher priced products and the integration of DBA. Transactional FX pressure has mitigated the upside in 2015 and will continue to do so in 2016, given forward inventory purchases.

Adjusted leverage is expected to increase to 3.3x in 2015 from 2.8x in 2014, and remain in the 3.0x–3.5x range over the next two to three years, in line with Hanes’ long-term target for net debt to EBITDA of 2.0x–3.0x, or approximately 3.0x–4.0x on a lease-adjusted basis. Fitch expects management could debt-financed share buybacks in the absence of acquisition opportunities while managing leverage within its publicly stated target.

Liquidity and Debt Structure Hanes had $285 million of cash and $830 million of unused availability under its $1 billion U.S. revolver as of Oct. 3, 2015. Fitch expects the liquidity position to remain strong over the next two years, supported by annual projected FCF of over $400 million beginning 2016. The $500 million Euro Term Loan B due August 2021 was added to the existing revolver in July 2014 to finance the DBA acquisition. The loan is structured to be an obligation of Hanes’ foreign subsidiary, but benefits from the same secured guarantee from the parent company as the company’s U.S. senior secured revolver, and is therefore treated pari-passu with the existing revolver.

In April 2015, Hanes issued $850 million of debt in two $425 million term loans, with Term Loan A maturing in April 2020 and Term Loan B maturing in April 2022. The company increased Term Loan A by $300 million on Oct. 23, 2015. Proceeds will be used to pay down existing revolver borrowings and for general corporate purposes, including the repurchase of

Leveraged Finance


$350 million in shares in 2015. Fitch expects year-end 2015 debt to increase $900 million versus year-end 2014 to $2.9 billion as a result of these transactions.

The $225 million accounts receivable securitization facility was amended to extend the termination date to March 2016, and the facility is expected to be renewed on a yearly basis. Hanes’ maturity profile is manageable, with $1 billion of 6.0% unsecured notes due 2020 and the recently issued term loans as the only major debt outstanding.

Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb+*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes.

Fitch has assigned a ‘bbb–*/rr1*’ recovery rating to the senior secured revolver, Euro Term Loan, Term Loan A and Term Loan B, indicating outstanding recovery prospects (91%–100%) in the event of default. The unsecured notes are expected to achieve average recovery prospects (31%–50%) and are assigned a ‘bb+*/rr4*’.

Capital Structure ($ Mil., At Oct. 3, 2015) Description Amount (%) Secured Debt $1.0 Bil. U.S. Revolver due 4/29/20 153.0 5.2 $225 Mil. A/R Securitization Facility 258.3 8.7 $500 Mil. Euro Term Loan due 8/29/21 400.7 13.5 $725 Mil. Term Loan A due 4/29/20a 714.4 24.1 $425 Mil. Term Loan B due 4/29/22 422.9 14.3 Total Secured Debt 1,949.3 65.9 Unsecured Debt 6.375% Sr. Unsecured Notes due 12/15/20 1,000.0 33.8 Other 10.1 0.3 Total Unsecured Debt 1,010.1 34.1 Total Debt 2,959.4 100.0 aOn Oct. 23, 2015, the company increased the term loan by $300 Mil. A/R – Accounts receivable. Source: Company filings, Fitch Ratings.


2016 11.0 2017 273.7 2018 15.4 2019 25.5 2020 1,690.2 Thereafter 775.2


Liquidity ($ Mil., At Oct. 3, 2015) Cash 284.6 U.S. Revolver Availability 830.3 Total 1,114.9


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Appendix A

Organizational Structure — Hanesbrands Inc. ($ Mil., As of Oct. 3, 2015)

aOn Oct. 23, 2015, the company increased the borrowing capacity by $300 million. bHBI Receivables LLC is a wholly owned bankruptcy-remote subsidiary. CO – Credit Opinion. A/R – Accounts receivable. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions. Source: Company filings, Fitch Ratings.

Upstream guarantee of all debt obligations at parent company level

Directors and Executives 3.1%

Hanesbrands Inc. (Parent Company)CO — bb+*/Positive

HBI Branded ApparelLimited, Inc.

Other Domestic Subsidiaries

HBI Receivables LLCb

$225 Mil. A/R Sec. Facility due 3/16/16 258UPEL, Inc.

Public Shareholders 96.9%

Upstream guarantee of all debt obligations at parent company level

MFB International Holdings, S.a.r.lCO — bb+*/Positive

Term Loan B due 8/29/21 EUR401

HBI International, LLC Confecciones El Pedregal, Inc.

2.42% 55.48% 26.98% 15.13%Secured downstream guarantee

from parent company

Upstream Guarantee Downstream Guarantee bbb–*/rr1*

Debt Issue Amount CO$1.0 Bil. Senior Secured Revolver due 4/29/20 153 bbb–*/rr1*Term Loan A due 4/29/20a 714 bbb–*/rr1*Term Loan B due 4/29/22 423 bbb–*/rr1*6.375% Senior Unsecured Notes due 12/15/20 1,000 bb+*/rr4*Total 2,290 —

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Appendix B

Bank Agreement Covenant Summary — Hanesbrands Inc. Overview Borrower Hanesbrands Inc. and MFB International Holdings S.a.r.l. Document Date and Location

First Amendment to the Third Amended and Restated Credit Agreement dated 5/5/15 Third Amended and Restated Credit Agreement dated 4/29/15 Second Amendment and Joinder Agreement dated 10/23/15

Maturity Date July 23, 2018 for Revolving Loan Facility, and Aug. 29, 2021 for Euro Term Loan Facility Description of Debt Senior secured credit facility Amount $1 Bil. for the revolver, $725 Mil. for Term Loan A, $425 Mil. for Term Loan B, and $500 Mil. for Euro Term Loans Ranking Senior secured Security Secured by first lien on substantially all present and future property and assets, real and personal, tangible and intangible,

of the company and each guarantors and equity interests of substantially all of the company’s direct and indirect domestic subsidiaries and 65% of the voting securities of certain first-tier foreign subsidiaries.

Guarantee Revolver is guaranteed by substantially all of the company’s existing and future direct and indirect domestic subsidiaries. Term loan is guaranteed by Hanesbrands and all of its existing and future direct and indirect domestic subsidiaries, and

substantially all of MFB International Holdings’ direct and indirect subsidiaries. Debt Restrictions Debt Incurrence Coverage Ratio Debt: None.

Notable Permitted Debt Incurrence: 1) Unsecured Indebtedness of the Obligors under the 2020 Senior Note not to exceed $1.0 Bil.; 2) indebtedness from governmental/municipal bonds, deferred purchase of acquired property or financing of acquisition of equipment, and capitalized lease obligations not to exceed the greater of $150 Mil. and 4% of total tangible assets; 3) foreign sub indebtedness to the parent borrower including investments made by the company and its subsidiary guarantors in such foreign subs limited to the greater of (i) $400 Mil. and (ii) the sum of (a) 10.0% of total tangible assets plus (b) available retained excess cash flow; 4) subsidiary indebtedness existing at the time of acquisition not to exceed the greater of 250 Mil. and 6.5% of total tangible assets; 5) the greater of $500 Mil. and 15% of total tangible assets for indebtedness at foreign subs with a carveout of the greater of $75 Mil. and 2% of total tangible assets for permitted acquisition by such foreign subs; 6) additional all-purpose debt not to exceed the greater of $150 Mil. and 4% of total tangible assets.

Limitation on Liens General carveout of the greater of $100 Mil. and 3% of total tangible assets and permitted securitization programs of $500 Mil., provided covenant compliance on pro forma basis.

Limitation on Guarantees Same as limits on debt incurrence. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 35% of voting stock by nonpermitted holders and constitutes an event of default. M&A, Investments Restriction

Acquisitions allowed up to 500 Mil. over the life of this agreement. General investment basket of the greater (i) $150 Mil. and (ii) the sum of (a) 4% of total tangible assets plus (b) the Available Amount; investments in foreign subs including foreign sub indebtedness limited to the greater of (i) $400 Mil. and (ii) the sum of (a) 10.0% of total tangible assets plus (b) the Available Amount.

Sale of Assets Restriction

Asset dispositions permitted provided pro forma senior secured debt to total tangible assets ≤ 50%.

Restricted Payments Restricted Payments (RP)

RP Basket: Available Amount ($400 Mil. plus 50% of Consolidated Net Income). Notable Permitted RPs: An amount that does not cause the Leverage Ratio to exceed 3.25x.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $75 Mil. MAC Clause None. Equity Cure None. Covenant Suspension 50% of total commitments Required Lenders/ Voting Rights

None.

MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/1359841/000135984115000145/hbi-20150704xex102.htm


http://www.sec.gov/Archives/edgar/data/1359841/000135984115000164/hbi-20151003xex101.htm

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Bank Agreement Financial Covenant Summary — Hanesbrands Inc. (Continued) Financial Covenants

Leverage (Maximum) Until 10/15/15 ≤ 4.00x; Following any acquisition of more than 200 Mil., temporary increased to 4.5x. Coverage (Minimum) 10/16/12 and thereafter ≥ 3.00x Current Ratio (Minimum)

Net Worth (Minimum)

Principal Repayments Mandatory/Tax Prepayment ECF Sweep: 50% if leverage ≥ 2.5x; 25% if leverage < 2.5x but ≥ 2.0x; 0% if leverage < 2.0x. Asset Sales: 100% of net proceeds subject to reinvestment period

Amortization Schedule Term loan amortizes 1% annually, with balance due at maturity. Callability/Optional Prepayment Optional prepayment with or without prepayment penalty

Pricing

Coupon Type/Index Term loan priced at EURIBOR + 275 bps Revolver floats based off LIBOR or Base Rate (BR)

Pricing Grid Leverage Pricing/Commitment Fee

≥ 4.00x L + 225 bps or BR + 125 bps/35 bps

< 4.00x but ≥ 3.25x L + 200 bps or BR + 100 bps/30 bps

< 3.25x but ≥ 2.50x L + 175 bps or BR + 75 bps/25 bps

< 2.50x L + 150 bps or BR + 50 bps/25 bps


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Appendix C

Bond Covenant Summary — Hanesbrands Inc. Overview Borrower Hanesbrands Inc. Document Date and Location Indenture dated 8/1/08 (Exhibit 4.3 to S-3 filed 8/1/08)

Fourth Supplemental Indenture dated 11/9/10 (Exhibit 4.2 to 8-K filed 11/10/10) Prospectus filed as 424(b)(3) on 1/7/11

Description of Debt 6.375% senior notes Maturity Date Dec. 15, 2020 Amount $1,000 Mil. Ranking Senior unsecured obligations ranking pari passu with existing and future unsubordinated indebtedness. Security None. Guarantee Guaranteed by substantially all the domestic subsidiaries. Debt Restrictions Debt Incurrence Coverage Debt Ratio: Pro forma FCCR ≥ 2.0x for the company and restricted subs.

Notable Permitted Debt Incurrence: 1) Credit facility up to greater of a) $1.7 Bil. and the sum of b) i) 85% of A/R plus ii) 85% of inventory; 2) indebtedness from governmental/municipal bonds, deferred purchase of acquired property or financing of acquisition of equipment, and capitalized lease obligations up to the greater of $200 Mil. or 5% of total assets; 3) foreign sub. debt of $500 Mil.; 4) additional general debt not to exceed $250 Mil.

Limitation on Liens Secured indebtedness permitted provided pro forma senior secured leverage ≤ 2.5x and subject to debt incurrence covenant; permitted securitization up to $500 Mil.; general basket of $200 Mil.

Limitation on Guarantees Guarantees are included under the definition of indebtedness and hence are governed by debt incurrence covenants. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of over 50% of voting stock, but does not constitute an event of default (EoD). There is a CoC put at 101. M&A, Investments Restriction General carveout of $100 Mil. Sale of Assets Restriction Not permitted unless 75% of proceeds in cash (or permitted asset swap); reinvested in 12 months or excess proceeds over $50 Mil. used

to repay senior indebtedness. Restricted Payments Restricted Payments (RP) RP Basket: RP not to exceed sum of a) 50% of adjusted consolidated net income plus 100% proceeds from equity issuance or other

marketable securities and sale of restricted investments. Notable Permitted RPs: 1) General investments up to $200 Mil.; 2) redemption of any Indebtedness subordinated the Notes or any Note Guarantee (i) at a purchase price ≤ 101% of the principal amount of such Indebtedness in the event of a CoC in accordance with customary provisions or (ii) at a purchase price ≤ 100% of the principal amount thereof in accordance with customary provisions; 3) payment of dividends or distributions to holders of Disqualified Stock and any class or series of preferred stock as long as the FCCR is ≥ 2.0x; 4) additional RP not to exceed $75 Mil. in any fiscal year provided unutilized amount may be carried forward and the additional RP shall be increased by an additional $120 Mil. as long as pro forma leverage ratio ≤ 3.75x.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $100 Mil. MAC Clause None. Equity Clawback Max. 35% of the issue can be redeemed @ 106.375% with proceeds from an IPO before 12/15/13. Callability 2015 — 103.188%

2016 — 102.125% 2017 — 101.062% 2018 and thereafter — 100.000%

Covenant Suspension If rated investment grade by both rating agencies, covenants including debt incurrence, RP, dividend and other payment restrictions, asset sales and M&A fall away.

FCCR – Fixed-charge coverage ratio. A/R – Accounts receivable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/846626/000095014408005947/g14371s3exv4w3.htm

http://www.sec.gov/Archives/edgar/data/1359841/000095012310103506/g25179exv4w2.htm

http://www.sec.gov/Archives/edgar/data/846626/000095012311001154/g25447b3e424b3.htm

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Appendix D

Financial Summary — Hanesbrands, Inc. 12




Ended ($ Mil.) 12/29/12 6/29/13 9/28/13 12/31/13 12/31/13 3/29/14 6/28/14 9/27/14 1/3/15 1/3/15 4/4/15 7/4/15 10/3/15 10/3/15 Profitability Operating EBITDAa 553.6 206.3 201.2 179.2 697.6 140.8 259.4 244.0 247.6 891.7 161.9 293.4 279.4 982.3 Operating EBITDA Margin (%) 12.2 17.2 16.8 13.9 15.1 13.3 19.3 17.4 16.3 16.7 13.4 19.3 17.6 16.8 FFO Return on Adjusted Capital (%)b 18.2 19.7 20.4 18.8 18.8 17.3 17.8 15.2 17.9 17.9 17.1 13.9 16.6 16.6 FCF Margin (%) 11.2 5.7 17.1 23.5 10.6 (9.8) 1.9 11.3 16.1 6.1 (27.8) (2.3) 5.5 (0.6) Coverages (x) FFO Interest Coverage 3.4 7.3 6.9 5.2 5.7 3.7 10.3 6.8 5.8 6.6 3.9 4.3 9.1 5.9 Operating EBITDA/ Gross Interest Expense 4.0 8.1 8.0 6.9 6.8 6.5 12.3 10.4 7.9 9.1 6.0 10.1 8.9 8.3 FFO Fixed-Charge Coverage 2.6 4.6 4.4 3.4 3.7 2.3 5.5 4.0 3.8 3.9 2.6 2.9 5.7 3.8 FCF Debt Service Coverageb 1.9 1.9 1.9 1.8 1.8 1.9 1.5 1.0 0.9 0.9 0.5 0.3 0.2 0.2 Cash Flow from Operations/Capex 13.4 10.1 16.4 25.9 13.6 (5.1) 5.4 9.6 16.5 7.9 (7.1) 1.3 8.3 2.3 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA 0.1 0.2 — 0.4 0.4 0.6 0.4 1.4 0.4 0.4 0.8 1.0 1.1 1.1 Long-Term Secured Debt/FFO 0.2 0.3 — 0.6 0.6 1.0 0.6 2.3 0.7 0.7 1.4 2.1 1.9 1.9 Total Debt with Equity Credit/ Operating EBITDA 2.7 2.3 2.0 2.4 2.4 2.5 2.3 2.8 2.2 2.2 2.5 2.7 2.8 2.8 FFO Adjusted Leverage 3.9 3.4 3.1 3.5 3.5 3.9 3.6 4.4 3.7 3.7 4.0 5.0 4.4 4.4 Total Adjusted Debt/Operating EBITDAR 3.4 2.9 2.6 3.0 3.0 3.2 2.9 3.3 2.8 2.8 3.0 3.2 3.3 3.3 FCF/Total Adjusted Debt (%) 24.2 22.8 20.5 21.4 21.4 18.5 17.0 12.7 12.0 12.0 3.1 1.0 (1.1) (1.1) Balance Sheet Short-Term Debt 200.1 200.8 171.8 218.0 218.0 203.4 265.8 382.8 369.8 369.8 327.8 379.4 417.8 417.8 Long-Term Senior Secured Debt 67.5 124.5 — 285.2 285.2 455.1 298.0 1,132.9 388.1 388.1 759.7 974.3 1,093.2 1,093.2 Long-Term Senior Unsecured Debt 1,250.0 1,250.0 1,250.0 1,181.8 1,181.8 1,164.9 1,225.0 755.2 1,211.0 1,211.0 1,199.6 1,232.1 1,258.3 1,258.3 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — 20.7 14.9 14.9 14.6 11.3 10.1 10.1 Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 1,517.6 1,575.3 1,421.8 1,685.0 1,685.0 1,823.4 1,788.8 2,291.5 1,983.8 1,983.8 2,301.7 2,597.1 2,779.4 2,779.4 Off-Balance Sheet Debtc 581.1 601.4 601.4 601.4 601.4 716.5 716.5 716.5 716.5 716.6 716.5 716.5 716.5 716.5 Total Adjusted Debt with Equity Credit 2,098.7 2,176.7 2,023.3 2,286.4 2,286.4 2,539.9 2,505.3 3,008.0 2,700.3 2,700.3 3,018.2 3,313.7 3,495.9 3,495.9 Cash Flow Funds From Operations 332.8 159.9 148.7 108.5 481.8 58.7 196.8 136.8 150.8 543.2 78.3 96.9 253.6 579.6 Change in Working Capital 216.1 (62.5) 90.0 225.7 109.5 (120.9) (129.6) 73.5 142.0 (35.1) (337.7) (70.7) (107.7) (374.0) Cash Flow from Operations 548.9 97.4 238.7 334.3 591.3 (62.2) 67.2 210.4 292.8 508.1 (259.3) 26.3 145.9 205.6 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (41.0) (9.6) (14.5) (12.9) (43.6) (12.2) (12.4) (22.0) (17.7) (64.3) (36.4) (19.9) (17.5) (91.5) Dividends — (19.8) (19.8) (19.8) (59.4) (29.9) (29.9) (29.9) (30.0) (119.6) (40.1) (41.4) (40.2) (151.7) FCF 507.9 68.0 204.3 301.6 488.2 (104.3) 24.9 158.5 245.1 324.2 (335.8) (35.0) 88.1 (37.6) Net Acquisitions and Divestitures 13.1 — 5.9 (559.7) (553.8) 0.1 4.9 (352.9) (5.3) (353.3) 4.7 (193.1) 10.7 (182.9) Net Debt Proceeds (520.5) (49.1) (153.5) 263.2 167.6 138.6 (34.6) 288.9 (277.3) 115.6 376.9 286.5 178.0 564.1 Net Equity Proceeds 8.8 0.9 — — 5.3 — — — — — — — (306.1) (306.1) Other (Investing and Financing) (1.9) (5.9) (6.7) (21.5) (34.3) 1.0 (2.7) (22.3) 61.6 37.5 (8.6) (20.1) (1.6) 31.3 Total Change in Cash 7.5 13.8 50.0 (16.5) 73.1 35.3 (7.5) 72.2 24.0 124.0 37.2 38.3 (30.8) 68.8 Ending Cash and Securities Balance 42.8 82.3 132.3 115.9 115.9 151.1 143.6 215.8 239.9 239.9 277.1 315.4 284.6 284.6 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable-store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — Hanesbrands, Inc. (Continued) 12




Ended ($ Mil.) 12/29/12 6/29/13 9/28/13 12/31/13 12/31/13 3/29/14 6/28/14 9/27/14 1/3/15 1/3/15 4/4/15 7/4/15 10/3/15 10/3/15 Income Statement Revenue 4,525.7 1,199.2 1,197.3 1,285.8 4,627.8 1,059.4 1,342.1 1,400.7 1,522.6 5,324.7 1,208.9 1,522.0 1,591.0 5,844.6 Revenue Growth (%) (2.4) 1.6 (1.8) 11.5 2.3 12.0 11.9 17.0 18.4 15.1 14.1 13.4 13.6 14.9 Operating EBIT 460.6 183.9 179.6 155.5 606.7 117.7 236.4 220.5 218.9 793.5 137.3 267.2 254.5 877.9 Gross Interest Expense 138.0 25.5 25.3 26.1 102.8 21.8 21.1 23.5 31.3 97.7 26.9 29.0 31.4 118.5 Sector-Specific Data Comparable Store Sales (%)d (1.0) 3.0 5.0 0.8 1.0 (4.0) (4.0) (5.0) — (2.0) (4.0) (3.0) — — No. of Stores — — — — — — — — — — — — — — Gross Margin (%) 31.4 36.3 35.2 34.5 35.2 35.1 37.9 37.1 37.9 37.1 38.1 39.1 37.0 38.0 SG&A/Revenues (%) 21.2 21.0 20.2 22.4 22.1 24.0 20.3 21.4 23.5 22.2 26.7 21.5 21.0 23.0 Operating EBIT Margin (%) 10.2 15.3 15.0 12.1 13.1 11.1 17.6 15.7 14.4 14.9 11.4 17.6 16.0 15.0 Operating EBITDAR 626.3 225.1 220.0 198.0 772.8 163.2 281.8 266.4 270.0 981.3 184.3 315.8 301.8 1,071.9 Operating EBITDAR Margin (%) 13.8 18.8 18.4 15.4 16.7 15.4 21.0 19.0 17.7 18.4 15.2 20.8 19.0 18.3 Operating EBITDAR/ (Interest + Rent) (x)b 3.0 5.1 5.0 4.4 4.3 3.7 6.5 5.8 5.0 5.2 3.7 6.1 5.6 5.2 Inventory Turnover (x)b 2.2 2.1 2.2 2.4 2.4 2.2 2.3 2.2 2.4 2.4 2.2 2.2 2.1 2.1 Accounts Payable Turnover (x)b 7.3 7.1 6.7 6.9 6.9 6.7 6.2 5.8 6.2 6.2 6.2 5.7 5.5 5.5 Return on Invested Capital (%)b 17.9 20.9 21.8 19.4 19.4 18.9 19.9 18.2 21.6 21.6 20.4 19.6 20.4 20.4 Return on Assets (%)b 4.5 9.4 9.9 8.1 8.1 7.5 8.0 6.3 7.7 7.7 7.7 6.1 6.9 6.9 Capex/Depreciation (%)b 52.0 43.0 67.4 144.6 57.3 53.0 53.8 93.5 275.7 84.6 148.0 75.7 70.3 70.3 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

J.Crew Group, Inc. Credit Profile

Credit Profile Summary EBITDA Halved: Since peaking at $354 million in both 2012 and 2013, J.Crew Group, Inc.’s (J.Crew) EBITDA has fallen precipitously to $245 million in 2014 and is projected at $165 million in 2015. Negative comparable store sales (comps) at J.Crew stores have led the decline, causing a heightened promotional cadence to clear excess inventory. Unplanned promotions have reduced merchandise margins, which in conjunction with fixed-cost deleverage, have caused EBITDA margins to fall from a peak of 14.6% in 2013 to an expected 6.7% in 2015.

Comps Declines Largely Self-Inflicted: Fitch Ratings believes the comps decline has stemmed from fashion misses combined with elevated price points at a time when the market has increasingly traded out of mid-tier apparel in favor of either value-priced channels — including fast fashion and off-price — or high-end retailers, which are aspirational in terms of either quality or brand value. Strong growth in its online business and growth in Madewell have somewhat offset the significant decline of in-store sales at the J.Crew brand.

No Immediate Fix: Fitch senses a lack of urgency on management’s part to make changes required to improve the sales trend. The company has recently outlined some opportunities, including replacing the head of women’s design, improving pricing perception through mix and refocusing the assortment toward classic pieces. However, Fitch believes more aggressive changes are needed, including lower initial prices, to reverse negative sales trends.

EBITDA Stabilization Assumed in 2016: Given the high fashion content and limited insight into J.Crew’s planned inventory buys for 2016, Fitch assumes comps will remain negative at J.Crew stores, with overall comps expected to decline 3%, offset by new store contribution. EBITDA is expected to be in the $160 million–$170 million range, similar to 2015, on expense management. Trend-right merchandise at more compelling prices could provide upside, but downside risk remains on weak execution and overall weak apparel demand.

Adequate Liquidity Despite Negative FCF: J.Crew has adequate liquidity, with $47 million of cash and $312 million of revolver availability, reflecting the upsize to $350 million, as of Oct. 31, 2015. J.Crew announced in October 2015 that the May 2016 interest payment on the holding company (holdco) notes will be paid in kind at the payment-in-kind (PIK) interest rate of 8.5%, preserving almost $20 million in cash. Fitch expects FCF of negative $80 million in 2015 and negative $20 million in 2016, assuming EBITDA remains around $165 million.

High Leverage: Leverage, including the $500 million of holdco notes (lease-adjusted debt/EBITDAR) increased to 9.2x at Oct. 31, 2015, from 8.2x at year-end 2014.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include stabilization in comps and sustainable improvement in adjusted leverage to 6.0x–7.0x, driven by both business growth and debt reduction with FCF.

Negative Drivers: Negative credit profile drivers would include continued fashion misses or competitive conditions that cause negative comps trends and margin pressure to persist, leading to a significant weakening in cash flow and liquidity.



Credit Opinion J.Crew Group, Inc. carries a ‘b–*/Negative’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data J.Crew Group, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 2,579.7 2,500.2 EBITDA 244.8 188.7 EBITDA Margin (%) 9.5 7.5 FCF 2.5 (30.8) Total Adjusted Debta 3,443.7 3,458.8 Total Adjusted Debt/EBITDAR (x)a 8.2 9.2 EBITDAR/(Interest + Rent) (x) 1.7 1.5 Comparable Store Sales (%)b (0.7) (11.7) Real Estate Owned (%) 2 DCs 2 DCs No. of Stores 504 536 aIncludes holdco notes. bComparable store sales include direct sales growth. Figure for the LTM reflects the performance for the nine months ended Oct. 31, 2015. DC – Distribution centers.






Leveraged Finance


Business Profile Assessment Upon his arrival at J.Crew in 2002, CEO Millard “Mickey” Drexler has steadily elevated the brand, through increasingly editorial merchandising and styling, high-touch and personalized customer service, and upscale store environments in store locations chosen to cater to high-end customers. While the company has had the occasional fashion misstep over the years, revenue and EBITDA have generally snapped back from prior hiccups. As shown in the chart below, the company experienced meaningful recession-related downturns in 2008–2009 and 2010–2011.

However, since peaking at $354 million in both 2012 and 2013, EBITDA has fallen precipitously to $245 million in 2014 and is projected at approximately $165 million in 2015. Negative comps have led the decline, causing excess inventory to require a heightened promotional cadence to clear merchandise. Excess promotions have reduced merchandise margins, which in conjunction with fixed-cost deleverage, have caused EBITDA margins to fall from a peak of 14.6% in 2013 to an expected 6.7% in 2015. Inventory was up 7% at the end of third-quarter 2015 versus 2014 and Fitch expects markdown pressure to continue into 2016.

Fitch Base Case Assumptions — J.Crew Group, Inc. ($ Mil.) 2014A 2015F 2016F 2017F Revenue 2,580 2,461 2,461 2,516 Revenue Growth (%) 6.2 (5.0) (0.0) 2.2 Comparable Store Sales (%) (0.7) (10.3) (3.4) — EBITDA 245 165 169 205 EBITDA Margin (%) 9.5 6.7 6.9 8.1 Working Capital Change (10) (17) (3) (9) Cash Flow From Operations 158 67 85 115 Capex (128) (110) (100) (100) Dividends (28) (39) — (42) FCF 3 (82) (15) (27) Share Repurchases — — — — Total Debt 2,048 2,106 2,130 2,144 Total Adjusted Debta 3,444 3,640 3,818 3,984 Total Adjusted Debt/EBITDAR (x) 8.2 10.2 10.1 9.2 aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

(1,800)

(1,200)

(600)

0

600

1,200

1,800

(45)

(30)

(15)

0

15

30

45

YoY Change in Gross Margin (bps) Comparable Store Sales Direct Sales Growth

Historical Comps, Direct Sales Growth and Margin Trends

Comps – Comparable store sales. YoY – Year over year. Note: Only comparable company sales (including comps, direct sales and S&H fees) are reported since second-quarter 2012. Gross margin for certain periods are adjusted for inventory step-up amortization and amortization of favorable/unfavorable leases. The company changed its reportable segments starting with year-end 2014 and direct sales are no longer broken out.Source: Company filings, Fitch Ratings.

(%) (bps)

Leveraged Finance


Fitch believes the comps decline has stemmed from the following factors.

Apparel Price Bifurcation Fitch believes customers are increasingly price bifurcating their apparel and accessories purchases. The rise of fast fashion retailers allows customers to buy trend-right merchandise of acceptable quality at prices significantly lower than mid-tier mall competitors, including specialty stores and department stores. Continued acceptance of, and therefore growth in, the off-price channel is further pressuring mid-tier apparel competitors. Fitch believes customers are also trading up for investment pieces at high-end retailers, which are aspirational in terms of either quality or brand value. As a result, mid-tier players such as J.Crew have seen growth stagnate as they fall victim to simultaneous trade-down and trade-up. J.Crew has responded to some extent by focusing growth on its Factory/Mercantile concept, though expansion here may only exacerbate sales declines at the core J.Crew brand.

Fashion Misses J.Crew has increasingly added editorial styles to its mix, as opposed to more basic items such as single-colored sweaters and khakis, over the years. The company is consequently more levered to fashion hits and misses. J.Crew has generally been able to lead fashion trends for its highly loyal customer base. However, the company’s fashion assortment has not resonated with customers recently. In an increasingly competitive market, customers have looked elsewhere for fashion leadership.

Price Ceiling Hit J.Crew’s brand elevation has encompassed improvements to both style and product quality. This elevation has led to increased retail prices over time, which have historically supported sales and EBITDA growth. However, in recent years, market perception of J.Crew’s pricing has turned negative, and this combined with fashion missteps has led to material comps declines at its J.Crew branded stores.

Athleisure as Primary Fashion Trend The most significant fashion trend in recent years has been athleisure, the rise of activewear — especially yoga wear — use outside an exercise context, whether it be to social occasions or the office. J.Crew has purposely avoided this trend, indicating the brand does not stand for activewear. While consumers may eventually return to the core categories that J.Crew offers, the company’s revenue is currently being negatively affected by its lack of athleisure assortment.

Promotions as Presumed Destiny The combination of the above issues in confluence with J.Crew’s high inventory position has resulted in excess promotional activity to clear merchandise. Fitch believes J.Crew has entered a vicious cycle where lack of product excitement and high retail prices have stifled demand early in a fashion season. J.Crew consequently is forced to discount its merchandise, training customers to wait for promotions in the following season. Once customers perceive a brand to be over-inventoried and in the mode of promotions, it can be very difficult to retrain their mindsets to purchase at full price.

Leveraged Finance


While a number of issues appear addressable, Fitch senses a lack of urgency on the part of senior management to fully acknowledge the underlying issues and make changes required to improve the sales trend. The company has recently outlined some opportunities, including replacing the head of women’s design, improving pricing perception through mix and refocusing the assortment toward classic pieces. However, Fitch believes more aggressive changes are needed, including lower initial prices and materially reduced inventory levels, to reverse negative sales trends.

Company Description J.Crew is a specialty apparel and accessories retailer that sells women’s, men’s and children’s apparel under the brand names J.Crew, crewcuts and Madewell, a women-exclusive concept introduced in 2006. J.Crew operated 286 J.Crew retail stores, 97 Madewell stores and 153 factory stores in the U.S., Canada, France, Hong Kong and the U.K. as of Oct. 31, 2015. All retail and factory stores are leased from third parties and have terms of 5–15 years.

Through 2014, J.Crew provided a breakdown of its in-store sales versus sales generated through its direct (Internet and catalogue) channel.

At 30%+, J.Crew’s direct channel represents one of the highest online penetrations across the retail space. The strong growth is likely to continue and this business is likely additive to margins. J.Crew now has the capacity to fulfill online orders from its J.Crew stores and ships to over 100 countries outside North America.

Direct sales, which carry lower fixed costs, have helped offset weak store-level sales and provide an outlet to clear excess inventory. J.Crew’s direct sales grew by over 9% in 2014, following 16% growth in 2013. With consolidated company comps, which incorporate both comps and direct sales growth, at negative 1% in 2014 following a 3.1% increase in 2013, the growth in the direct channel essentially offset the estimated 6% decline in store-level comps.

Starting in fourth-quarter 2014, J.Crew changed its reportable segments from Stores and Direct into one reportable segment that reflects its two main operating formats, J.Crew and Madewell.

Madewell, which represented approximately 11% of total company sales in the latest LTM period ending Oct. 31, 2015, offers modern, denim-based clothing, as well as shoes and accessories for women that emanate a downtown-cool vibe. Fitch expects Madewell to generate close to $300 million in revenue in 2015, up almost 20% year over year, and to sustain low double-digit growth in 2016 and 2017. This is based on low single-digit comps and 10%–12% top-line contribution from 20 store openings annually.

Contribution to Comps from Stores and Direct (%) 2007 2008 2009 2010 2011 2012 2013 2014 Total Company Comps 10.5 (0.2) 3.9 6.7 3.0 12.6 3.1 (0.7) Direct Sales Contribution 6.2 2.4 1.4 4.1 3.3 5.8 4.7 2.9 Store-Level Contribution 4.3 (2.6) 2.5 2.6 (0.3) 6.8 (1.6) (3.6) Implied Comps at Retail Stores 5.6 (4.0) 4.1 4.0 1.0 9.7 (2.3) (5.3)

Comps – Comparable store sales. Source: Company reports, Fitch Ratings.

Leveraged Finance


Continued Store Expansion Despite negative store-level comps, management has accelerated the growth of its store base over the past three years, adding 53 stores in 2014, up from 50 in 2013, 39 in 2012 and 29 in 2011. The company is targeting midsingle-digit growth of J.Crew retail stores, 10% growth of J.Crew factory stores (including Mercantile stores) and around 20 new Madewell stores per year, and will open 51 new stores in 2015. However, Fitch expects the company may have to pull back on J.Crew store openings and its international expansion plans to preserve liquidity.

Internationally, J.Crew is building its presence in Canada, opened its first two stores in Hong Kong in May 2014 and opened its first store in Paris in first-quarter 2015. The company had 24 international locations at the end of 2014 and added seven more locations in 2015.

The company has moved its factory offering beyond outlet centers through the launch of J.Crew Mercantile stores in July 2015. The J.Crew Mercantile stores feature an assortment of J.Crew factory merchandise and are located in strip and other outdoor centers. The company plans to end 2015 with 15 Mercantile stores.

Breakdown by Brand, Store Type and Merchandise

2010 2011 2012 2013 2014

LTM 10/31/15 4Q14 1Q15 2Q15 3Q15

Net Sales by Brand ($ Mil.) J.Crew 1,632.0 1,740.8 2,066.2 2,212.7 2,295.1 2,162.9 620.8 506.5 526.9 558.7 Madewell 51.5 85.6 131.9 181.4 245.3 282.1 73.5 67.9 78.7 83.1 Other 38.8 28.6 29.6 34.2 39.3 55.3 11.0 19.2 13.8 14.3 Total Net Sales 1,722.3 1,855.0 2,227.7 2,428.3 2,579.7 2,500.3 705.3 593.6 619.4 656.1

YoY Growth (%) J.Crew 6.7 18.7 7.1 3.7 (0.1) (5.2) (9.7) (8.6) Madewell 66.2 54.1 37.5 35.2 33.4 32.5 21.5 13.7 Other (26.3) 3.5 15.5 14.9 15.8 30.2 90.1 43.8 Total Net Sales 7.7 20.1 9.0 6.2 2.8 (1.7) (5.4) (5.5)

% of Total Net Sales J.Crew 94.8 93.8 92.8 91.1 89.0 86.5 88.0 87.4 85.3 85.1 Madewell 3.0 4.6 5.9 7.5 9.5 11.3 10.4 10.6 11.4 12.7 Other 2.3 1.5 1.3 1.4 1.5 2.2 1.6 1.9 3.2 2.2

Comps Growth (%)a J.Crew 12.4 2.7 (1.9) (5.0) (9.6) (13.4) (12.0) Madewell 16.6 9.1 14.1 14.0 11.6 8.1 1.0 Total 6.7 3.3 12.6 3.1 (0.7) (11.7) (3.0) (7.9) (11.4) (10.6)

Store Count J.Crew Retail Stores 228 234 247 265 280 286 280 283 283 286 J.Crew Factory Stores 85 96 106 121 139 153 139 142 147 153 Madewell 20 32 48 65 85 97 85 87 89 97 Total Store Count 333 362 401 451 504 536 504 512 519 536 YoY Change 12 29 39 50 53 Sales/Gross Square Foot ($)c 601 618 686 671 618

Merchandise Breakdown (%)b Women’s Apparel 62 58 57 55 54 55 49 55 55 55 Men’s Apparel 21 23 24 25 26 23 30 24 25 22 Children’s Apparel 5 6 6 6 7 7 7 8 6 8 Accessories 12 13 13 14 13 15 14 13 14 15 Total 100 100 100 100 100 100 100 100 100 100 aFigures for the LTM reflect the performance for the nine months ended Oct. 31, 2015. bMerchandise breakdown for the LTM period is for the 39-week period ended Oct. 31, 2015. cSales/Gross Square Foot are for J.Crew only starting in 2014. Comps – Comparable store sales. YoY – Year over year. Source: Company reports, Fitch Ratings.

Leveraged Finance


2016 Outlook Fitch expects J.Crew’s total revenue to be essentially flat in 2016, after an anticipated 5%–6% decline in 2015 to $2.4 billion. This reflects comps of negative 3%-4%, offset by contribution from new store openings. Fitch has assumed the pace of new store openings will moderate to 30–35 units in 2016 from 47 in 2015, but management could maintain the current level of store openings.

Fitch expects 2016 FCF — excluding any holdco dividend payments, neutral working capital swings and a modest decline in capex to $100 million — to be approximately negative $20 million. This compares with our expectation for FCF to decline over $80 million in 2015, including $39 million in holdco dividends.


High Leverage TPG Capital Group (TPG) and Leonard Green & Partners, L.P. (Leonard Green) acquired J.Crew in March 2011 for approximately $3.1 billion, or 10.8x 2010 adjusted EBITDA of $291 million, with pro forma leverage of 6.7x. An entity controlled by these two sponsors owns approximately 89% of the outstanding stock.

Mickey Drexler continues as chairman and CEO, and maintains a significant equity investment in the company. Adjusted leverage increased to 9.2x at Oct. 31, 2015, from 8.2x at year-end 2014 (Jan. 31, 2015) due to a sharp decline in EBITDA in the LTM period.

Leverage includes the $500 million of 7.75%/8.50% senior PIK toggle notes due May 1, 2019 (holdco notes) at indirect holding company Chinos Intermediate Holdings A, Inc. Proceeds from the issuance were used to fund a $490 million dividend to the sponsors and management in November 2013. The holdco notes are senior unsecured obligations of Chinos Intermediate Holdings A, structurally subordinated to all of the liabilities of the issuers’ subsidiaries, and are not guaranteed.

These notes are not on J.Crew’s financial statements, but J.Crew intends to pay dividends to the issuer to fund $39 million of annual interest payments on the notes, which are paid semiannually. Fitch consequently includes the holdco notes in J.Crew’s debt and leverage calculations.

The company filed an 8-K on Oct. 30, 2015 stating the May 2, 2016 interest payment on the holdco notes will be paid in kind at the PIK interest rate of 8.50%. The PIK election will increase the principal balance of the PIK notes by $21.3 million.

Capital Structure In addition to the holdco notes, J.Crew’s capital structure consists of a $350 million ABL revolver and a $1.56 billion term loan facility. The revolver, which was upsized by $50 million in December 2015, is secured by a first lien on inventory and accounts receivable (A/R); a second lien on all other tangible and intangible assets, including owned real property and IP; and a second-priority pledge of 100% of U.S. subsidiaries stock and 65% of foreign subsidiaries stock. The ABL facility is guaranteed by J.Crew’s parent and certain existing and future domestic restricted subsidiaries on a secured basis.

The term loan facility is secured by a first lien on all other tangible and intangible assets, including owned real property and intellectual property; a first-priority pledge of 100% of U.S.

Leveraged Finance


subsidiaries stock and 65% of foreign subsidiaries stock; and a second lien on inventory and A/R. One notable carveout under the restricted payment covenants is that the company can sell the Madewell business and pay the proceeds to the sponsor without repaying the existing indebtedness, as long as the total leverage ratio is less than or equal to 6.0x. With total leverage at J.Crew at 8.3x on an LTM EBITDA of $190 million, Fitch estimates any proceeds of up to $425 million for Madewell would have to be deployed toward term loan paydown. (see the Recovery Analysis section for our valuation of the Madewell business).

Adequate Liquidity, No Near-Term Maturities J.Crew has adequate liquidity, with $47.5 million of cash and $311.7 million of revolver availability, pro forma for the December 2015 upsizing of the facility. The availability on the revolver is net of $20 million of borrowings and $18.3 million of letters of credit. The cash balance has come down significantly compared with historical levels since year-end 2012, when the company paid a dividend of $197.5 million to the sponsors and management with cash on hand.

Capital Structure ($ Mil., At Oct. 31, 2015, Pro Forma for Upsized Credit Facility) Description Amount (%) Secured Debt $350 Mil. ABL Revolver due 12/10/19 20.0 1.0 $1.56 Bil. Senior Secured Term Loan Facility due 3/5/21 1,543.5 74.0 Total Secured Debt 1,563.5 75.0 Unsecured Debt 7.750%/8.500% Holdco Senior PIK Toggle Notes due 5/1/19a 521.3 25.0 Total Unsecured Debt 521.3 25.0 Total Debt 2,078.3 100.0 aHoldco note principal was increased by $21.3 Mil. to reflect the May 2, 2016 interest payment that the company intends to pay in kind at the PIK interest rate of 8.500%. ABL – Asset-based revolver. PIK – Payment-in-kind. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015 )

2016 15.7 2017 15.7 2018 15.7 2019 1,492.6 2020 — Thereafter 521.3

Note: Includes $500 Mil. holdco notes. Excludes borrowings under credit facility, mortgages, and capital leases. Source: Company filings, Fitch Ratings.

Liquidity ($ Mil., At Oct. 31, 2015, Pro Forma for Upsized Credit Facility) Cash 47.5 Revolver Availability 311.7 Total 359.2

Note: Revolver availability is net of letters of credit outstanding. Source: Company filings, Fitch Ratings.

ABL Availability — J.Crew Group, Inc. LTM

($ Mil.) Cash Facility Size Borrowing

Base Borrowings LOC Revolver

Availability Total

Liquidity EBITDA CFO Capex FCF 4Q13 157 250 250 0 8 242 399 354 232 (131) 101 1Q14 59 250 250 0 8 242 301 318 154 (129) 6 2Q14 74 250 250 0 11 239 313 302 162 (130) 13 3Q14 80 250 250 0 11 239 319 273 193 (131) 42 4Q14 111 300 300 0 13 287 398 241 157 (128) 3 1Q15 64 300 300 0 12 288 352 222 175 (120) 28 2Q15 41 300 300 10 18 272 313 195 139 (112) (19) 3Q15 47 350a 350 20 18 312 359 185 120 (104) (30) aReflects the upsize of revolver to $350 Mil. on Dec. 17, 2015. Source: Company filings, Fitch Ratings.

Leveraged Finance


J.Crew has unsecured, demand letter of credit facilities with HSBC and Bank of America that provide for the issuance of up to $50 million and $20 million, respectively, of documentary letters of credit on a no-fee basis. Outstanding documentary letters of credit were $12.8 million and availability was $57.2 million in the aggregate under these facilities on Oct. 31, 2015.

Recovery Analysis Fitch’s recovery analysis assumes an enterprise value (EV) of $1.4 billion, based on a post-default going concern EBITDA of $200 million and a 7.0x EV multiple (EV/EBITDA). The 7.0x multiple, which is higher than the typical distressed average multiple of 5.5x for retailers, puts an 8.0x–10.0x multiple on the Madewell business and acknowledges the high online penetration of the overall business, which should be multiple enhancing.

Fitch expects Madewell to generate approximately $300 million in revenue, or 12% of total revenue in 2015, and grow to over $350 million in 2017. Fitch assumes EBITDA margin in the mid-teens and putting an 8.0x–10.0x multiple on the business yields a valuation of $425 million–$525 million for the business. This would value the J.Crew business (including online) at $900 million–$1 billion, or a multiple of 6.0x–6.5x.

Applying the $1.4 billion EV across the capital structure results in outstanding recovery prospects (91%–100%) for the ABL revolver given its first lien security interest in the current assets, which is assigned a ‘bb–*/rr1*’.

Recovery Analysis J.Crew Group, Inc. ($ Mil., Except Where Noted; Credit Opinion: b–*)



Advance Rate (%)

Avail. to Creditors

Going Concern EBITDA 200 Cash 47.5 0 GC EV Multiple (x) 7.0 A/R — 80 Distressed EV on GC Basis 1,400 Inventory 483.0 70 338.1 Net PPE 403.1 10 40.3 Total LV 378.4


Greater of GC or LV 1,400

Less: Administrative Claims (10%) 140 Adjusted EV Available for Claims 1,260



Recovered Recovery


Credit Opinion

Sr. Secured ABL Revolvera 245.0 245.0 100 rr1* +3 bb–* Sr. Secured Term Loan 1,543.5 1,015.0 66 rr3* +1 b* Sr. Secured (Other) 0 0 — — —

Concession Payment Availability Table Adjusted EV Available for Claims 1,260 Less Secured Debt Recovery 1,260 Remaining Recovery for Unsecured Claims —


Recovered Recovery


Credit Opinion

Sr. Unsecuredb 58.1 0 0 Unsecured 0 0 Sr. Subordinatedc 500.0 0 rr6* –2 ccc* aFitch assumes the recently upsized $350 Mil. credit facility is 70% drawn in a distressed scenario. bSenior unsecured debt includes estimated operating lease claims. cSenior subordinated debt includes the new holdco payment-in-kind (PIK) toggle notes, as it is structurally subordinated to the subsidiary debt at the J.Crew Group, Inc. level and is not guaranteed by any subsidiaries. A/R – Accounts receivable. PPE – Property, plant and equipment. ABL – Asset-backed loan. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Fitch Ratings.

Leveraged Finance


Fitch expects the $1.56 billion term loan facility to have good recovery prospects (51%–70%) given it is secured by a first lien on all other tangible and intangible assets, including owned real property and intellectual property, a first-priority pledge of 100% of stock of U.S. subs and 65% of foreign subs, and a second lien on inventory and A/R. The term loan is assigned ‘b*/rr3*. Fitch projects poor recovery prospects (0%–10%) for the holdco notes, which are unsecured and unguaranteed, and are assigned a ‘ccc*/rr6*’.


Leveraged Finance


Appendix A

Organizational Structure — J. Crew Group, Inc. ($ Mil., As of Oct. 31, 2015, Pro Forma for Upsized Credit Facility)

aHoldco note principal was increased by $21.3 million to reflect the May 2, 2016 interest payment the company intends to pay in kind at the PIK interest rate of 8.500%. CO – Credit Opinion. PIK – Payment in kind. ABL – Asset-based revolver. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions.Source: Company filings, Fitch Ratings.

65.0%

ManagementTPG Leonard Green

24.0%

J. Crew Group, Inc. (JCG)CO — b–*/Negative

Debt Issue$350 Mil. ABL Revolver due 12/10/19$1.56 Bil. Senior Secured Term Loan due 3/5/21Total

Amount20.0

1,543.5 1,563.5

Chinos Holdings, Inc.

100.0%

11.0%

Chinos Intermediate Holdings A, Inc.CO — b–*/Negative

Subsidiary Guarantors Nonguarantor Subsidiaries

Amount521.3

Debt Issue7.750%/8.500% Senior PIK Toggle Notes Due 5/1/19a

CObb–*/rr1*b*/rr3*

COccc*/rr6*

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — J.Crew Group, Inc. Overview

Borrower J.Crew Group, Inc. (J.Crew) Document Date and Location Credit Agreement dated March 3, 2011 (Exhibit 10.1 to 8-K filed March 20, 2011)

First Amendment to Credit Agreement (Exhibit 10.1 to 8-K filed Oct. 11, 2012) Second Amendment to Credit Agreement dated March 5, 2014 (Exhibit 10.1 to 8-K filed March 11, 2014) Third Amendment to Credit Agreement dated Dec. 10, 2014 (Exhibit 10.1 to 8-K filed Dec. 11, 2014) Fourth Amendment to Credit Agreement dated Dec. 17, 2015 (Exhibit 10.1 to 8-K filed Dec. 18, 2015)

Description of Debt ABL Revolver Maturity Date Dec. 10, 2019 Amount $350 Mil. subject to borrowing base (90% of credit card receivables + 85% accounts + 90% [or 92.5% in high season] of NRV

of inventory). Ranking Senior secured Security First lien on inventory and A/R; second lien on all other tangible and intangible assets, including owned real property and IP;

second-priority pledge of 100% of stock of U.S. subs and 65% of foreign subs. Guarantee Guaranteed by J.Crew’s immediate parent and all domestic restricted subsidiaries on a secured basis. Financial Covenants Fixed-Charge Coverage A minimum fixed-charge coverage ratio of 1.0x is required, if excess availability is less than the greater of 10.0% of the lesser of

(i) the aggregate revolving commitments and (ii) the borrowing base, or $20 Mil. Debt Restrictions Debt Incurrence $75 Mil. incremental borrowings; up to $1,875 Mil. for term loan facility; up to the greater of $50 Mil. and 1.75% of total assets for

debt to finance acquisition of fixed or capital assets or attributable indebtedness for sale-leaseback transactions; $25 Mil. for foreign subsidiary debt; $50 Mil. for debt to finance inventory purchase; $50 Mil. for debt incurred or refinanced for an entity becoming restricted subsidiary, provided debt secured by current asset collateral limited to $25 Mil.; general carveout for borrower and restricted subsidiaries up to the greater of $100 Mil. and 3.25% of total assets, provided indebtedness incurred by nonloan parties limited to the greater of $25 Mil. and 1.0% of total assets; unsecured debt permitted provided a) no event of default; b) pro forma excess availability is greater than or equal to the greater of 15% of maximum credit (lesser of revolver commitment and borrowing base) and $30 Mil.; and c) either pro forma excess availability is greater than 25% of maximum credit or pro forma FCCR is greater than or equal to 1.0x.

Limitation on Liens General carveout of $50 Mil. Limitation on Guarantees Guarantee obligations are defined as debt and investments and hence, governed by the debt and investment restrictions. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 35% of voting stock by nonpermitted holders and constitutes an event of default. M&A, Investments Restriction Investments in restricted subsidiaries limited to $37.5 Mil.; general carveout up to $50 Mil., provided a) no event of default;

b) pro forma excess availability is greater than or equal to the greater of 15% of maximum credit and $30 Mil.; and c) either pro forma excess availability is greater than 25% of maximum credit or pro forma FCCR is greater than or equal to 1.0x.

Sale of Assets Restriction Not permitted unless 75% of proceeds in cash (or permitted asset swap) provided any noncash consideration of the asset sale is less than the greater of $25 Mil. or 1.0% of total assets; proceeds more than $100 Mil. need to be reinvested; sale of Madewell assets provided pro forma total leverage is less than or equal to 6.0x.

Restricted Payments Restricted Payments (RP) Carveouts: RP permitted provided a) pro forma leverage is less than or equal to 6.0x, b) pro forma excess availability is greater than

15% of maximum credit and $30 Mil., and c) either pro forma excess availability is greater than 25% of maximum credit or pro forma FCCR is greater than or equal to 1.1x; $15 Mil. per year ($25 Mil. post-IPO) for equity purchases from employees (with any unused amount permitted to roll over for two years); dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; proceeds from the sale of Madewell; general carveout of $25 Mil. provided a) no event of default, b) pro forma excess availability is greater than or equal to the greater of 15% of maximum credit and $30 Mil., and c) either pro forma excess availability is greater than 25% of maximum credit or pro forma FCCR is greater than or equal to 1.0x.

Other Cross-Default Yes, upon payment default in any other debt above $35 Mil. threshold. Cross-Acceleration Same as above. MAC Clause None. Equity Cure None. Covenant Suspension None. Required Lenders/Voting Rights More than 50%. Pricing

Coupon Type/Index Floating based off either LIBOR (1% floor) or base rate ABL Revolver Avg. Historical Excess Availability Applicable Margin > $175 Mil. 1.250% LIBOR or 0.250% Base Rate < $175 Mil. but > $75 Mil. 1.500% LIBOR or 0.500% Base Rate < $75 Mil. 1.750% LIBOR or 0.750% Base Rate

ABL – Asset-based revolver. NRV – Net realizable value. A/R – Accounts receivable. FCCR – Fixed-charge coverage ratio. MAC – Material adverse charge. Source: Company filings, Fitch Ratings.



http://www.sec.gov/Archives/edgar/data/1051251/000156459014000667/jcg-ex10_201403056.htm




Leveraged Finance


Term Loan Agreement Covenant Summary — J.Crew Group, Inc. Overview Borrower J.Crew Group, Inc. Document Date and Location Amended and Restated Credit Agreement dated March 5, 2014 (Exhibit 10.2 to 8-K filed March 11, 2014)

Description of Debt Senior secured term loan facility Maturity Date March 5, 2021 Amount $1,567 Mil. Ranking Senior secured Security First lien on all other tangible and intangible assets including owned real property and IP; first-priority pledge of 100% of stock of

U.S. subs and 65% of foreign subs; Second lien on inventory and A/R. Guarantee Guaranteed by J.Crew’s immediate parent and all domestic restricted subsidiaries on a secured basis. Debt Restrictions Debt Incurrence Permitted Ratio Debt: Debt that is unsecured and matures at least 181 days after the maturity of the term loan, assuming the Total

Leverage Ratio (debt/EBITDA) is less than or equal to 6.0x. Other Carveouts: $375 Mil. for ABL facilities; up to the greater of $50 Mil. and 1.75% of total assets for debt to finance acquisition of fixed or capital assets or attributable indebtedness for sale-leaseback transactions; $25 Mil. for foreign subsidiary debt; $50 Mil. for LOCs to finance inventory purchase; $50 Mil. for debt incurred or refinanced for an entity becoming restricted subsidiary; general carveout for borrower and restricted subsidiaries up to the greater of $100 Mil. and 3.25% of total assets, provided indebtedness incurred by nonloan parties limited to the greater of $25 Mil. and 1.0% of total assets. Borrower may request additional tranches of loans under the term loan of up to $200 Mil., provided the Total Senior Secured Leverage Ratio is less than or equal to 3.75x, among other conditions.

Limitation on Liens General carveout up to the greater of $50 Mil. or 1.75% of total assets. Limitation on Guarantees Guarantee obligations are defined as indebtedness and, hence, governed by the debt incurrence restrictions. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 35% of voting stock by nonpermitted holders and constitutes an event of default. M&A, Investments Restriction General carveout up to $100 Mil. or 3.25% of total assets.

Other Carveouts: Investments made by Loan Parties in Persons that do not become Loan Parties shall not exceed the greater of $75 Mil. and 2.5% of total assets, and the Available Amount, provided the pro forma Total Leverage Ratio is less than or equal to 6.0x; loans to officers up to $20 Mil.; intercompany loans up to the greater of $400 Mil. or 4% of total assets, or the Available Amount.

Sale of Assets Restriction Carveouts: For dispositions of more than $15 Mil., 75% of proceeds must be in cash (or permitted asset swap) and any noncash consideration of the asset sale must be less than the greater of $25 Mil. or 1.0% of total assets, provided proceeds in excess of $100 Mil. shall be used to repay loans and may not be reinvested in the business; sale of Madewell assets provided the pro forma Total Leverage Ratio is less than or equal to 6.0x.

Restricted Payments Restricted Payments (RP) Carveouts: General carveout, assuming no event of default, of up to 2.5% of Total Assets and, provided the pro forma Total

Leverage Ratio is less than or equal to 6.0x, the Available Amount, defined as $65 Mil. plus 50% of net income beginning on Feb. 2, 2014; $15 Mil. per year ($25 Mil. post-IPO) for equity purchases from employees (with any unused amount permitted to roll over for two years); dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; proceeds from the sale of Madewell.

Other Cross-Default Yes ($35 Mil. threshold). Cross-Acceleration N.A. MAC Clause Yes. Equity Cure None. Covenant Suspension None. Required Lenders/Voting Rights More than 50%.

A/R – Accounts receivable. ABL – Asset-based revolver. LOC – Letter of credit. MAC – Material adverse charge. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.


Leveraged Finance


Term Loan Agreement Covenant Summary — J.Crew Group, Inc. (Continued) Financial Covenants Maintenance Leverage (Maximum) — Coverage (Minimum) — Current Ratio (Minimum) — Net Worth (Minimum) — Principal Repayments

Mandatory/Tax Prepayment Mandatory Prepayment Proceeds From: • 50% of Excess cash flow (reduced to 25% if Sr. Secured Net Leverage is less than or equal to 3.25x but greater than 2.75x, and

reduced to 0% if leverage is less than or equal to 2.75x). • Asset Sales: 100% of net proceeds. • New Debt: 100% of net proceeds.

Amortization Schedule J.Crew must make principal payments equal to 0.25% of the $1.567 Bil. outstanding under the term loan, or $3.9 Mil., on the last business day of January, April, July and October, beginning in July 2014.

Callability/Optional Prepayment Optional prepayment without prepayment penalty pursuant to a repricing transaction before March 5, 2015, shall be subject to a 1% prepayment premium.

Pricing

Coupon Type/Index Floating based off either LIBOR (1% floor) or base rate Pricing Grid Moody’s Corporate Family Rating Applicable Margin Term Loan 'B1' or better 2.750% LIBOR or 1.750% Base Rate Less than 'B1' 3.000% LIBOR or 2.000% Base Rate

ABL – Asset-based revolver. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix C

Financial Summary — J.Crew Group Inc.




LTM Ended


Operating EBITDAa 274.9 354.1 108.0 67.1 354.2 62.3 65.0 78.2 39.4 244.8 43.0 37.7 68.5 188.7 Operating EBITDA Margin (%) 14.8 15.9 17.5 9.8 14.6 10.5 10.4 11.9 5.6 9.5 7.4 6.4 11.1 7.5 FFO Return on Adjusted Capital (%)b 8.8 11.3 11.4 11.8 11.8 10.8 11.0 12.5 10.8 12.1 13.4 12.7 17.2 17.2 FCF Margin (%) (1.0) (6.1) (2.9) 11.9 4.2 (11.5) 2.9 1.7 5.8 0.1 (7.4) (4.8) 0.0 (1.2)

Coverages (x) FFO Interest Coverage 2.2 2.8 3.5 2.8 3.0 3.0 3.0 4.2 2.7 3.2 2.5 1.6 4.0 2.7

Operating EBITDA/ Gross Interest Expense 2.9 3.4 4.0 2.8 3.4 2.9 3.6 4.3 2.3 3.3 2.4 2.1 3.7 2.7 FFO Fixed-Charge Coverage 1.6 1.8 2.0 1.7 1.8 1.7 1.6 2.0 1.4 1.7 1.4 1.2 1.9 1.5 FCF Debt Service Coverageb 0.7 (0.3) 0.1 1.8 1.8 0.9 1.0 1.3 0.8 0.9 1.1 0.5 0.4 0.4 Cash Flow from Operations/Capex 1.5 1.5 0.5 3.9 1.8 (0.8) 1.5 1.3 2.9 1.2 (0.3) 0.6 1.0 1.2


Operating EBITDA 4.3 3.3 3.2 3.2 3.3 4.9 5.1 5.6 6.3 6.3 6.8 7.7 8.1 8.1 Long-Term Secured Debt/FFO 10.1 6.2 5.8 5.4 5.4 8.9 8.2 8.5 9.2 9.1 10.2 12.4 12.7 12.7 Total Debt with Equity Credit/ Operating EBITDA 5.8 5.9 4.4 4.4 5.8 6.5 6.8 7.5 10.4 8.4 9.1 10.4 10.9 10.9 FFO-Adjusted Leverage 7.7 7.4 6.2 6.0 7.0 7.7 7.6 7.9 10.4 8.3 8.6 9.2 9.2 9.2 Total Adjusted Debt/ Operating EBITDAR 6.4 6.5 5.6 5.5 6.5 7.0 7.2 7.7 10.3 8.2 8.5 9.1 9.2 9.2 FCF/Total Adjusted Debt (%) (0.7) (4.3) (3.5) 3.6 3.0 0.2 0.4 1.3 0.0 0.1 0.8 (0.6) (0.9) (0.9)


Long-Term Senior Secured Debt 1,179.0 1,167.0 1,158.0 1,155.0 1,155.0 1,543.5 1,540.0 1,536.4 1,532.8 1,532.8 1,535.7 1,531.7 1,527.8 1,527.8 Long-Term Senior Unsecured Debt 400.0 400.0 400.0 400.0 400.0 — — — — — — — — — Long-Term Subordinated Debt — 500.0 — — 500.0 500.0 500.0 500.0 1,000.0 500.0 500.0 500.0 500.0 500.0 Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 1,594.0 2,079.0 1,570.0 1,567.0 2,067.0 2,059.2 2,055.7 2,052.1 2,548.4 2,048.4 2,051.3 2,057.4 2,063.5 2,063.5 Off-Balance Sheet Debtc 890.4 1,058.9 1,263.5 1,263.6 1,263.5 1,263.5 1,263.5 1,263.5 1,790.6 1,395.3 1,395.3 1,395.3 1,395.3 1,395.3 Total Adjusted Debt with Equity Credit 2,484.4 3,137.9 2,833.5 2,830.6 3,330.5 3,322.7 3,319.2 3,315.6 4,339.0 3,443.7 3,446.6 3,452.7 3,458.8 3,458.8

Cash Flow Funds From Operations 117.2 187.3 66.6 41.0 212.4 43.5 37.4 58.4 27.8 168.3 26.6 10.5 55.2 120.1

Change in Working Capital 28.0 7.0 (45.1) 69.3 19.7 (66.1) 15.7 (6.7) 47.0 (10.1) (31.6) 6.5 (22.0) 0.0 Cash Flow from Operations 145.2 194.2 21.5 110.3 232.1 (22.6) 53.2 51.7 74.8 158.1 (4.9) 17.0 33.3 120.2 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (95.6) (132.0) (39.6) (28.6) (131.2) (26.6) (35.0) (40.7) (25.5) (127.9) (18.5) (27.1) (33.1) (104.1) Common Dividends (67.5) (197.5) — — — (19.1) — (0.0) (8.6) (27.7) (19.5) (18.7) (0.0) (46.8) FCF (17.9) (135.2) (18.1) 81.7 100.9 (68.3) 18.2 10.9 40.7 2.5 (42.9) (28.7) 0.2 (30.8) Net Acquisitions and Divestitures (2,981.9) — — — — — — — — — — — — — Net Debt Proceeds 1,594.0 (15.0) (3.0) (3.0) (12.0) (7.8) (3.9) (3.9) (3.9) (19.6) (3.9) 6.1 6.1 4.3 Net Equity Proceeds 1,171.8 (0.5) (0.1) (0.1) (0.7) — — — — — — — — — Other (Investing and Financing) 74.5 (2.7) 0.2 0.2 0.0 (21.1) (0.1) (0.9) (6.3) (28.5) 0.2 (0.4) (0.2) (6.7) Total Change in Cash (159.5) (153.5) (20.9) 78.8 88.3 (97.3) 14.1 6.1 30.4 (45.6) (46.6) (23.1) 6.1 (33.2) Ending Cash and Securities Balance 221.9 68.4 77.9 156.6 156.6 59.4 73.5 79.6 111.1 111.1 64.5 41.4 47.5 47.5 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — J.Crew Group Inc. (Continued)




LTM Ended


Revenue 1,855.0 2,227.7 618.8 686.2 2,428.3 592.0 627.2 655.2 705.3 2,579.7 581.8 593.6 619.4 2,500.2 Revenue Growth (%) 7.7 20.1 11.3 6.7 9.0 4.9 12.2 5.9 2.8 6.2 (1.7) (5.4) (5.5) (2.4) Operating EBIT 202.4 271.8 84.4 39.0 259.3 35.6 37.4 49.1 8.8 130.9 14.1 8.5 38.1 69.5 Gross Interest Expense 94.4 103.4 27.0 24.1 105.1 21.9 18.3 18.1 16.8 75.1 17.6 17.9 18.3 70.6

Sector-Specific Data Comparable-Store Sales (%)d 1.0 12.6 4.0 3.0 2.9 (2.0) 4.4 (1.7) (3.0) (0.7) (7.9) (11.4) (10.6) (11.7)

No. of Stores 362 401 436 451 451 458 467 495 504 504 512 519 536 536 Gross Margin (%) 41.3 43.7 43.1 35.9 40.6 37.8 36.7 39.3 33.2 36.7 36.0 32.1 37.2 34.6 SG&A/Revenues (%) 31.8 32.7 30.7 31.6 31.2 33.2 32.3 33.2 33.5 33.1 35.5 33.9 33.2 34.0 Operating EBIT Margin (%) 10.9 12.2 13.6 5.7 10.7 6.0 6.0 7.5 1.2 5.1 2.4 1.4 6.2 2.8 Operating EBITDAR 386.2 486.4 147.5 106.6 512.2 101.8 104.5 117.7 95.3 419.2 86.6 81.3 112.1 375.4 Operating EBITDAR Margin (%) 20.8 21.8 23.8 15.5 21.1 17.2 16.7 18.0 13.5 16.3 14.9 13.7 18.1 15.0 Operating EBITDAR/ (Interest + Rent) (x)b 1.9 2.1 2.2 1.7 1.9 1.7 1.8 2.0 1.3 1.7 1.4 1.3 1.8 1.5 Inventory Turnover (x)b 4.7 4.9 3.6 4.6 4.6 4.2 4.3 3.6 4.5 4.5 4.0 4.0 3.4 3.4 Accounts Payable Turnover (x)b 7.0 8.3 6.8 7.5 7.5 7.4 6.7 6.1 6.7 6.7 6.7 6.2 5.6 5.6 Return on Invested Capital (%)b 8.6 10.8 10.4 10.4 10.4 9.5 8.9 9.5 7.9 8.8 9.7 8.9 11.7 11.7 Return on Assets (%)b (0.1) 2.8 2.5 2.4 2.4 0.8 0.6 (20.5) (22.3) (22.3) (45.2) (46.7) (77.9) (77.9) Capex/Depreciation (%)b 131.8 160.4 186.2 111.0 138.3 109.4 138.8 152.2 117.9 112.3 73.6 106.9 124.9 87.4 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

J. C. Penney Company, Inc. Full Rating Report

Key Rating Drivers Pathway to $1 Billion EBITDA: J. C. Penney Company, Inc. (J. C. Penney) has demonstrated a meaningful turnaround in its business over the last eight quarters. Fitch Ratings expects the company to generate EBITDA of approximately $690 million (excluding $40 million in noncash share-based compensation expense) in 2015 versus $275 million in 2014. There is good visibility on J. C. Penney’s ability to improve EBITDA to approximately $800 million in 2016 and move toward $1 billion in 2017, unless the recent weakness in apparel sales persists into 2016.

Sustainable Low Single-Digit Comps: Fitch expects J. C. Penney to sustain comparable store sales (comps) growth, including online growth, in the 2%–3% range in 2016/2017 and to improve gross margin modestly. While online growth is expected to contribute at least half of comps growth, modestly positive store sales momentum should occur as the company’s square footage productivity continues to rebound from the significant reductions during 2012/2013 due to now-reversed promotional and merchandising changes.

FCF Positive in 2016: FCF is expected to be modestly positive in 2015, positive $50 million in 2016 and approach almost $150 million in 2017. Fitch expects total liquidity (cash and revolver availability) to be over $2.5 billion at year-end 2015, which will enable the company to address total unsecured debt maturities of $600 million through 2018. J. C. Penney is currently evaluating its options to amend and extend its $2.2 billion real estate term loan due May 2018, which could include reducing some of the collateral and/or improving the terms on the loan.

Improved Credit Metrics: Adjusted debt/EBITDAR is expected to be just over 8.0x at the end of 2015, versus 9.0x for the LTM period ended Aug. 1, 2015. Leverage could trend to 6.0x by 2017 if EBITDA approaches $1 billion and J. C. Penney refinances its real estate term loan and pays down approximately $600 million in unsecured debt.

Rating Sensitivities Positive Rating Action: A positive rating action could occur if J. C. Penney continues to generate 2%–3% comps growth, EBITDA improves to the $1 billion range, the company pays down upcoming unsecured debt maturities and refinances its $2.2 billion term loan, and leverage moves to around 6.0x.

Negative Rating Action: A negative rating action could occur if comps and margin trends stall, indicating resumption of market share loss and leading to concerns about the company’s liquidity position.

Ratings J. C. Penney Company, Inc. Long-Term IDR B–

J. C. Penney Corporation, Inc. Long-Term IDR B– Bank Credit Facility BB–/RR1 Senior Term Loan BB–/RR1 Senior Unsecured Notes B–/RR4

IDR – Issuer Default Rating.

Rating Outlook Stable

Financial Data J. C. Penney Company, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 12,257.0 12,522.0 EBITDAa 275.0 678.0 EBITDA Margin(%)a 2.2 5.4 FCF (13.0) (7.0) Total Adjusted Debt 7,768.0 7,645.0 Total Adjusted Debt/EBITDAR (x)a 13.6 7.9 EBITDAR/ (Interest + Rent) (x)a 0.8 1.3 Comparable Store Sales (%)b 4.4 4.6 Real Estate Owned (%) 40 40 No. of Stores 1,062 1,020 aEBITDA excludes noncash pension expenses and is adjusted for stock-based compensation and restructuring charges. bComparable store sales for the LTM period reflect the nine-month period ended Oct. 31, 2015.




Leveraged Finance


Business Profile Assessment and Outlook

Pathway to $1 Billion EBITDA J. C. Penney has turned the corner with the reintroduction of promotions, key private brands and other remerchandising initiatives, such as beefing up its basics offering and revamping the home department. Comps returned to positive territory in fourth-quarter 2013 and have continued on a positive trajectory through third-quarter 2015. Fitch expects J. C. Penney to generate positive EBITDA of $690 million in 2015, based on 4.5% comps growth and gross margin of 36%. The material gross margin improvement from 29.4% in 2013 has been made through improved clearance and promotional selling margin performance, improved performance in private brands and key value items, and better in-stock positions. Selling, general and administrative (SG&A) is expected to decline by approximately $120 million versus 2014, driven primarily by lower store expenses, advertising costs and corporate overhead.

Fitch Base Case Assumptions — J. C. Penney Company, Inc. ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 12,257 12,600 12,890 13,186 — Revenue Growth (%) 3.4 2.8 2.3 2.3 — Comparable Store Sales (%) 4.4 4.4 2.5 2.5 — EBITDA 275 687 802 936 Assumes modest gross margin

improvement and relatively flat SG&A to 2015 levels.

EBITDA Margin (%) 2.2 5.5 6.2 7.1 — Working Capital Change 332 21 (33) (34) — Cash Flow From Operations 239 307 375 508 — Capex (252) (300) (325) (375) J. C. Penney expects capex to

increase modestly in the $25 Mil.–$50 Mil. range.

Dividends — — — — — FCF (13) 7 50 133 — Share Repurchases — — — — — Total Debt 5,416 5,366 5,240 4,978 — Total Adjusted Debta 7,768 7,718 7,592 7,330 — Total Adjusted Debt/EBITDAR (x) 13.6 7.8 6.9 6.0 — aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. SG&A – Selling, general and administrative. Source: Fitch Ratings.

(40.0)

(30.0)

(20.0)

(10.0)

0.0

10.0

J.C. Penney Middle Market

Comps Versus Industry

Note: Middle market reflects the sales-weighted comparable store sales (comps) performance of Bon-Ton, Dillard's, J.C. Penney, Kohl's and Macy's. Source: Company filings, Fitch Ratings.

(%)

Leveraged Finance


At its October 2014 Analyst Day, J. C. Penney outlined its strategy to increase top-line and EBITDA by rebuilding market share on its existing platform and investing in growth initiatives in center core (fine jewelry and fashion accessories, Sephora, footwear, handbags and intimate apparel), home and omnichannel. The company identified a $3.6 billion top-line opportunity that could result from its various opportunities and stated that achieving 60% of the total potential would deliver $14.5 billion in total revenue and $1.2 billion in EBITDA by 2017.

J.C. Penney’s Three-Year Sales and EBITDA Targets 2014–2017 ($ Mil.) 2011 2014 2017 CAGR (%) Increase Sales 17,260 12,257 14,500 5.8 2,243 Gross Profit 6,425 4,261 5,300 — 1,039 Gross Margin (%) 37.20 34.8 36.60 — 179 bps SG&Aa 5,109 3,993 4,100 — Modestly up EBITDA 1,316 277 1,200 63.0 923 EBITDA Margin (%) 7.62 2.26 8.28 — Approx.600 bps aExcludes depreciation and amortization, noncash pension expense and other restructuring charges. SG&A – Selling, general and administrative. Source: J.C. Penney’s October 2014 Analyst Day Presentation.

(30)

(20)

(10)

0

10

0

5

10

15

20

2008 2009 2010 2011 2012 2013 2014 2015E

Revenue (LHS) Comps (RHS)

Revenue and Comps

Comps – Comparable store sales. E – Estimated.Source: Company filings, Fitch Ratings.

($ Bil.) (%)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2008 2009 2010 2011 2012 2013 2014 2015E

EBITDA — J.C. Penney

E – Estimated.Source: Company filings, Fitch Ratings.

($ Bil.)

Leveraged Finance


Relative to these goals, J.C. Penney is making strong progress on cost reduction — which could come in below the $4.1 billion initially targeted for 2017 with 2015 SG&A at $3.9 billion — and gross margin goals appear reasonable. The shortfall is likely to be on the top line given the 8% overall top-line growth required annually in 2016 and 2017 to hit $14.5 billion in revenue.

Fitch expects J. C. Penney to sustain comps growth in the 2%–3% range in 2016/2017, as it invests in Sephora home and builds back its private brands and omnichannel capabilities. This in line with Fitch’s expectation for overall apparel, accessories, footwear and home sales to grow 2%–3% annually, with growth in online sales accounting for over 50% of growth. Department store traffic trends remain soft and industry sales are expected to continue to decline 2% annually as volume continues to shift to off-mall channels, such as online, discount and off-price retailers.

Fitch expects J. C. Penney’s store traffic to be flat to up slightly over the next 12–24 months, with store-level comps expected to be up 1%–2%. Fitch expects online sales to grow at 10%–12% annually from the 2014 base of $1.2 billion, to $1.6 billion–$1.7 billion in 2017, contributing 1.0%–1.3% annually to overall comps. Fitch expect online sales to grow at 10%–12% annually from the 2014 base of $1.2 billion, to $1.6 billion–$1.7 billion in 2017, contributing 1.0%–1.3% annually to overall comps.

J.C. Penney expects capex spending to pick up modestly in 2016 from $300 million in 2015 and grow at a clip of $25 million–$50 million thereafter. After a relatively flat store base from 2008 to 2013, J. C. Penney closed 32 underperforming stores in 2014 and another 40 stores, or 4% of its store base, in 2015. Fitch expects further store closings over the next few years given continued a decline in mall traffic.

Total Sales and EBITDA Opportunity

($ Mil.) Areas of Opportunity Sales EBITDA

EBITDA Flow-Through

Rate (%) Continued Share Growth 1,000 300 30.0 Center Store 1,000 250 25.0 Home Store 750 175 23.3 Omnichannel 800 175 21.9 Other Margin Opportunities — 150 — Expense Control — 150 — Total 3,550 1,200 —

Source: J.C. Penney’s October 2014 Analyst Day Presentation.

0.01.02.03.04.05.06.07.08.09.0

0

200

400

600

800

1,000

1,200

1,400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E

Capex ($) Capex as % of Sales

Capex

E – Estimated.Source: Company filings, Fitch Ratings.

($ Mil.) (%)

Leveraged Finance


The company continues to improve its center core presence, with 500 stores planned for resets in 2016 from the current 12 pilot stores. J. C. Penney is also investing in its omnichannel operations, with plans for a companywide roll out of buy online pick up in store by 2016.

Liquidity and Debt Structure J. C. Penney had cash and cash equivalents of $638 million as of Oct. 31, 2015, and $1.37 billion available under its $1.85 billion credit facility, net of $294 million in outstanding letters of credit. Fitch expects total liquidity (cash and revolver availability) to be over $2.5 billion at year-end 2015, which will enable the company to address total unsecured debt maturities of $600 million through 2018.

J. C. Penney announced on Dec. 10, 2015 that it had received $500 million in incremental bank commitments to upsize its revolving credit facility to $2.35 billion from $1.85 billion currently. The company used the upsized facility to prepay and retire the $494 million outstanding principal of the term loan due in June 2019.

The company is evaluating its refinancing options on the $2.2 billion real estate term loan due May 2018, for which the 1% no-call provision rolled off in May 2015. As a result of increased profitability, the company is looking to improve terms, including increasing the tenor, reducing the collateral and/or reducing the pricing of the loan.

Capital Structure ($ Mil., As of Oct. 31, 2015) Description Amount (%) Secured Debt $2.35 Bil. Senior Secured Revolver due 6/20/19a — — $500 Mil. Senior Secured Term Loan due 6/20/19a — — $2.25 Bil. Senior Secured Term Loan due May 2018 2,199 41.0 Total Secured Debt 2,199 41.0 Unsecured Debt. 7.650% Debentures due 8/15/16 78 1.6 7.950% Debentures due 4/1/17 220 4.5 5.750% Notes due 2/15/18 300 6.2 8.125% Notes due 10/1/19 400 8.2 5.650% Notes due 6/1/20 400 8.2 7.125% Debentures due 11/15/23 10 0.2 6.900% Notes due 8/15/26 2 0.0 6.375% Notes due 10/15/36 400 8.2 7.400% Debentures due 4/1/37 326 6.7 7.625% Notes due 3/1/97b 500 10.3 Total Unsecured Debt 2,636 54.1 Capital Leases 40 0.8 Total Debt 4,875 100.0 aPro forma for the Dec. 10, 2015 amendment where the company upsized the revolver by $500 Mil. to $2.35 Bil. to retire the outstanding principal of the $500 Mil. term loan due 2019. bNotes guaranteed by J.C. Penney Company, Inc. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015) 2015 7 2016 106 2017 248 2018 2,454 2019 878 Thereafter 1,638

Note: Excludes borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

Liquidity ($ Mil., At Oct. 31, 2015) Cash 638 Availability Under Credit Facilitya 1,871 Total 2,509 aPro forma for the upsizing of the facility. Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Leveraged Finance


Recovery Analysis For issuers with Issuer Default Ratings (IDRs) at ‘B+’ and below, Fitch performs a recovery analysis for each class of obligations of the issuer. The issue ratings are derived from the IDR and the relevant Recovery Rating (RR) and notching, based on Fitch’s recovery analysis that places a liquidation value under a distressed scenario of approximately $6.0 billion as of Oct. 31, 2015 for J. C. Penney.

J. C. Penney’s $2.35 billion senior secured asset-backed (ABL) facility that matures in June 2019 is rated ‘BB–/RR1’, which indicates outstanding recovery prospects (91%–100%) in a distressed scenario.

The facility is secured by first lien priority on inventory and receivables with borrowings subject to a borrowing base. Any proceeds of the collateral will be applied first to the satisfaction of all obligations under the revolving facility and second to the satisfaction of the obligations under the term loan facility.

J. C. Penney is required to maintain a minimum excess availability at all times of not less than (a) $200 million in the event that 10% of the line cap (the lesser of total commitments under the credit facility or the borrowing base) is equal to or greater than $200 million or (b) the greater of (i) 10% of line cap and (ii) $150 million in the event that 10% of the line cap is less than $200 million.

Recovery Analysis J. C. Penney Company, Inc. ($ Mil., Except Where Noted; IDR: B–)



Book Value

Advance Rate (%)

Avail. to Creditors

Going Concern EBITDA 750 Cash 638.0 0 — GC EV Multiple (x) 4.0 A/R — 80 — EV on GC Basis 3,000 Inventory 3,669.0 70 2,568.3 Net PPE 4,905.0 71 3,500.0 Total LV 6,068.3


Greater of GC or LV 6,068.3

Less: Administrative Claims (10%) 606.8 Adjusted EV Available for Claims 5,461.5



Recovered Recovery

(%) Recovery Rating Notching Rating

Sr. Secured Credit Facilitya 1,645.0 1,645.0 100 RR1 +3 BB– Sr. Secured Term Loan (Real Estate) 2,199.0 2,199.0 100 RR1 +3 BB– Concession Payment Availability

Adjusted LV Available for Claims 5,461.5 Less Secured Debt Recovery 3,844.0 Remaining Recovery for Unsecured Claims 1,617.5


Value Recovered

Recovery (%)


Rating

Sr. Unsecuredb 3,547.0 1,617.5 46 RR4 0 B– Unsecured 0.0 0 Sr. Subordinated 0.0 0 Subordinated 0.0 0 Sr. Equity 0.0 0

aFitch assumes the recently upsized $2.35 Bil. credit facility is 70% drawn in a distressed scenario. bIncludes estimated operating lease claims. IDR – Issuer Default Rating. A/R – Accounts receivable. PPE – Property, plant and equipment. FILO – First in, last out. Source: Fitch Ratings.

Leveraged Finance


The $2.2 billion term loan due May 2018 is also expected to have outstanding recovery prospects of 91%–100%, leading to a ‘BB–/RR1’ rating. The term loan facility is secured by (a) first lien mortgages on owned and ground-leased stores (subject to certain restrictions primarily related to Principal Property owned by J. C. Penney Corporation, Inc.), the company’s headquarters and related land, and nine owned distribution centers; (b) a first lien on intellectual property (trademarks including J. C. Penney, Liz Claiborne, St. John’s Bay and Arizona), machinery and equipment; (c) a stock pledge of J. C. Penney Corporation and all of its material subsidiaries and all intercompany debt; and (d) second lien on inventory and accounts receivable that back the ABL facility.

The $2.6 billion of senior unsecured notes are rated ‘B–/RR4’, indicating average recovery prospects (31%–50%).


Leveraged Finance


Appendix A

Organizational Structure — J.C. Penney Company, Inc.($ Mil., As of Oct. 31, 2015)

J. C. Penney Corporation, Inc. (Opco)(IDR — B–/Stable)

Debt Issue$2.35 Bil. Senior Secured Credit Facility due 6/20/19a

$2.25 Bil. Senior Secured Term Loan due May 20187.650% Debentures due 8/15/167.950% Debentures due 4/1/175.750% Senior Unsecured Notes due 2/15/18 8.125% Senior Unsecured Notes due 10/1/195.650% Senior Unsecured Notes due 6/1/207.125% Debentures due 11/15/236.900% Notes due 8/15/266.375% Senior Unsecured Notes due 10/15/367.400% Debentures due 4/1/377.625% Notes due 3/1/97b

Total

aPro forma for the Dec. 10, 2015 amendment, where the company upsized the revolver by $500 Mil. to $2.35 billion to retire the outstanding principal of the $500 Mil. term loan due 2019. bNotes are guaranteed by JCP Company, Inc. IDR – Issuer Default Rating. ABL – Asset-based lending credit facility. Source: Company filings, Fitch Ratings.

AmountOutstanding

—2,199.0

78.0 220.0 300.0 400.0 400.010.0 2.0

400.0 326.0 500.0

4,835.0

Long-TermRatingBB–/RR1BB–/RR1BB–/RR4B–/RR4B–/RR4B–/RR4B–/RR4B–/RR4B–/RR4B–/RR4B–/RR4B–/RR4B–/RR4

Directors and Management < 1.0%

J.C. Penney Company, Inc. (Holdco)(IDR — B–/Stable)

(Co-Borrower and Guarantor of ABL/Guarantor of Term Loan/Co-Obligor on all Unsecured Notes)

JCP Realty, Inc./Other Immaterial Subsidiaries J.C. Penney Purchasing Corporation

(Co-Borrower and Guarantor of ABL/Guarantor of Term Loan)JCP Real Estate Holdings, Inc.(Guarantor of ABL/Term Loan)

J.C. Penney Properties, Inc.(Guarantor of ABL/Term Loan)

JCP Savings, Profit Sharing and Stock Ownership Plan Other Public Shareholders

4.5%94.5%

Guarantees and Secured Stock Pledge

Leveraged Finance


Real Estate Collateral Overview The text and charts related to the real estate collateral and appraisal are taken from the J. C. Penney 8-K filing dated May 14, 2013, when the company was in the process of securing its $2.25 billion secured term loan due May 2018. The information has not been updated since.

At the time of the transaction, J. C. Penney’s real estate portfolio consisted of 306 owned stores, 123 ground-leased stores, 675 leased stores, 15 distribution centers (six leased, nine owned), the home office, affiliated land in Plano, TX, and miscellaneous other real estate assets. • Cushman & Wakefield performed appraisals that concluded $3.3 billion of total appraised

value for the owned and ground-leased stores and $762 million of total appraised value for the owned distribution centers and the home office.

• The term loan collateral included 379 owned and ground-leased properties (including stores, distribution centers and home office) with an appraised value of $3.3 billion and estimated dark value of $1.7 billion. The term loan had perfected mortgages on approximately 327 properties with an appraised value of $3.2 billion, including 317 owned and ground-leased stores with an appraised value of $2,547 million (or $8 million per store). Fifty-two owned and ground-leased stores with fair market value of less than $2 million were not required to be mortgaged. Fitch estimated these properties had a total value of $50 million–$80 million, or $1.0 million–$1.5 million per store. In addition, the nine distribution centers and home office (except for certain land) were appraised at $698 million.

• Fitch estimates J. C. Penney had about 60 stores at the J. C. Penney Corporation, Inc. level with an appraised value of approximately $650 million that remain unencumbered, as they cannot be pledged, given each property has a book value of more than $7.4 million (and therefore comes under the definition of Principal Property under the bond covenants).

J.C. Penney Owned and Ground-Leased Real Estate Overview($ Mil.)

aAppraised values based on reports provided by Cushman & Wakefield dated May 10, 2013. bHome office owned by J.C. Penney Corporation, Inc. Note: The chart demonstrates entities with material properties and excludes other material and immaterial subs. Includes de minimis properties with fair market values below $2 million. Excludes three properties in JCP Puerto Rico. ABL – Asset-backed facility. TL – Term loan.Source: J.C. Penney 8-K filing dated May 14, 2013.

J.C. Penney Corporation, Inc.(OpCo)

Stores at J.C. Penney Corporation, Inc.

Count7231

103

OwnershipOwnedGround-LeasedTotal

Mortgaged Properties at J.C. Penney Corp:. 37 stores with appraised value of $322 Mil.

Appraised Valuea

708266974

Stores at J.C. Penney Properties, Inc.

Count23489

323

OwnershipOwnedGround-LeasedTotal

Appraised Valuea

1,929395

2,324

Distribution Centers and Home Officeb

Count10

OwnershipOwned

Appraised Valuea

762

JCP Real Estate Holdings, Inc.Guarantor of ABL/Term Loan

J.C. Penney Properties, Inc.Guarantor of ABL/Term Loan

Mortgaged Properties at JCP Properties: 280 stores with appraised value of $2,225 Mil.

Mortgaged Properties: All distribution centers and home office (except for certain land) with appraised

value of $698 Mil.

Guarantees and Stock Pledges for New $2,250 Mil.Senior Secured Term Loan

$1.85 Bil.Senior Secured ABL due June 2019$500 Mil.Senior Secured TL Facility due June 2019$2.25 Bil.Senior Secured TL due May 2018$2.60 Bil. Unsecured Notes

Leveraged Finance


Real Estate Appraisal Methodology by Cushman

Valuation Methodology

For owned properties and properties with ground leases with terms greater than 30 years, Cushman employed a direct capitalization approach. For ground-leased properties with remaining terms of less than 30 years, Cushman employed a discounted cash flow approach.

Asset quality, mall location and quality, local market conditions, and the length of the remaining lease term were used to determine capitalization rates and discount rates.

Market rent was determined by analyzing rent comparables and by looking at rent-to-sales and total occupancy cost ratios based on projected sales levels. Higher ranked stores were considered more productive assets and were afforded a higher rent-to-sales ratio.

Dark Value Estimates

The dark valuation methodology accounts for deductions for rent loss, expenses borne by the landlord during lease-up, tenant improvements and leasing commissions. Wider cap rates (100 bps–200 bps) were used to account for the higher risk associated with stores assumed to be vacant and to afford entrepreneurial profit for investors.

J.C. Penney Real Estate Portfolio Store Category Count Square Feet

Lit Appraised Value ($)

Dark Appraised Value ($)

Stores by Ownership Owned 306 40,372,552 2,641,805,000 1,520,270,000 Ground Leased 123 15,425,653 680,342,000 297,431,000 Leased 673 55,262,593 Total Stores 1,102 111,060,798 3,322,147,000 1,817,701,000

Properties by Mall Grade (Owned and Ground Leased Only) A 105 16,641,652 1,424,042,000 913,826,000 B 148 20,971,787 1,140,390,000 589,895,000 C/D 44 5,531,785 168,470,000 52,560,000 Not Rated or Non-Mall 132 12,652,981 589,245,000 261,420,000 Othera 10 16,995,286 762,400,000 385,300,000 Total Owned and Ground Leased Properties 439 72,793,491 4,084,547,000 2,203,001,000 aIncludes distribution centers, home office and affiliated land. Mall grades based on Green Street Advisors Mall Database. Appraised values based on reports provided by Cushman & Wakefield dated May 10, 2013. Source: J.C. Penney 8-K filing dated May 14, 2013.

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary J. C. Penney Corporation, Inc. Overview Borrower J. C. Penney Company, Inc. (HoldCo); J. C. Penney Corporation, Inc.; J. C. Penney Purchasing Corporation Document Date and Location Credit Agreement dated 6/20/14 (Exhibit 10.1 to 8-K filed 6/23/14)

Guarantee and Collateral Agreement dated 6/20/14 (Exhibit 10.2 to 8-K filed 6/23/14) Amendment No. 1 to Credit Agreement dated 12/10/15 (Exhibit 10.1 to 8-K filed 12/11/15)

Description of Debt Asset-based revolving credit facility subject to a borrowing base consists of (i) 85% of eligible accounts receivables; (ii) 90% of eligible credit card receivables; and (iii) 90% of NOLV of eligible inventory valued at cost, minus term loan balance and reserves.

Maturity Date June 20, 2019 (or 60 days prior to 5/22/18 as the scheduled maturity date of the real estate term loan agreement unless it is refinanced to have a maturity date no earlier than 6/20/19 or 60 days prior to the stated maturity date of the existing debt if the outstanding amount of such debt is greater than $225 Mil.)

Amount ($ Mil.) $2,350 Mil. ($750 Mil. sublimit for letter of credit) Ranking Senior Security Secured by a lien on the inventory (except for consignment inventory), accounts receivable, and deposit accounts and cash credited

thereto, of the loan parties and the other subsidiary guarantors pursuant to a Guarantee and Collateral Agreement dated 6/20/14. Guarantee Guaranteed by the borrowers and certain of the company’s indirect wholly owned subsidiaries that are not borrowers under the

credit agreement. Financial Covenants Minimum Excess Availability Loan Parties shall maintain minimum excess availability at all times of not less than (a) $200 Mil. in the event that 10% of the line cap

(the lesser of total commitments under the credit facility or the borrowing base) is equal to or greater than $200 Mil. or (b) the greater of (i) 10% of line cap and (ii) $150 Mil. in the event that 10% of the line cap is less than $200 Mil.


Notable Permitted Debt: 1) $2.25 Bil. indebtedness basket to be secured by a second lien on the ABL collateral or a first lien on other assets including real property and intellectual property, provided such indebtedness shall not mature and require scheduled principal payments on or prior to 90 days after 6/20/19 and any scheduled principal payments shall not exceed the lesser of 10% of initial principal amount of such incremental indebtedness and $100 Mil.; 2) debt for PP&E up to $500 Mil.; 3) acquisition debt for new restricted subsidiaries up to $500 Mil., subject to pro forma fixed-charge coverage ratio (FCCR) ≥ 1.1x; and 4) additional all-purpose up to $250 Mil.

Limitation on Liens Carveouts: $50 Mil. for liens arising out of conditional sale, title retention, consignment (including “sale or return” arrangements) or similar arrangements for the sale of goods entered into by the parent borrower or any of its subsidiaries; other liens (other than liens on any collateral other than specified involuntary liens securing obligations up to $20 Mil.) incurred including sale leasebacks limited to 12.50% of net tangible assets and total book value of all assets subject to such liens not to exceed $225 Mil.; liens on fixed or capital assets acquired, constructed or improved not to exceed 100% of the cost of acquiring, constructing or improving such fixed or capital assets and such security interests shall not apply to any other property or assets of the company or any subsidiaries.

Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 42.5% of voting stock and constitutes an event of default (EoD). The acquisition by a

financial institution of equity interests in HoldCo acquired by such financial institution pursuant to an underwriting arrangement in the ordinary course of its business shall not constitute a CoC.

M&A, Investments Restriction Investments permitted provided no EoD and pro forma revolver availability exceeds the greater of (x) 17.5% of line cap and (y) $225 Mil. if pro forma FCCR for the test period is greater than 1.1x, or pro forma availability needs to be the greater of (x) 25% of line cap and (y) $350 Mil. if FCCR falls below 1.1x.

Sale of Assets Restriction Sale of noncore business segment provided no EoD and the EBITDA attributable to the business not to exceed $100 Mil.; sale and leaseback transactions plus all monetary obligations subject to liens are limited to 12.5% of net tangible assets.


Notable Permitted Restricted Payment: None. Special Situation: No restriction if excess availability exceeds the greater of 25% of the revolving credit line cap and $400 Mil.

Other Cross-Default Yes, exceeding $100 Mil. Cross-Acceleration N.A. MAC Clause None. Equity Cure None. Covenant Suspension None. Cash Dominion Event The company’s funds will be swept daily to reduce the borrowings outstanding under the credit facility if there is a) an occurrence and

continuance of an EoD and b) availability is less than the greater of (i) 12.5% of revolving credit line cap and (ii) $175 Mil.

NOLV – Net orderly liquidation value. ABL – Asset-based lending. PP&E – Property, plant and equipment. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/1166126/000116612614000039/creditagreement.htm

http://www.sec.gov/Archives/edgar/data/1166126/000116612614000039/gcagreement.htm

http://www.sec.gov/Archives/edgar/data/1166126/000116612615000057/amendmentno1-creditagreeme.htm

Leveraged Finance


Term Loan Covenant Summary J. C. Penney Corporation, Inc. Overview Borrower J. C. Penney Corporation, Inc. Document Date and Location Credit and Guaranty Agreement dated 5/22/13 (Exhibit 10.3 to 10-Q filed 9/10/13) Description of Debt Senior secured term loan Maturity Date May 22, 2018 Amount $2,250 Mil. Ranking Senior Security Secured by (a) first lien mortgages on owned and ground leased stores (subject to certain restrictions primarily related to Principal

Property owned by J. C. Penney Corporation, Inc.), the company’s headquarters, and nine owned distribution centers; (b) a first lien on intellectual property (trademarks including J. C. Penney, Liz Claiborne, St. John’s Bay and Arizona), machinery and equipment; (c) a stock pledge of J. C. Penney Corporation and all of its material subsidiaries and all intercompany debt; and (d) second lien on inventory and accounts receivable that back the $1.85 Bil. ABL revolver.

Guarantee Guaranteed on a senior basis by J. C. Penney Company, Inc. (HoldCo) and all material subsidiaries of J. C. Penney Corporation, Inc. Debt Restrictions Debt Incurrence Coverage Ratio Debt: None.

Notable Permitted Debt: 1) Debt for PP&E up to $500 Mil.; and 2) acquisition debt for new restricted subsidiaries up to $500 Mil., subject to pro forma fixed-charge coverage ratio (FCCR) ≥ 1.1x; and 3) additional all-purpose up to $250 Mil.

Limitation on Liens Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 42.5% of voting stock and constitutes an event of default (EoD). The acquisition by a

financial institution of equity interests in HoldCo acquired by such financial institution pursuant to an underwriting arrangement in the ordinary course of its business shall not constitute a CoC.

M&A, Investments Restriction $200 Mil. permitted investments provided that no EoD and pro forma FCCR for the test period is greater than 1.1x; investments of the fringe land in the fringe land joint venture; $100 Mil. for investments in nonloan parties; general carveout of $100 Mil.

Sale of Assets Restriction $75 Mil. for mortgage on real property constituting collateral; sales, transfers and other dispositions (including permitted sale/leaseback transactions) of assets not constituting collateral provided that no EoD and such sale is made for fair market value and for at least 75% of consideration shall be in cash; sale of noncore business segment provided no EoD and the EBITDA attributable to the business not to exceed $100 Mil.; sales, transfers and other dispositions of assets (other than equity interests in a material subsidiary) plus aggregate cash consideration received from sale and leaseback transactions are limited to 7.5% of net tangible assets, under which sale and leaseback transactions are capped at $500 Mil. in aggregate fair market value, provided no EoD and net asset sale proceeds shall be applied to prepay the loans or make permitted reinvestments.


Notable Permitted Restricted Payment: None. Special Situation: No restriction in two cases. 1) Availability exceeds the greater of 25% of the line cap and $350 Mil. 2) Availability exceeds the greater of 17.5% of the line cap and $225 Mil. and the FCCR >1.1x.

Other Cross-Default Yes, exceeding $100 Mil. Cross-Acceleration N.A. MAC Clause None. Equity Cure None. Covenant Suspension None. Key Definitions Material subsidiary means any subsidiary of HoldCo that had net tangible assets representing more than 3% (or in the case of JCP

Realty, Inc. and its Subsidiaries, 5%) of the total net tangible assets of HoldCo and its subsidiaries, as of the date of the most recent financial statements.

PP&E – Property, plant and equipment. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.


Leveraged Finance


Bank Agreement/Term Loan Financial Covenant Summary J. C. Penney Corporation, Inc. Financial Covenants (Incurrence) Leverage (Maximum) Total Debt/EBITDA: None. Senior Secured Leverage: None. Coverage (Minimum) Fixed-Charge Coverage Ratio: ABL revolver requires a minimum fixed-charge coverage ratio of 1.0x only if the availability falls

below the greater of (i) 10% of the lesser of line cap or borrowing base and (ii) $125 Mil. Asset Coverage None. Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment None. Amortization Schedule None. Callability/Optional Prepayment None. Pricing ABL Revolver Quarterly Average Excess Availability

(% of Revolving Commitment) Applicable Rate ≥ 66.67% LIBOR + 250 bps or BR + 150 bps ≥ 33.33% but < 66.67% LIBOR + 275 bps or BR + 175 bps < 33.33% LIBOR + 300 bps or BR + 200 bps Term Loan L+500 (with 1% LIBOR floor).

ABL – Asset-based lending. BR – Base rate. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix C

Bond Covenant Summary J. C. Penney Corporation, Inc. Overview Issuer J. C. Penney Corporation, Inc., with J.C, Penney Company, Inc. as co-obligor Document Date and Location Indenture dated 4/1/94 (Exhibit 4(a) to S-3 filed 4/26/94)

First Supplemental Indenture dated 1/27/02 (Exhibit 4(p) to 10-K filed 4/25/02) Second Supplemental dated 7/26/02 (Exhibit 4 to 10-Q filed 9/6/02) 8.125% Senior Unsecured Notes Indenture dated 9/15/14 (Exhibit 4.1 to 8-K filed 9/15/14); First Supplemental Indenture to 8.125 Senior Unsecured Notes dated 9/15/2014 (Exhibit 4.2 to 8-K filed 9/15/14)

Description of Debt 6.875% Medium-Term Notes due 10/15/15 7.650% Debentures due 8/15/16 7.950% Debentures due 4/1/17 5.750% Senior Unsecured Notes due 2/15/18 8.125% Senior Unsecured Notes due 10/1/2019 5.650% Senior Unsecured Notes due 6/1/20 6.900% Notes due 8/15/26 6.375% Senior Unsecured Notes due 10/15/36 7.400% Debentures due 4/1/37 7.625% Notes due 03/01/97 Original Issue/Outstanding 6.875% Notes $200 Mil./$0 Mil.

7.650% Notes $200 Mil./$78 Mil. 7.950% Notes $300 Mil./$220 Mil. 5.750% Notes $300 Mil./$300 Mil. 8.125% Notes $400 Mil./$400 Mil. 5.650% Notes $400 Mil./$400 Mil. 6.900% Notes $119.195 Mil./$2 Mil. 6.375% Notes $700 Mil./$400 Mil. 7.400% Notes $400 Mil./$326 Mil. 7.625% Notes $500 Mil./$500 Mil.

Ranking Senior Security Unsecured Guarantee The 7.625% Notes due 2097 are guaranteed by JCP Company, Inc. Debt Restrictions Debt Incurrence No limitation. Limitation on Liens Indebtedness secured by mortgages including attributable debt pursuant to sale-leaseback transactions shall not exceed 5% of

stockholders’ equity. Lien restriction principally covers real estate liens (store, warehouse or distribution center and excludes home office and some other misc. property).with net book value of more than 0.25% of stockholder’s equity.

Limitation on Guarantees None. Acquisitions/Divestitures Change of Control (CoC) The 5.75% notes due 2018, 8.125% due 2019, 5.65% Notes due 2020 and 6.375% Notes due 2036 have CoC put at 101 with change

of control (50% voting interest) plus downgrade to below investment grade by all three rating agencies. M&A, Investments Restriction No limitation. Sale of Assets Restriction No limitation. Restricted Payments Restricted Payments (RP) No limitation. Other Cross-Default No. Cross-Acceleration No. MAC Clause None. Equity Clawback None. Covenant Suspension None.


http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-secText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTE3MjI4NTYmRFNFUT00JlNFUT0mU1FERVNDPVNFQ1RJT05fRVhISUJJVCZleHA9JnN1YnNpZD01Nw%3d%3d

http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-secText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTE4NTMyNDYmRFNFUT00JlNFUT0mU1FERVNDPVNFQ1RJT05fRVhISUJJVCZleHA9JnN1YnNpZD01Nw%3d%3d




Leveraged Finance


Appendix D

Financial Summary — J. C. Penney Company, Inc.




LTM Ended


Operating EBITDAa 1,328.0 (273.0) (190.0) 66.0 (631.0) (82.0) 47.0 27.0 285.0 277.0 81.0 170.0 142.0 678.0 Operating EBITDA Margin (%) 7.7 (2.1) (6.8) 1.7 (5.3) (2.9) 1.7 1.0 7.3 2.3 2.8 5.9 4.9 5.4 FFO Return on Adjusted Capital (%)b 11.8 (2.2) (6.0) (3.2) (3.2) (3.3) 0.4 2.0 6.3 6.3 7.8 9.7 12.2 12.2 FCF Margin (%) 0.0 (7.0) (32.3) 6.5 (23.3) (12.5) 2.7 (13.8) 16.5 (0.1) (9.5) (1.8) (11.2) (0.1)

Coverages (x) FFO Interest Coverage 3.6 (2.2) (1.8) (0.3) (1.9) (1.7) 1.1 (0.1) 3.8 0.8 (0.4) 2.7 2.0 2.1

Operating EBITDA/ Gross Interest Expense 5.9 (1.2) (1.9) 0.7 (1.8) (0.8) 0.4 0.3 2.9 0.7 0.8 1.7 1.4 1.7 FFO Fixed-Charge Coverage 2.1 (0.4) (0.6) 0.3 (0.5) (0.5) 1.0 0.3 2.6 0.9 0.2 2.0 1.6 1.6 FCF Debt Service Coverageb 0.5 (2.7) (2.3) (2.3) (2.3) (1.6) (1.2) (0.0) 0.9 0.9 1.0 0.7 0.7 0.7 Cash Flow from Operations/Capex 1.3 (0.0) (4.6) 2.8 (1.9) (3.4) 2.2 (5.2) 13.9 0.9 (4.9) 0.4 (2.5) 1.0

Leverage (x)b Long-Term Secured

Debt/Operating EBITDA — — (2.3) (3.5) (3.5) (5.0) — — 9.8 9.8 — 4.8 4.0 4.0 Long-Term Secured Debt/FFO — — (1.8) (2.2) (2.2) (2.1) — — (29.2) (29.2) — 13.0 6.4 6.4 Total Debt with Equity Credit/ Operating EBITDA 2.3 (10.9) (5.7) (8.9) (8.9) (12.6) (34.1) 93.6 19.6 19.6 12.3 9.4 7.8 7.8 FFO-Adjusted Leverage 5.0 (28.9) (12.6) (22.6) (22.6) (22.2) 199.4 38.0 12.8 12.8 10.5 8.4 6.8 6.8 Total Adjusted Debt/ Operating EBITDAR 3.4 147.6 (11.8) (24.2) (24.2) (55.0) 56.4 22.0 13.6 13.6 10.6 8.9 7.9 7.9 FCF/Total Adjusted Debt (%) 0.1 (16.6) (32.4) (34.6) (34.6) (27.1) (11.9) (5.3) (0.2) (0.2) 0.9 (0.8) (0.1) (0.1)


Long-Term Senior Secured Debt — — 2,240.0 2,239.0 2,239.0 2,234.0 — — 2,714.0 2,714.0 — 2,700.0 2,693.0 2,693.0 Long-Term Senior Unsecured Debt 2,871.0 2,956.0 2,672.0 2,662.0 2,662.0 2,657.0 5,367.0 5,369.0 2,646.0 2,646.0 5,337.0 2,543.0 2,468.0 2,468.0 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 3,102.0 2,982.0 5,612.0 5,601.0 5,601.0 5,594.0 5,425.0 5,427.0 5,416.0 5,416.0 5,405.0 5,298.0 5,293.0 5,293.0 Off-Balance Sheet Debtc 2,584.0 2,480.0 2,400.0 2,400.0 2,400.0 2,352.0 2,352.0 2,352.0 2,352.0 2,352.0 2,352.0 2,352.0 2,352.0 2,352.0 Total Adjusted Debt with Equity Credit 5,686.0 5,462.0 8,012.0 8,001.0 8,001.0 7,946.0 7,777.0 7,779.0 7,768.0 7,768.0 7,757.0 7,650.0 7,645.0 7,645.0

Cash Flow Funds From Operations 597.0 (725.0) (278.0) (122.0) (1,006.0) (264.0) 7.0 (115.0) 279.0 (93.0) (133.0) 177.0 101.0 424.0

Change in Working Capital 223.0 715.0 (459.0) 505.0 (808.0) (7.0) 130.0 (205.0) 414.0 332.0 (93.0) (135.0) (333.0) (147.0) Cash Flow from Operations 820.0 (10.0) (737.0) 383.0 (1,814.0) (271.0) 137.0 (320.0) 693.0 239.0 (226.0) 42.0 (232.0) 277.0 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (634.0) (810.0) (161.0) (137.0) (951.0) (80.0) (61.0) (61.0) (50.0) (252.0) (46.0) (95.0) (93.0) (284.0) Common Dividends (178.0) (86.0) — — — — — — — — — — — — FCF 8.0 (906.0) (898.0) 246.0 (2,765.0) (351.0) 76.0 (381.0) 643.0 (13.0) (272.0) (53.0) (325.0) (7.0) Net Acquisitions and Divestitures (253.0) 517.0 — — 19.0 2.0 11.0 68.0 (11.0) 70.0 5.0 7.0 1.0 2.0 Net Debt Proceeds — (250.0) (210.0) (11.0) 2,545.0 (10.0) (169.0) (5.0) (11.0) (195.0) (11.0) (25.0) (11.0) (58.0) Net Equity Proceeds (832.0) 71.0 786.0 — 793.0 — — — — — — — — — Other (Investing and Financing) (38.0) (9.0) 14.0 53.0 (7.0) 14.0 (52.0) (34.0) 13.0 (59.0) 4.0 — — 17.0 Total Change in Cash (1,115.0) (577.0) (308.0) 288.0 585.0 (345.0) (134.0) (352.0) 634.0 (197.0) (274.0) (71.0) (335.0) (46.0) Ending Cash and Securities Balance 1,507.0 930.0 1,227.0 1,515.0 1,515.0 1,170.0 1,036.0 684.0 1,318.0 718.0 1,044.0 973.0 638.0 638.0 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — J. C. Penney Company, Inc. (Continued)




LTM Ended


Revenue 17,260.0 12,985.0 2,779.0 3,782.0 11,859.0 2,801.0 2,799.0 2,764.0 3,893.0 12,257.0 2,857.0 2,875.0 2,897.0 12,522.0 Revenue Growth (%) (2.8) (24.8) (5.1) (2.6) (8.7) 6.3 5.1 (0.5) 2.9 3.4 2.0 2.7 4.8 3.1 Operating EBIT 810.0 (816.0) (351.0) (95.0) (1,232.0) (240.0) (113.0) (129.0) 128.0 (354.0) (73.0) 17.0 (10.0) 62.0 Gross Interest Expense 227.0 226.0 99.0 97.0 352.0 97.0 106.0 103.0 100.0 406.0 98.0 103.0 102.0 403.0

Sector-Specific Data Comparable Store Sales (%)d 0.2 (25.2) (4.8) 2.0 (7.4) 7.4 6.0 — 4.4 4.4 3.4 4.1 6.4 4.6

No. of Stores 1,102 1,104 1,095 1,094 1,094 1,063 1,062 1,062 1,062 1,062 1,027 1,020 1,020 1,020 Gross Margin (%) 37.2 32.5 29.5 28.4 29.4 33.1 36.0 36.7 33.8 34.8 36.4 37.0 37.3 36.0 SG&A/Revenues (%) 32.5 38.8 42.1 30.9 39.8 41.6 40.1 41.3 30.5 37.7 39.0 36.5 37.7 35.5 Operating EBIT Margin (%) 4.7 (6.3) (12.6) (2.5) (10.4) (8.6) (4.0) (4.7) 3.3 (2.9) (2.6) 0.6 (0.3) 0.5 Operating EBITDAR 1,651.0 37.0 (115.0) 141.0 (331.0) (8.5) 120.5 100.5 358.5 571.0 154.5 243.5 215.5 972.0 Operating EBITDAR Margin (%) 9.6 0.3 (4.1) 3.7 (2.8) (0.3) 4.3 3.6 9.2 4.7 5.4 8.5 7.4 7.8 Operating EBITDAR/ (Interest + Rent) (x)b 3.0 0.1 (0.7) 0.8 (0.5) (0.1) 0.7 0.6 2.1 0.8 0.9 1.4 1.2 1.4 Inventory Turnover (x) b 3.5 3.3 2.4 3.2 3.2 3.0 2.8 2.3 2.9 2.9 2.8 2.7 2.3 2.3 Accounts Payable Turnover (x)b 10.1 8.0 6.1 7.9 7.9 8.1 7.4 6.0 8.2 8.2 8.3 7.6 5.9 5.9 Return on Invested Capital (%)b 11.7 (5.9) (11.5) (8.4) (8.4) (7.2) (4.8) (2.8) (0.6) (0.6) 1.1 2.5 3.9 3.9 Return on Assets (%)b (1.3) (10.1) (16.6) (11.8) (11.8) (12.3) (8.8) (6.1) (7.4) (7.4) (5.7) (5.4) (4.7) (4.7) Capex/Depreciation (%)b 122.4 149.2 100.0 85.1 158.2 50.6 38.1 39.1 31.8 39.9 29.9 62.1 61.2 46.1 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

Kate Spade & Company Credit Profile

Credit Profile Summary Continued Strong Comps Growth: Kate Spade & Company’s (Kate Spade) annual comparable store sales (comps) including e-commerce have been positive since 2010. Comps were strong at 24.4% in 2014 (excluding a 53rd week) and are expected to come in at 11% in 2015, driven by both traffic and conversion. Fitch expects comps could moderate to the 5%–6% range in 2016, which is still above peers, as the recent slowdown in luxury spending may spill over into aspirational spending.

Margin Benefits from Premium Focus: Since shedding its lower margin brands (Liz Claiborne/Juicy Couture) in 2013, Kate Spade’s EBITDA margin has expanded to approximately 13% in 2014 from 7.7% in 2013, and grew to 14.7% for the LTM ending Oct. 3, 2015. Fitch Ratings believes the focus on the premium kate spade new york brand will allow EBITDA margin to sustain in the 15%–16% range. International operations should also positively affect margins as that segment begins to mature and contribute to company EBITDA.

Improving Leverage: Adjusted debt/EBITDAR decreased to 4.1x for the LTM period, compared with 4.6x at the end of 2014 and 6.1x at the end of 2013. The reduction is due to a 17.9% increase in EBITDA from $151 million in 2014 to $178 million for the LTM period, driven by strong comps and revenue growth of 6.5%, after adjusting out Juicy Couture and Lucky Brand. As revenue and EBITDA grow due to strong comps, product expansion and margin accretion, Fitch expects a further reduction in leverage to the low-3.0x range over the next 24 months, assuming no debt issuance.

Adequate Liquidity and Improving FCF: Kate Spade had $220 million of cash on hand and revolver availability of $189 million as of Oct. 3, 2015. FCF has been negative over the past three years, but Fitch expects FCF excluding discontinued operations to turn to positive $80 million in 2015, due to EBITDA margin expansion and a $25 million reduction in capex. FCF is expected to grow to roughly $100 million annually over the next few years.

Risk as Monobrand Specialty Retailer: While the kate spade new york brand has produced a significantly positive growth trajectory, the company’s reliance on a single high-fashion brand poses risk. Kate Spade’s handbag focus (70% of sales) heightens this risk. Fashion retailers with limited brand and product diversity can exhibit significant swings in operational performance. An example of this erratic performance is handbag retailer Coach, whose sales and EBITDA have declined precipitously in recent years, due in part to fashion misses, after a long history of growth.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include continued EBITDA margin expansion to the high teens, sustained positive FCF and adjusted leverage below 3.0x. A clearly defined financial policy would also be a positive rating driver.

Negative Drivers: Negative credit profile drivers would include a sharp reduction to the company’s comps trajectory, a deteriorating EBITDA margin or an aggressive financial policy, any of which would drive sustained leverage above 4.0x.



Credit Opinion Kate Spade & Company carries a ‘bb*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data Kate Spade & Company

($ Mil.) FYE

1/03/15 LTM

10/3/15a Total Revenue 1,138.6 1,212.3 EBITDA 151.1 176.8 EBITDA Margin (%) 13.3 14.6 FCF (79.2) 31.0 Total Adjusted Debt 1,106.7 1,097.6 Total Adjusted Debt/EBITDAR (x) 4.6 4.1 EBITDAR/ (Interest + Rent) (x) 2.2 2.5 Comparable Store Sales (%)b 25.9 11.6 No. of Stores 277 249 aLTM period income statement items adjusted for disposal of Lucky Brand and Juicy Couture. bComparable store sales for the LTM period reflects the performance for the nine months ended Oct. 3, 2015.

Analysts Jemini Patel +1 212 908-0586 [email protected]

David Silverman +1 212 908-0840 [email protected]





Leveraged Finance


Business Profile Assessment Kate Spade is a global specialty soft goods retailer that designs and markets women’s, men’s and children’s accessories and apparel under the kate spade new york and Jack Spade brands. Approximately 70% of the company’s sales are driven by handbags, with the remainder other accessories and apparel. Products are sold through wholly owned specialty retail and outlet stores and wholesale distribution at select specialty retail and upscale department stores, such as Nordstrom, Saks Fifth Avenue, Neiman Marcus and Bloomingdales. Approximately 20% of sales are generated online.

Kate Spade operated 121 specialty stores, 76 outlet stores and 52 concessions as of Oct. 3, 2015. Specialty and outlet stores are operated under various company-owned and licensed trademarks within the U.S. and outside the U.S., primarily in Japan, Southeast Asia, Europe, Latin America and Canada. Concession stores are either owned or leased by a third-party department store or specialty store retailer. Approximately 80% of company sales are within the U.S.

As a company, Kate Spade has seen significant evolution over the last decade. The kate spade new york brand was purchased in 2006 by Liz Claiborne Inc. (Liz Claiborne), whose $5 billion revenue base dwarfed Kate Spade’s $84 million in annual sales at that time. In the subsequent years, Liz Claiborne disposed of its entire portfolio except Kate Spade, eventually renaming the company to Kate Spade & Company in 2014. Brands sold during this time include Ellen Tracy, Mexx, Enyce, Liz Claiborne, Lucky Brand and Juicy Couture. Cash from dispositions was partially used to reduce debt, which declined from $565 million at the end of 2010 to $385 million at the end of 2013. Kate Spade retained certain licensee rights for disposed brands, and manufacturers jewelry and apparel as part its Adelington Group, which generates 3% of Kate Spade’s sales.

Fitch Base Case Assumptions — Kate Spade & Company ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 1,139 1,229 1,374 1,515 — Revenue Growth (%) (10.0) 7.9 11.8 10.3 Growth driven by product category

and geographic expansion. Comparable Store Sales (%) 25.9 11.1 6.0 5.5 Comps lower in 2016 and 2017 due to

expected slowdown in U.S. luxury sales. EBITDA 151 185 208 234 — EBITDA Margin (%) 13.3 15.0 15.1 15.5 Margin improvement from less planned

promotional activity and the international business maturing.

Working Capital Change (68) (8) (8) (6) — Cash Flow from Operations 45 159 183 214 — Capex (94) (75) (100) (125) — Dividends — — — — — FCF Before Discontinued Operations (49) 84 83 89 — Discontinued Operations (30) (32) — — Related to sale of Lucky Brand and

Juicy Couture, and closure of Kate Spade Saturday and Jack Spade stores.

FCF (79) 52 83 89 Share Repurchases — — — — — Total Debt 411 397 343 279 — Total Adjusted Debta 1,107 1,145 1,148 1,141 — Adjusted Debt/EBITDAR (x) 4.6 4.1 3.7 3.3 Assumes no change in debt. aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Comps – Comparable store sales. Source: Fitch Ratings.

Leveraged Finance


Segment Data

2007 2008 2009 2010 2011 2012 2013 2014

LTM 10/3/15

Net Sales ($ Mil.) Mexx 1,252.0 1,203.0 831.2 731.8 — — — — — Lucky Brand 421.6 476.8 439.6 386.9 418.2 461.7 — — — Juicy Couture 493.8 604.6 539.9 566.8 530.7 498.6 461.6 — — Kate Spadea 90.5 126.0 141.2 184.3 312.9 461.9 743.2 891.8 986.6 Kate Spade International — — — — — — — 213.6 196.2 Adelington Design Group and Partnered Brands 2,319.0 1,575.0 1,059 630.3 256.9 82.8 60.2 33.3 29.7 Total Sales 4,576.9 3,985.4 3,011.6 2,500.1 1,518.7 1,505.0 1,265.0 1,138.7 1,212.5

Net Sales Growth YoY (%) Mexx — (3.9) (30.8) (12.0) — — — — — Lucky Brand — 13.1 (7.8) (12.0) 8.1 10.4 — — — Juicy Couture — 22.4 (10.7) 5.0 (6.4) (6.0) (7.4) — — Kate Spadea — 39.2 12.1 30.5 69.8 47.6 60.9 20.0 Kate Spade International — — — — — — — — — Adelington Design Group and Partnered Brands — (32.1) (32.8) (40.5) (59.2) (67.8) (27.3) (44.7) — Total Sales Growth — (12.9) (59.3) (34.0) 18.6 (9.7) 33.6 (24.7) — Average Retail Square Footage Mexx 1,331,000 1,432,000 1,498,000 1,552,000 — — — — — Lucky Brand 391,000 511,000 584,000 586,000 565,000 560,000 — — — Juicy Couture 118,000 240,000 325,000 369,000 419,000 428,000 415,000 — — Kate Spadea 68,000 117,000 146,000 141,000 148,000 170,000 263,000 315,000 — Kate Spade International — — — — — — — 94,000 — Sales Per Average Square Foot ($) Mexx 433 444 325 265 — — — — — Lucky Brand 587 603 421 365 420 440 — — — Juicy Couture 1,158 986 804 745 674 685 644 — — Kate Spadea 631 616 538 666 934 1,016 1,212 1,437 — Kate Spade International — — — — — — — 1,711 — Store Count Mexx Specialty 138 136 157 172 — — — — — Outlet 84 100 101 93 — — — — — Concession 313 241 206 138 — — — — — Total 535 477 464 403 — — — — — Lucky Brand Specialty 171 193 194 189 179 177 — — — Outlet 15 39 46 38 42 47 — — — Total 186 232 240 227 221 224 — — — Juicy Couture Specialty 37 62 66 74 78 78 74 — — Outlet 15 33 33 52 51 54 53 — — Concession 0 0 0 5 5 2 — — — Total 15 33 99 131 134 134 127 — — Kate Spadea Specialty 26 48 38 44 50 89 118 108 101 Outlet 13 28 29 29 29 32 51 58 63 Concession 0 0 0 0 0 32 43 — — Total 39 76 67 73 79 153 212 166 164 Kate Spade International Specialty — — — — — — — 42 20 Outlet — — — — — — — 15 13 Concession — — — — — — — 54 52 Total — — — — — — — 111 85 aIn 2014, Kate Spade segment broken out into Kate Spade North America and Kate Spade International. Kate Spade North America includes Kate Spade Saturday and Jack Spade. Source: Company filings, Fitch Ratings.

Leveraged Finance


Strong Brand Foundation Kate Spade has grown brand revenues at a compounded annual rate of nearly 40% from 2006 to 2014, with positive growth each year. Growth has been predicated on square footage growth in the U.S., international expansion, and positive annual comps ranging from 26% to 69% between 2010 and 2014. Strong product resonance with customers and category expansion has driven explosive growth, which has been supported by a generally expanding market for handbags and accessories.

The company has recently focused on scaling back promotional activity through the reduction of its e-commerce flash sales activity by 30%–40% and reduced participation in department store sales. The goal of the strategy is to solidify Kate Spade’s brand perception in the premium/luxury category while improving merchandise margin. As a consequence of reduced promotions, comps have moderated in 2015 to approximately 12% for the first three quarters. However, comps still remain above peers that have all experienced negative comps in 2015 (See the Primary Competitors table).

Long-Term Goals The company’s long-term target is to generate $4 billion in annual revenue at retail, compared with company-expected revenue of $1.8 billion at retail in 2015. The company’s strategies to continue growth include further geographic expansion and product category extensions, and a micro-assortment strategy to merchandise stores to local tastes. Fitch believes Kate Spade’s strategies will drive revenue gains, but estimates comps could moderate to the midsingle digits over the next few years as market share gains become increasingly challenging. Additionally, an uncertain economic environment and sluggish tourist spending has led to a discernable slowdown in sales at luxury players such as Neiman Marcus and Tiffany, which may have a broader implication for aspirational luxury brands such as Kate Spade heading into 2016.

Geographic expansion will occur both domestically and internationally as the company expands its footprint in existing and new markets. Fitch projects Kate Spade will open approximately 20 company-owned stores per year globally from a base of approximately 264 at the end of 2015. While the company generally operates its domestic locations, international expansion includes a mix of company-owned stores, operations through joint ventures and wholesaling to local operators. Fitch views the partnered approach positively, as it partially hedges operational risks in new markets and reduces start-up and fixed costs associated with opening new stores. As the international segment matures and the company leverages fixed costs, EBITDA margin improvement is expected. Fitch expects international segment EBITDA margin to be in the 8%–10% range for 2015 — compared with break-even in 2014 — and to eventually be in line with total company EBITDA margin long-term.

Comparable Direct-to-Consumer Salesa (%) 2007 2008 2009 2010 2011 2012 2013 2014 9M15 MEXXb (2.0) (10.1) (10.3) (4.2) — — — — — Lucky Brand 0.0 (5.5) (16.2) (11.7) 15.6 10.0 — — — Juicy Coutureb 23.0 0.0 (12.0) (0.5) (7.1) (3.5) (0.6) — — Kate Spade — (9.6) (6.8) 36.0 68.9 29.5 28.2 25.9 11.6 Kate Spade Excluding E-Commerce — — — 23.6 N.A. N.A. 16.3 23.1 9.7 aComparable direct-to-consumer sales include concession comparable store sales for MEXX in 2010, and Juicy Couture in 2011 and 2012. bIncludes e-commerce sales beginning in 2010. N.A. – Not available. Source: Company filings, Fitch Ratings.

Leveraged Finance


Beyond new units, sales growth is expected to result from expanded product offerings in complementary categories such as small leather goods and new product categories outside core handbags. The company has a pipeline of product offerings it has recently rolled out or plans to roll out over the next year, which should support top-line growth (see Kate Spade Product Offering Expansion table below). Price points of new product offerings will vary from mid-tier pricing to high end.

Micro-assortment and product expansion efforts within the core category, such as small leather goods, have successfully contributed to add-on purchases and increased store productivity. However, the company’s line extension into categories outside its core business has been met with mixed success thus far. The company changed course on several growth avenues designed to broaden the customer base in 2015.

Kate Spade closed its 10 Jack Spade stores and discontinued its Kate Spade Saturday brand, closing its 16 stores, after only launching the brand in 2013. While product diversification is a positive given that 70% of sales come from handbags, Fitch views the pace of product expansion as aggressive and complex given the number of new product categories being entered into over a short period of time. While the partnered and licensed approach to expansion reduces execution risk, overexpansion could still lead to customer confusion from core customers and cheapening of the brand due to overexposure from new customers.

In addition to its long-term revenue goal, Kate Spade targets a 2016 adjusted EBITDA margin of 18%–20%, versus 13% in 2014 on their adjustments, which differs modestly from Fitch-defined EBITDA. Fitch views this target as somewhat aggressive given the risk of brand dilution from product category overexpansion, fashion risk and the overall competitive retail environment. Fitch expects gradual margin improvement over the next few years, with EBITDA margin sustainable in the mid-teens.

2016 Outlook Fitch expects midsingle-digit comps in 2016 and the following 24 months as the company’s current sales momentum is mitigated by the increasing challenge of achieving market share gains and a potential slowdown in luxury sales in 2016. With the annual opening of 20 new company-owned units globally for the next three years, Fitch expects low-teens revenue growth in 2016 and thereafter.

EBITDA margins are expected to sustain in the 15%–16% range from a higher percentage of full-price sales that is realized from micro-assortment and reduced promotions. Fixed-cost

Kate Spade Product Offering Expansion Product Release Date Swimwear Late 2014 through licensing with Swimwear Anywhere Childrenswear License February 2015 Watch License February 2015 through licensing with Fossil Group Childrenswear — Japan Fall 2015 through partnership with Narumiya Baby Collection August 2015 Housewares — All in Good Taste August 2015, distribution in 430 Macy's department stores Yoga Spring 2016, collaboration with Beyond Yoga Sleepwear, Loungewear and Bridal Spring 2016 through licensing with Carole Hochman Home — Four New Home Licenses

DWI Holdings (Bed and Bath) EJ Victor (Furniture) JAIPUR (Rugs) Kravet (Fabrics and Wallpaper)

2016


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leverage and international profitability should enable EBITDA margins to sustainably remain in the mid-teens thereafter. These assumptions yield EBITDA of approximately $208 million in 2016, trending toward $250 million thereafter. As a result of continued EBITDA growth, adjusted leverage is expected to decline from 4.5x in 2014 to the low-3x range over the next 12–24 months.

Primary Competitors (%) 2010 2011 2012 2013 2014 LTMa Revenue ($ Mil.) Kate Spadeb 184.3 312.9 461.9 743.2 1,105.4 1,182.8 Coachc 3,607.6 4,158.5 4,763.2 5,075.4 4,806.2 4,182.6 Michael Korsd 803.3 1,302.3 2,181.7 3,310.8 4,371.5 4,511.7 Ralph Laurene 5,660.3 6,859.5 6,945.0 7,450.0 7,620.0 7,506.0

Revenue Growth Kate Spadeb — 69.8 47.6 60.9 48.7 7.0

Coachc — 15.3 14.5 6.6 (5.3) (13.0) Michael Korsd — 62.1 67.5 51.8 32.0 3.2 Ralph Laurene — 21.2 1.2 7.3 2.3 (1.5)

EBITDA ($ Mil.) Kate Spadeb N.A. 57.4 95.0 130.5 143.8 173.9

Coachc 1,358.3 1,525.9 1,752.4 1,861.2 1,536.0 1,028.9 Michael Korsd 166.2 315.5 706.0 1,118.2 1,445.2 1,413.5 Ralph Laurene 1,140.1 1,386.0 1,505.3 1,519.0 1,452.0 1,341.0

EBITDA Growth YoY Kate Spadeb — — 65.6 37.4 10.2 20.9 Coachc — 12.3 14.8 6.2 (17.5) (33.0) Michael Korsd — 89.8 123.7 58.4 29.2 (2.2) Ralph Laurene — 21.6 8.6 0.9 (4.4) (7.6) EBITDA Margin

Kate Spadeb N.A. 18.3 20.6 17.6 13.0 14.7 Coachc 37.7 36.7 36.8 36.7 32.0 24.6 Michael Korsd 20.7 24.2 32.4 33.8 33.1 31.3 Ralph Laurene 20.1 20.2 21.7 20.4 19.1 17.9

Comps Kate Spadeb 36.0 68.9 29.5 28.2 25.9 11.6

Coachc 3.5 10.6 6.6 0.3 (14.6) (22.0) Michael Korsd 48.2 39.2 40.1 26.2 10.3 (4.2) Ralph Laurene 10.0 14.0 3.0 0.0 (1.0) (1.0) aLTM period for Kate Spade is as of Oct. 3, 2015; LTM period for Coach, Michael Kors and Ralph Lauren is as of Sept. 26, 2015. bKate Spade segment only includes the Kate Spade brand segment. Comps for the LTM period is for the nine months ending Oct. 3, 2015. cCoach fiscal year end is as of the end of June for all periods presented. Comps includes North America only. Comps for the LTM period are fiscal 2015 comps ending June 27, 2015. dMichael Kors year end is as of the end of March. Comps are on a constant currency basis for 2014 and LTM. Comps for LTM period are for the six months ended Sept. 26, 2015. eRalph Lauren comps are on a constant currency basis. Comps for the LTM period are for the six months ended Sept. 26, 2015. N.A. – Not available. YoY – Year-over-year. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

Leveraged Finance



Adequate Liquidity Kate Spade’s debt structure consists of a $400 million term loan and $200 million asset-based loan (ABL). The current cash balance of $220 million and revolver availability of $189 million provide sufficient liquidity for the company in the short to medium term. The company plans to reduce capex from a peak level of $100 million in 2014, to approximately $75 million in 2015 as it scales back on planned outlet center openings in North America for the year. Fitch expects FCF, excluding discontinued operations, to become positive in 2015 and to eventually grow to the $100 million–$150 million range over the next few years due to the improved profitability of existing stores and geographic expansion abroad. FCF is expected to be $89 million in 2017.

Capital Structure In April 2014, the company refinanced $372 million of outstanding 10.5% senior secured notes due April 2019 using proceeds from the issuance of its new $400 million term loan. The term loan is subject to amortization payments of $1 million per quarter and bears interest at a rate equal to LIBOR plus 3%, subject to a 1% LIBOR floor. The refinancing will reduce the company’s interest expense from about $40 million to approximately $23 million.

The term loan is guaranteed by all of the company’s existing material domestic subsidiaries and is secured by a first-priority lien on the Kate Spade trademark and certain related rights owned by the company and the guarantors. The term loan also has a second-priority lien on the ABL collateral.

The company completed its fourth amendment to its revolving credit facility in May 2014, which extended the maturity date of the facility to May 2019 from April 2018 and reduced the facility size to $200 million from $350 million.

Capital Structure ($ Mil.,At Oct. 3, 2015) Description Amount (%) Secured Debt

$200 Mil. ABL Revolver due 5/16/19 0.0 0.0 $400 Mil. Term Loan due 4/3/21 395.0 98.0 Total Secured Debt 395.0 98.0 Unsecured Debt

Capital Lease Obligations 8.2 2.0 Total Unsecured Debt 8.2 2.0 Total Debt 403.2 100.0


Scheduled Debt Maturities ($ Mil. At Oct. 3, 2015)

2016 4.0 2017 4.0 2018 4.0 2019 4.0 2020 4.0 Thereafter 375.0



Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings.

Leveraged Finance


Availability on the ABL facility is based on the lesser of $200 million and a borrowing base that is computed monthly and composed of eligible cash, accounts receivable and inventory. The ABL also includes a swingline subfacility of $30 million, a multicurrency subfacility of $35 million and the option to expand the facility by up to $100 million under certain conditions. Up to $125 million of the ABL facility is available for the issuance of letters of credit, and standby letters of credit may not exceed $40 million. The ABL is guaranteed by substantially all of the company’s current domestic subsidiaries and is secured by a first-priority lien on substantially all the assets of the company and the guarantors other than trademark collateral secured by the term loan facility.

Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes.



Leveraged Finance


Appendix A

Organizational Structure — Kate Spade & Company($ Mil., As of Oct. 3, 2015)

aAs of April 2015, public shareholders with ownership of 10% or more include FMR LLC and Goldman Sachs Asset Management. CO – Credit Opinion. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions.Source: Company filings, Fitch Ratings.

Kate Spade & CompanyCO — bb*/Stable

Borrower

Debt IssueAmount

Outstanding CO$200 Mil. Revolver due May 5/1619 0.0 bb+*/rr1*Term Loan due 4/3/21 395.0 bb+*/rr1*Capital Leases 8.2Total 403.2

Kate Spade Canada Inc.Kate Spade UK Limited

(Guarantors) Other Domestic and International Subsidiaries

< 99%

ManagementPublic Shareholdersa

> 1%

Leveraged Finance


Appendix B

Key Historical Events — Kate Spade & Company

Source: Fitch Ratings, company presentations.

1993 1996 2006 2011 2012 2013 2014 2015

Kate Spade founded by Kate Brosnahan Spade, former editor at Mademoiselle magazine

Company opens its first store in New York

Launched Jack Spade

Kate Spade acquired by Liz Clairborne, Inc. in December 2006 for approximately $124 Mil.

Sold global Mexxbusiness to affiliates of Gores Group, LLC for $85 Mil. in October 2011; remaining 18.75% indirect interest later sold in July 2013

Sold Kensie, Kensie Girl and Mac & Jactrademarks to affiliate of Bluestar Alliance LLC in October 2011. Also sold Dana Buchman trademark to Kohl’s Corp. in October 2011. Both transactions generated aggregate cash proceeds of $39.8 Mil.

Global trademark rights for the Liz Claiborne brands and trademark rights for U.S. and Puerto Rico for the Monet brand sold to J.C. Penney for $267.5 Mil.

Lucky Brand sold to Leonard Green & Partners for $225 Mil. in February 2014

Juicy Couture sold to Authentic Brands Group (affiliate of Leonard Green & Partners) for $195 Mil.

Kate Spade Saturday discontinued, and closed all Jack Spade stores in the first half of 2015

1997

Leveraged Finance


Appendix C

Bank Agreement Covenant Summary — Kate Spade & Company Overview

Borrower Kate Spade & Company, Kate Spade UK and Kate Spade Canada Document Date and Location Credit Agreement dated 5/16/14 (Exhibit 10.1 to 10-Q filed 8/12/14)

Maturity Date 5/16/19 Description of Debt Senior Secured ABL Revolver Amount USD200 Mil., with the Canadian sublimit of CAD20 Mil. and the U.K. sublimit of GBP30 Mil. Ranking Senior secured. Security Bifurcated lien with the term loan. Second lien on trademarks and other related rights, and first lien on the rest of the assets. Guarantee The facility is guaranteed by all restricted subsidiaries. However, the Canadian subs only guarantee the Canadian portion and the

U.K. subs only guarantee the U.K. portion. Debt Restrictions

Debt Incurrence

Coverage Ratio Debt: Unsecured debt allowed in case (a) availability is more than the greater of 15% of borrowing base and USD25 Mil. and the fixed-charge coverage ratio is more than 1.0x or (b) availability is more than the greater of 20% of borrowing base and USD35 Mil. Notable Permitted Debt: Additional unsecured debt allowed up to USD75 Mil.

Limitation on Liens Additional lien basket is USD30 Mil. Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures

Change of Control (CoC) Event of default. Defined as sale of substantially all assets or change of ownership of more than 50% voting stocks. M&A, Investments Restriction Investments are allowed in case (a) availability is more than the greater of 12.5% of borrowing base and USD20 Mil. and the fixed-

charge coverage ratio is more than 1.0x or (b) availability is more than the greater of 17.5% of borrowing base and USD30 Mil. Sale of Assets Restriction After one year, the proceeds from the sale need be applied to repay the term loan. Restricted Payments:

Restricted Payments (RP) RP Basket: No limit in case (a) availability is more than the greater of 15% of borrowing base and USD25 Mil. and the fixed-charge coverage ratio is more than 1.0x or (b) availability is more than the greater of 20% of borrowing base and USD35 Mil. Notable Permitted Payments: Additional all-purpose up to USD10 Mil. per year.

Other:

Cross-Default Yes, for any amount USD20 Mil. or greater. Cross Acceleration N.A. MAC Clause MAC clause is only a condition for executing the agreement. Equity Cure N.A. Covenant Suspension No. Required Lenders/Voting Rights Lenders holding more than 50% of the aggregate commitments.

ABL – Asset-based loan. MAC – Material adverse change. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.


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Bank Agreement Covenant Summary — Kate Spade & Company (Continued) Financial Covenants

First Lien Secured Net Leverage (Maximum) — Coverage (Minimum) 1.0x if availability is less than the greater of 10% of borrowing base and USD15 Mil. Current Ratio (Minimum) — Excess Availability (Minimum) — Net Worth (Minimum) — Principal Repayments

Mandatory/Tax Prepayment — Amortization Schedule — Callability/Optional Prepayment Prepayment is allowed at any time. Pricing

Coupon Type/Index Pricing varies depending on availability and types of drawing.


Leveraged Finance


Appendix D

Term Loan Covenant Summary — Kate Spade & Company Overview

Borrower Kate Spade & Company Document Date and Location Credit Agreement dated 4/10/14 (Exhibit 10.2 to 10-Q filed 5/14/14)

Maturity Date 4/3/21 Description of Debt Senior Secured Term Loan Amount ($ Mil.) $400 Mil. Ranking Senior secured. Security Bifurcated lien with the ABL facility. First lien on trademarks and other related rights, and second lien on the rest of the assets. Guarantee The facility is guaranteed by all restricted subsidiaries Debt Restrictions

Debt Incurrence

Coverage Ratio Debt: Allowed as long as fixed-charge coverage ratio is more than 2.0x. Notable Permitted Debt:

1) Debt incurred in sale and leasebacks up to the greater of $25 Mil. and 2.75% of consolidated total assets; 2) acquisition debt allowed if i) fixed-charge ratio is more than 2.0x or ii) the pro forma fixed-charge ratio is greater; 3) additional all-purpose debt up to $25 Mil.

Limitation on Liens Additional lien basket is $25 Mil. Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures

Change of Control (CoC) Event of default. Defined as sale of substantially all assets or change of ownership of more than 50% voting stocks. M&A, Investments Restriction General permitted investment basket up to the greater of $35 Mil. and 4% of consolidated total assets. Sale of Assets Restriction After one year, the proceeds from the sale need be applied to repay the term loan. Restricted Payments:

Restricted Payments (RP) RP Basket: 50% of net income starting in April 2014 and conditioned upon fixed-charge coverage ratio is more than 2.0x. Notable Permitted Payments: Additional all-purpose payments up the greater of $20 Mil. and 2.25% of consolidated total assets.

Other:

Cross-Default Yes, for any amount $20 Mil. or greater. Cross Acceleration N.A. MAC Clause MAC clause is only a condition for executing the agreement. Equity Cure N.A. Covenant Suspension No. Required Lenders/Voting Rights Lenders holding more than 50% of the aggregate commitments.

ABL – Asset-based loan. MAC – Material adverse change. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.


Leveraged Finance


Term Loan Covenant Summary — Kate Spade & Company (Continued) Financial Covenants

First Lien Secured Net Leverage (Maximum) — Coverage (Minimum) — Current Ratio (Minimum) — Excess Availability (Minimum) — Net Worth (Minimum) — Principal Repayments

Mandatory/Tax Prepayment 50% of excess cash flow if consolidated net total debt ratio is more than 2.75x; 25% between 2.75x and 2.25x; and 0% if less than 2.25x.

Amortization Schedule 0.25% of the principal amount annually. Callability/Optional Prepayment Prepayment is allowed at any time with 1% prepayment premium on the amount prepaid. Pricing

Coupon Type/Index Eurodollar Term Loan, LIBOR + 3% ABR Term Loan, LIBOR + 2%


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Appendix E

Financial Summary — Kate Spade & Company 12 Months Three Months



LTM Ended


Operating EBITDAa 93.1 115.5 25.4 58.6 97.8 20.1 26.5 21.5 83.0 151.1 26.4 44.0 39.5 192.9 Operating EBITDA Margin (%) 6.1 7.7 5.9 72.7 7.7 6.1 10.0 8.6 28.2 13.3 10.3 15.6 14.2 17.4 FFO Return on Adjusted Capital (%)b 12.1 16.9 — 14.7 14.7 14.1 16.8 17.3 16.8 16.8 17.5 17.6 18.0 18.0 FCF Margin (%) (6.0) (4.7) (15.9) 121.4 (8.1) (38.6) 13.4 (22.5) 23.2 (7.0) (22.7) 10.5 (3.1) 2.8 Coverages (x)

FFO Interest Coverage 0.7 1.8 1.0 5.1 1.5 (1.1) 6.4 10.3 39.8 6.6 (2.9) 8.1 5.5 8.9 Operating EBITDA/ Gross Interest Expense 1.6 2.2 2.1 5.2 2.1 2.1 4.1 9.8 41.6 7.5 7.8 8.2 7.5 12.2 FFO Fixed-Charge Coverage 0.9 1.2 1.0 2.2 1.2 0.4 2.2 1.9 4.3 2.1 0.5 2.4 1.9 2.2 FCF Debt Service Coverage(LTM)b (0.3) (0.3) — (1.1) (1.1) (2.0) (0.5) (0.6) (1.9) (1.9) 0.1 (0.2) 2.3 2.3 Cash Flow from Operations/ Capex (x) 1.6 0.3 (0.5) 281.5 (0.1) (2.9) 1.3 0.0 4.7 0.5 (2.5) 3.5 0.5 1.8 Leverage (x)b

Long-Term Secured Debt/ Operating EBITDA 2.4 3.3 — 3.9 3.9 0.0 3.0 3.1 2.6 2.6 2.4 2.2 2.0 2.0 Long-Term Secured Debt/FFO (11.0) 9.1 — 15.3 15.3 0.3 6.4 4.8 3.5 3.5 3.3 3.2 3.1 3.1 Total Debt with Equity Credit/Operating EBITDA 4.8 3.5 — 4.0 4.0 3.5 3.1 3.2 2.7 2.7 2.5 2.3 2.1 2.1 FFO-Adjusted Leverage 8.9 6.5 — 7.0 7.0 6.7 5.6 5.4 5.0 5.0 5.0 4.9 4.8 4.8 Total Adjusted Debt/ Operating EBITDAR 6.7 5.9 — 6.1 6.1 5.0 4.8 5.0 4.6 4.5 4.5 4.1 3.9 3.9 FCF/Total Adjusted Debt (%) (6.2) (4.9) — (8.1) (8.1) (13.0) (5.6) (4.5) (7.2) (7.2) (1.0) (1.5) 2.8 2.8 Balance Sheet

Short-Term Debt 64.7 22.6 137.4 3.4 3.4 5.3 6.4 7.4 10.5 10.5 12.5 4.5 4.5 4.5 Long-Term Senior Secured Debt 220.1 379.3 381.4 381.8 381.8 4.9 393.6 392.7 391.7 391.7 390.8 389.8 388.9 388.9 Long-Term Senior Unsecured Debt 161.5 4.3 9.9 9.0 9.0 385.4 8.8 8.7 8.6 8.6 8.5 8.4 8.2 8.2 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 446.3 406.3 528.7 394.2 394.2 395.6 408.8 408.8 410.7 410.7 411.7 402.7 401.6 401.6

Off-Balance Sheet Debtc

1,025.6 1,057.6 870.4 870.4 870.4 696.0 696.0 696.0 696.0 696.0 696.0 696.0 696.0 696.0 Total Adjusted Debt with Equity Credit

1,471.9 1,463.9

1,399.1 1,264.6 1,264.6 1,091.6 1,104.8 1,104.8 1,106.7 1,106.7 1,107.7 1,098.7 1,097.6 1,097.6

Cash Flow Funds From Operations (20.0) 41.9 0.3 45.8 24.9 (19.6) 34.8 20.4 77.3 112.8 (13.2) 38.0 23.8 125.8

Change in Working Capital 139.1 (17.3) (14.6) 46.2 (30.0) (61.6) (12.5) (19.1) 25.0 (68.2) (23.7) 8.7 (14.2) (4.2) Cash Flow from Operations 119.2 24.6 (14.2) 92.0 (5.1) (81.2) 22.2 1.3 102.3 44.6 (36.9) 46.6 9.6 121.6 Total Non-Operating/ Nonrecurring Cash Flow

(136.2) (13.2) (23.6) 6.1 (19.0) (17.4) 30.1 (30.6) (12.4) (30.2) (6.5) (3.6) (0.8) (23.2)

Capex (73.7) (82.8) (30.7) (0.3) (78.1) (27.9) (16.8) (27.1) (21.8) (93.6) (14.7) (13.5) (17.5) (67.4) Common Dividends — — — — — — — — — — — — — — FCF (90.7) (71.4) (68.5) 97.8 (102.1) (126.5) 35.6 (56.5) 68.2 (79.2) (58.0) 29.5 (8.7) 31.0 Net Acquisitions and Divestitures 309.7 (41.0) 24.3 188.9 213.2 (40.0) 7.7 32.3 (32.3) (32.3) 0.8 — — (31.5)

Net Debt Proceeds

(113.7) 2.0 59.7 (138.0) 6.9 1.8 4.2 0.1 2.2 8.3 0.9 (9.1) (0.8) (6.8) Net Equity Proceeds 0.3 6.2 (2.9) 6.2 4.8 30.3 9.8 1.3 0.5 41.9 2.4 0.0 — 3.0 Other (Investing and Financing) 51.6 (16.3) (14.8) (31.5) (51.8) 136.2 (12.2) (31.0) 22.0 115.0 82.5 (1.6) (2.3) 100.6 Total Change in Cash 157.2 (120.5) (2.3) 123.6 71.0 1.8 45.1 (53.8) 60.7 53.8 28.6 18.8 (11.8) 96.3 Ending Cash and Securities Balance 179.9 59.4 6.8 130.2 130.2 128.5 177.1 123.3 184.0 184.0 212.6 231.4 219.7 219.7 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects eight times gross rent expense. dComparable store sales for LTM period reflects latest 9 month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — Kate Spade & Company (Continued) 12 Months Three Months



LTM Ended

($ Mil.) 12/31/11 12/29/12 9/28/13 12/28/13 12/28/13 4/5/14 7/5/14 10/4/14 1/3/15 1/3/15 4/4/15 7/4/15 10/3/15 10/3/15 Income Statement Revenue 1,518.7 1,505.1 430.6 80.6 1,264.9 328.1 266.0 250.4 294.1 1,138.6 255.3 281.1 277.3 1,107.9 Revenue Growth (%) (39.3) (0.9) — — (16.0) (11.8) (30.4) (41.8) 265.0 (10.0) (22.2) 5.7 10.7 19.8 Operating EBIT 7.1 41.1 8.3 51.0 37.9 2.5 20.7 10.2 69.3 102.6 13.9 32.2 26.9 142.3 Gross Interest Expense 57.2 51.7 12.1 11.2 47.2 9.5 6.5 2.2 2.0 20.2 3.4 5.3 5.3 16.0 Sector-Specific Data (%) Comparable Store Salesd 68.9 29.5 31.0 30.0 28.2 29.3 30.4 15.2 28.0 25.9 9.0 10.0 15.7 15.7 No. of Stores 79 153 196 212 212 225 245 259 277 277 242 250 249 249 Gross Margin 53.3 56.0 56.5 77.7 57.4 55.3 58.6 62.8 63.1 59.7 60.6 61.0 61.2 61.5 SG&A/Revenues 52.8 53.3 54.5 14.4 54.4 54.5 50.8 58.8 39.5 50.7 55.1 49.5 51.5 48.7 Operating EBIT Margin 0.5 2.7 1.9 63.2 3.0 0.8 7.8 4.1 23.6 9.0 5.5 11.5 9.7 12.8 Operating EBITDAR ($ Mil.) 221.3 247.7 52.6 85.8 206.6 41.9 48.3 43.2 104.7 238.1 48.1 65.7 61.3 279.9 Operating EBITDAR Margin 14.6 16.5 12.2 106.5 16.3 12.8 18.1 17.3 35.6 20.9 18.9 23.4 22.1 25.3 Operating EBITDAR/ (Interest + Rent) (x)b 1.2 1.3 1.3 2.2 1.3 1.3 1.7 1.8 4.4 2.2 1.9 2.4 2.3 2.7 Inventory Turnover (x)b 2.9 3.2 — — 2.7 2.4 2.2 1.4 2.7 2.7 2.1 2.2 1.8 1.8 Accounts Payable Turnover (x)b 4.2 4.2 — 7.6 3.4 3.9 3.7 2.2 4.0 4.0 3.8 4.2 3.5 3.5 Return on Invested Capitalb 9.9 13.0 — 11.9 11.9 13.6 15.3 15.0 14.5 14.5 16.0 16.8 18.0 18.0 Return on Assetsb (18.1) (8.3) — 7.5 7.5 18.3 22.8 24.1 17.2 17.2 6.7 8.1 8.9 8.9 Capex/Depreciationb 85.7 111.3 179.9 4.3 130.3 146.4 228.6 211.8 143.2 172.0 117.7 114.5 138.7 129.5 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

L Brands, Inc. Full Rating Report

Key Rating Drivers Dominant Market Positions: L Brands, Inc. (L Brands) is the dominant player in intimate apparel and personal care and beauty products through its two main brands — Victoria’s Secret and Bath & Body Works. The company has demonstrated relatively strong pricing power, driven by its unique merchandise and loyal customers. Fashion risk is a factor, but given solid performance over the past four years, merchandise has been on trend and well received.

Solid Financial Performance: L Brands’ strong top-line growth has been driven by robust comparable store sales (comps) and normalized to around 4% in 2014 from a historic high of 10% in 2011. Comps for the 40-week period ended Jan 2, 2016 were up 6%, and the company executed particularly well, with recently reported holiday comps (November/December) at 7%–8%. Fitch Ratings expects sustainable comps growth in the 2%–3% range, with EBITDA margins at approximately 22% over the next three years.

Diverse but Seasonal Business: Products are sold through retail stores (85% of total sales) and online/catalogs (15% of total sales). Victoria’s Secret, including its PINK brand, represents approximately 62% of EBITDA, while Bath & Body Works represents about 34%. The growth of PINK concept stores in the U.S. and international expansion could potentially drive top-line growth in the midsingle-digit range. The business relies heavily on the fourth quarter, when it generates about 50% of EBITDA and essentially all its FCF.

Shareholder-Friendly Posture: L Brands remains committed to returning cash to shareholders through share repurchases and dividends. As of Oct. 31, 2015, the company has returned $8.8 billion to shareholders since 2010, utilizing $5.2 billion in FCF before dividends and funding the remainder with debt. The company’s commitment to high levels of discretionary activities has been a rating constraint.

Reasonable Leverage, Strong Liquidity: Lease-adjusted leverage was relatively modest at 3.4x as of Oct. 31, 2015. Fitch expects the company to maintain a leverage profile in the mid-3.0x range given strong EBITDA growth. The company has a strong liquidity position and comfortable maturity profile. Fitch considers refinancing risk low given L Brands’ strong business profile, favorable operating trends and reasonable leverage.

Rating Sensitivities Positive Rating Action: A positive rating action would require both the continuation of positive operating trends and the public commitment to maintain financial leverage around low 3x.

Negative Rating Action: A negative rating action could be driven by a trend of negative comps and/or margin compression from fashion misses, execution missteps or loss of competitive traction. A larger than expected debt-financed share repurchase and/or leverage rising to approximately 4.0x would be negative for the rating.

Ratings Long-Term IDR BB+ Secured Bank Credit Facility BBB–/RR1 Senior Guaranteed Unsecured Notes BB+/RR4 Senior Nonguaranteed Unsecured Notes BB/RR5

IDR – Issuer Default Rating


Financial Data L Brands, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 11,454.0 11,827.7 EBITDA 2,441.0 2,572.1 EBITDA Margin (%) 21.3 21.7 FCFa 672.0 506.6 Total Adjusted Debt 9,941.0 10,942.0 Total Adjusted Debt/EBITDAR (x) 3.2 3.4 EBITDAR/ (Interest + Rent) (x) 3.2 3.3 Comparable Store Sales (%)b 4.0 5.0 No. of Storesc 2,969 3,003 aFCF is before special dividends. bComparable store sales for the LTM reflects the performance for the nine months ended Oct. 31, 2015. cCompany-owned stores.

Analysts Grace Barnett +1 212 908-0718 [email protected]


mailto:@fitchratings.com


Leveraged Finance


Business Profile Assessment L Brands is a specialty retailer focused on women’s intimate apparel, and beauty and personal care with dominant market shares in the U.S. Two brands, Victoria’s Secret (1,116 U.S. stores, 45 Canadian stores and 10 U.K stores, including approximately 139 PINK stores globally as of Oct. 31, 2015) and Bath & Body Works (1,573 U.S. stores and 98 Canadian stores as of Oct. 31, 2015), generate the vast majority of operating profits. Core products include bras, panties and loungewear on the intimate apparel side, and antibacterial and home fragrance product lines on the personal care and beauty side. Products are purchased through contract manufacturers and imports, and directly from third-party manufacturers. Fitch believes both flagship concepts are strong, particularly Victoria’s Secret, which represents nearly two-thirds of profitability.

The company sees the potential to grow its Victoria’s Secret footprint in the U.S. by approximately 12% on the 2014 base of 6.7 million square feet, supported by the rollout of its PINK concept within existing stores. The company’s targeted growth of PINK in the U.S. — which could approach $3 billion in revenue over the next few years from just under $2 billion currently — and continued international expansion, if executed successfully, could drive top-line growth in the midsingle-digit range and enable the company to maintain its targeted high teens EBIT margin (18.3% for LTM ended Oct. 31, 2015 after adding back noncash stock-based compensation expense).

Management has repositioned its La Senza intimate apparel store base (less than 2.5% of annual sales) with an improved merchandise assortment, while aggressively closing underperforming stores.

Fitch Base Case Assumptions — L Brands, Inc. ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 11,454 12,214 12,617 13,033 — Revenue Growth (%) 6.3 6.6 3.3 3.3 — Comparable Store Sales (%) 4.0 5.9 2.0 2.0 Strong holiday 2015

performance results in comps above Fitch’s expectations. The out years (2016 and 2017) are conservative based on sustainable levels.

EBITDA 2,441 2,702 2,812 2,911 — EBITDA Margin (%) 21.3 22.1 22.3 22.3 — Working Capital Change 202 (20) 3 3 Record sales resulted in

marked inventory reductions and an above normal source of cash in 2014.

Cash Flow from Operations 1,786 1,677 1,747 1,783 — Capex (715) (800) (950) (950) Capex increases due to

approximately 70% increase in remodeling activity.

Dividends (691) (1,174) (648) (713) — FCF 380 289 149 121 FCF before special dividends in

the $150 Mil. range in out years due to increase in capex.

Share Repurchases (87) (500) (1,100) (400) — Total Debt 4,765 5,765 6,265 6,300 $1 Bil. of guaranteed notes

issued in October 2015. Total Adjusted Debta 9,941 11,301 12,078 12,403 — Adjusted Debt/EBITDAR (x) 3.2 3.3 3.4 3.4 — aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Comps – Comparable store sales. Source: Fitch Ratings.

Leveraged Finance


Two Flagship Brands and a Meaningful Direct Business Fitch has a favorable view of the business profile given the company’s focus on its two profitable flagship brands, a strong direct business and a growing international footprint. Both concepts have been successful in keeping merchandise fresh and current, which has fueled strong comps growth, enhanced customer loyalty and reduced markdown activity.

While L Brands is not a luxury player, per se, and has offerings across price points, it shares some similar characteristics to the luxury names. These companies tend to have stronger pricing power, because their differentiation is anchored around the brand name, and a loyal customer who is less likely to substitute away to a different offering at a lower price point.

Historical Comps and Store Growth Fiscal Year Ended 1/30/10 1/29/11 1/28/12 2/2/13 2/1/14 1/31/15

LTM 10/31/15

Comps (%) Victoria’s Secret (6.0) 14.0 14.0 7.0 2.0a 3.0a 5.0a

Bath & Body Works (1.0) 5.0 6.0 7.0 1.0a 6.0a 5.0a Totalb (4.0) 9.0 10.0 6.0 2.0 4.0 5.0c

Company-Owned Store Count Victoria’s Secret U.S. 1,040 1,028 1,017 1,019 1,060 1,098 1,116

Bath & Body Works U.S. 1,627 1,606 1,587 1,571 1,559 1,558 1,573 La Senza 258 252 230 158 157 145 132 Henri Bendel 11 11 19 29 29 29 29 Bath & Body Works Canada 31 59 69 71 79 88 98 Victoria’s Secret Canada 4 12 19 26 34 41 45 Victoria’s Secret U.K. — — — 2 5 10 10 Total 2,971 2,968 2,941 2,876 2,923 2,969 3,003

U.S. Sales per Sq Ft Victoria’s Secret 581 663 754 817 824 836 —

Bath & Body Works 587 620 658 718 725 774 — aIncludes company-owned stores in both U.S. and Canada. bTotal comps includes Victoria’s Secret U.S., Victoria’s Secret Canada, Bath & Body Works U.S., Bath & Body Works Canada, Victoria’s Secret U.K., La Senza and Henri Bendel. cComps for the first 48 weeks of 2015 were 6%, and the total store count was 3,010 as of Jan 2, 2016. Comps – Comparable store sales. Sq Ft – Square feet. Source: Company filings, Fitch Ratings.

Leveraged Finance


Business Segments ($ Mil.) 2010 2011 2012 2013a 2014 LTM 10/31/15 Sales

Victoria’s Secret 4,018 4,564 4,981 5,368b 5,700b 5,979b Victoria’s Secret Direct 1,502 1,557 1,593 1,516 1,507 1,485 La Senza 398 415 — — — — Bath & Body Works 2,515 2,674 2,902 2,868b 3,048b 3,140b Bath & Body Works Direct — — — 250 302 331 Victoria’s Secret & Bath & Body Works International — — — 222c 336c 379c Other 1,180 1,154 983 549d 561d 514d Total 9,613 10,364 10,459 10,773 11,454 11,828

Sales Growth YoY (%)e Victoria’s Secret 14.9 13.6 9.1 NM 6.2 7.1

Victoria’s Secret Direct 8.2 3.7 2.3 (4.8) (0.6) (2.3) La Senza (5.9) 4.2 N.A. N.A. N.A. N.A. Bath & Body Works 5.5 6.3 8.5 NM 6.3 6.4 Bath & Body Works Direct — — — — 20.8 19.9 Victoria’s Secret & Bath & Body Works International — — — — 51.4 24.1 Other 25.3 (2.2) (14.8) NM 2.2 (9.2) Total 11.4 7.8 0.9 3.0 6.3 5.6

Sales Mix (%)e Victoria’s Secret 41.8 44.0 47.6 49.8 49.8 50.5

Victoria’s Secret Direct 15.6 15.0 15.2 14.1 13.2 12.6 La Senza 4.1 4.0 0.0 0.0 0.0 0.0 Bath & Body Works 26.2 25.8 27.7 26.6 26.6 26.5 Bath & Body Works Direct — — — 2.3 2.6 2.8 Victoria’s Secret & Bath & Body Works International — — — 2.1 2.9 3.2 Other 12.3 11.1 9.4 5.1 4.9 4.3 Total 100.0 100.0 100.0 100.0 100.0 100.0

Operating Incomee Victoria’s Secret 888 1,081 1,188 1,153 1,271 1,306

Bath & Body Works 464 513 604 648 737 820 Victoria’s Secret & Bath & Body Works International — — — 38 78 89 Other (68) (47) (85) (96) (133) (144) Total 1,284 1,546 1,707 1,743 1,953 2,071

EBITDAe Victoria’s Secret 1,023 1,223 1,336 1,328 1,469 —

Bath & Body Works 519 565 657 713 802 — Victoria’s Secret & Bath & Body Works International — — — 47 94 — Other 101 115 68 23 (14) — Total 1,643 1,902 2,061 2,111 2,351 —

EBITDA Growth YoY (%)e Victoria’s Secret 44.5 19.5 9.3 NM 10.6 —

Bath & Body Works 24.7 8.9 16.3 NM 12.5 — Victoria’s Secret & Bath & Body Works International — — — NM 100.0 — Other 9.5 13.8 (40.8) NM (160.9) — Total 35.1 15.8 8.4 NM 11.4 —

EBITDA Contribution (%)e Victoria’s Secret 62.3 64.3 64.8 62.9 62.5 —

Bath & Body Works 31.6 29.7 31.9 33.8 34.1 — Victoria’s Secret & Bath & Body Works International — — — 2.2 4.0 — Other 6.1 6.0 3.3 1.1 (0.6) — Total 100.0 100.0 100.0 100.0 100.0 — aRestated amounts from 2014 10-K used for comparability. bIncludes company-owned stores in both U.S. and Canada. cIncludes company-owned and partner operated stores outside of the U.S. and Canada. dNo longer includes international operations of Victoria’s Secret and Bath & Body Works. eSegment EBITDA calculated as segment operating income adjusted for one-time expenses plus depreciation and amortization. Reflects the reporting change in segments for 2013 and 2014. YoY – Year over year. N.A. – Not available. NM – Not meaningful. Note: Other includes corporate, Mast Global, Henri Bendel and international operations including La Senza, with the exception of 2013 and 2014, which do not include international operations. 2012 operating income excludes several one-time items related to goodwill impairment and restructuring of La Senza (including expense associated with store closures), and the divestiture of third-party apparel sourcing business. 2011 operating income is also adjusted for expense associated with the charitable contribution to The L Brands Foundation. Source: Company filings, Fitch Ratings.

Leveraged Finance


2016 Outlook Fitch expects L Brands can sustain comps growth in the 2%–3% range and EBITDA margin at approximately 22% over the next three years. Fitch expects the company will continue to generate strong FCF and apply it in a similar manner to its historical endeavors toward dividends and share repurchases.

Fitch expects FCF after regular dividends to be approximately $100 million plus annually over the next three years, assuming regular dividends of approximately $600 million in 2015, which grows at 10% thereafter.

2016 capex is expected to increase to $950 million from an estimated $800 million in 2015 and $715 million in 2014, reflecting mainly a 70% increase in remodeling activity, new store constructions and square footage expansion — primarily to support PINK and international growth (square footage to grow by approximately 3.0%–3.5% annually) — and investments in technology, logistics and facilities. Leverage is anticipated to remain around mid-3x.


Rating Affected by Shareholder-Friendly Posture L Brands remains committed to returning cash to shareholders through share repurchases, regular dividends and special dividends, which have totaled $8.8 billion since 2010, as of Oct. 31, 2015. This posture is a key constraint to the rating. Total lease-adjusted leverage stood at 3.4x as of Oct. 31, 2015. Fitch expects L Brands to deploy excess cash and potentially execute more debt-financed share repurchases and special dividends in the context of maintaining mid-3x leverage metrics.

Capital Structure The company’s debt structure is composed of a secured $1.0 billion credit facility, guaranteed senior unsecured notes and unguaranteed notes. The revolver contains fixed-charge coverage (not less than 1.75x) and debt-to-EBITDA (not exceeding 4.0x) financial covenants. Restricted payments may be made if debt to EBITDA is less than 3.0x.

Six bond issues benefit from guarantees — the 2019 notes, 2020 notes, 2021 notes, 2022 notes, 2023 notes and newly issued 2035 notes. Fitch rates these notes at ‘BB+/RR4’, the same as the Issuer Default Rating (IDR). The notes are guaranteed on a full and unconditional basis by the material domestic subsidiaries. The guarantors represent more than 90% of the

Significant FCF Generation ($ Mil.) 2010 2011 2012 2013 2014

LTM 10/31/15

Beginning Cash Balance 1,804 1,130 935 773 1,519 745 FCF Before Dividends 1,010 840 763 557 1,071 945 Regular Dividends (197) (248) (296) (349) (399) (538) FCF After Regular Dividends 813 592 467 208 672 407 Special Dividends (1,291) (896) (1,153) — (292) (585) FCF After Special Dividends (478) (304) (686) 208 380 (178) Share Buybacks (207) (1,190) (629) (60) (88) (402) Debt Proceeds 390 981 985 495 — 988 Ending Cash Balance 1,130 935 773 1,519 1,681 1,311 Total Adjusted Debt/EBITDAR (x) 3.0 3.2 3.4 3.5 3.2 3.4


Leveraged Finance


assets owned by the company’s domestic subsidiaries (other than real property, certain other assets, and intercompany investments and balances) and more than 95% of the accounts receivable and inventory directly owned by the domestic subsidiaries.

The remaining bond tranches are not guaranteed. Fitch notes this distinction by rating these issues at ‘BB/RR5’, one notch below the IDR and guaranteed bonds.

Adequate Liquidity, Manageable Maturities Minimum cash needed to fund the working capital of the business at the beginning of any given year is roughly $600 million. This amount would enable the company to adequately fund the buildup of inventory as it approaches the peak holiday selling season. Liquidity is strong, supported by a cash balance of $1.3 billion as of Oct. 31, 2015, and the company’s $1.0 billion revolving credit facility. The company has a comfortable maturity profile, staggered over many years. Fitch considers refinancing risk low given the strong business profile, favorable operating trends and reasonable leverage.

Capital Structure ($Mil. At Oct. 31, 2015) Description Amount (%) Secured Debt $1 Bil. Revolver expiring July 2019 0.0 0.0 Total Secured Debt 0.0 0.0 Unsecured Debt Guaranteed Notes 8.500% Sr. Unsecured Notes due June 2019 500.0 8.7 7.000% Sr. Unsecured Notes due May 2020 400.0 7.0 6.625% Sr. Unsecured Notes due April 2021 1,000.0 17.4 5.625% Sr. Unsecured Notes due February 2022 1,000.0 17.4 5.625% Sr. Unsecured Notes due October 2023 500.0 8.7 6.875% Sr. Unsecured Notes due November 2035 1,000.0 17.4 Nonguaranteed Notes 6.900% Sr. Unsecured Notes due July 2017 700.0 12.2 6.950% Sr. Unsecured Notes due March 2033 350.0 6.1 7.600% Sr. Unsecured Notes due July 2037 300.0 5.2 Total Unsecured Debt 5,750.0 100.0 Total Debt 5,750.0 100.0


Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015) 2016 — 2017 700 2018 — 2019 500 2020 400 Thereafter 4,150


Liquidity ($ Mil., At Oct. 31, 2015) Cash 1,311 Revolver Availability 981 Total 2,292

Note: Revolver availability is net of borrowings and outstanding letters of credit. Source: Company filings, Fitch Ratings.

Leveraged Finance


Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘BB+’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes.

Fitch rates the senior secured revolver ‘BBB–/RR1’, indicating outstanding recovery prospects (91%–100%) in the event of default. The guaranteed senior unsecured debt are rated ‘BB+/RR4’, indicating average recovery (31%–50%) prospects. The senior unsecured notes that are not guaranteed are rated one notch lower than the IDR at ‘BB/RR5’.


Leveraged Finance


Appendix A

Organizational Structure — L Brands, Inc.($ Mil., As of Oct. 31, 2015)

L Brands, Inc. IDR — BB+/Stable

Nonguarantor Subsidiaries

aThe guarantor subsidiaries represent: substantially all of the sales of the company’s domestic subsidiaries; more than 90% of the assets owned by the company’s domestic subsidiaries, other than real property, certain other assets, and intercompany investments and balances; and more than 95% of the accounts receivable and inventory directly owned by the company’s domestic subsidiaries. IDR – Issuer Default Rating.Source: Company filings, Fitch Ratings.

Guarantor Subsidiariesa

Ups

tream

Gua

rant

ees

Debt Issue Amount IDR$1,000 Mil. Senior Secured Revolver Due 7/18/19 0 BBB–/RR16.900% Senior Unsecured Notes Due 7/15/17 700 BB/RR58.500% Senior Unsecured Notes Due 6/15/19 (Guaranteed) 500 BB+/RR47.000% Senior Unsecured Notes Due 5/1/20 (Guaranteed) 400 BB+/RR46.625% Senior Unsecured Notes Due 4/1/21 (Guaranteed) 1,000 BB+/RR45.625% Senior Unsecured Notes Due 2/15/22 (Guaranteed) 1,000 BB+/RR45.625% Senior Unsecured Notes Due 10/15/23 (Guaranteed) 500 BB+/RR46.875% Senior Unsecured Notes Due 11/1/35 (Guaranteed) 1,000 BB+/RR46.950% Senior Unsecured Notes Due 3/1/33 350 BB/RR57.600% Senior Unsecured Notes Due 7/15/37 300 BB/RR5Total 5,750 —

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — L Brands, Inc. Overview Borrower L Brands, Inc., L (Overseas) Holdings LP, Canadian Retail Holdings Corporation, Victoria’s Secret UK Limited, Mast Industries

(Far East) Limited. Document Date and Location Amended and Restated Five -Year Revolving Credit Agreement dated July 18, 2014 (Exhibit 4.1 to 8-K filed July 23, 2014). Description of Debt Senior secured revolving credit facility. Maturity Date July 18, 2019 Amount $1,000 Mil. (up to GBP50 Mil. of sublimit to the U.K. borrower and up to CAD100 Mil. of sublimit to the Canadian borrower) —

increase in commitments up to $500 Mil. Ranking Senior Security Secured by 90% of consolidated assets (excluding real estate) and 95% of consolidated domestic inventory and receivables.

Collateral shall be released in the event of a ratings upgrade to low ‘BBB’ or better by two rating agencies; further automatic reinstatement in the event of a ratings downgrade to ‘BB+’ or lower by two rating agencies or ‘BB’ or lower by one rating agency

Guarantee Guaranteed on secured basis by all material domestic subsidiaries. Guarantee shall be released in the event of ratings upgrade to low ‘BBB’or better by two rating agencies.

Debt Restrictions Debt Incurrence Additional all-purpose debt up to $225 Mil. for subsidiary indebtedness only. Limitation on Liens General carveout of $750 Mil., provided that no more than $50 Mil. of such obligations are secured by inventory; carveout of

$750 Mil. on second lien basis, provided later maturing date, no scheduled repayment prior to the credit facility’s maturity date and less restrictive terms.

Limitation on Guarantees Guarantee is included under the definition of investments and, hence, is governed by the investment-related covenants.

Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as the acquisition of more than 30% voting stock or occupation of a majority of seats on the board by nonpermitted

holders and constitutes an event of default. M&A, Investments Restriction Carveout of $200 Mil. in aggregate, but the limitation on amount can be removed if consolidated debt to EBITDA for the most recent

four-quarter period is less than 3.0x and no event of default exists. Sale of Assets Restriction None Restricted Payments Restricted Payments (RPs) RP Basket: None.

Notable Permitted Restricted Payment: Greater of $500 Mil. and 7.5% of total assets per year, but the limitation on the amount can be removed if pro forma consolidated debt to EBITDA for the most recent four-quarter period is less than 3.0x and there is no event of default.

Other Cross-Default Yes, exceeding $100 Mil. Cross-Acceleration N.A. MAC Clause None Equity Cure None Covenant Suspension RP covenant falls away in the event of rating upgrade to low ‘BBB’. Required Lenders/Voting Rights 50% of total commitment.

MAC − Material adverse change. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/701985/000070198514000030/ex41lbrands-2014amendmenta.htm

Leveraged Finance


Bank Agreement Covenant Summary — L Brands, Inc. (Continued) Financial Covenants Maintenance Leverage (Maximum) Consolidated debt to consolidated EBITDA: Must not exceed 4.0x. Coverage (Minimum) Fixed-charge coverage (consolidated EBITDAR to consolidated fixed charges): Not less than 1.75x Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment None. Amortization Schedule None. Callability/Optional Prepayment None. Pricing Coupon Type/Index Currently LIBOR + 1.50%; commitment fee equals 0.30% per annum, subject to rating-based pricing grid. Pricing Grid (Rating-Based Grid) Issuer Default Ratings Applicable Rate and Commitment Fee

More than or equal to ‘Baa2 and ‘BBB’ LIBOR + 100; 0.25% Equal to ‘Baa3’ and ‘BBB−’ LIBOR + 125; 0.25% Equal to ‘Ba1’ and ‘BB+’ LIBOR + 150; 0.30% Less than or equal to ‘Ba2’ and ‘BB’ LIBOR + 175; 0.35%


Leveraged Finance


Appendix C

Guaranteed Bonds Covenant Summary — L Brands, Inc. Overview Issuer L Brands, Inc. Document Date and Location Indenture dated June 19, 2009

(Exhibit 4.1 to 8-K filed June 24, 2009) Base indenture dated March 15, 1988 (Exhibit 4.1 to S-3 filed May 22, 2003). First supplemental indenture dated May 31, 2005 (Exhibit 4.1.2 to S-3 filed June 6, 2005). Second supplemental indenture dated July 17, 2007 (Exhibit 4.1.4 to S-3 dated Oct. 1, 2007)

Description of Debt 8.500% unsecured notes. Unsecured notes. Amount $500 Mil. 7.000% notes — $400 Mil.

6.625% notes — $1,000 Mil. 5.625% notes — $1,000 Mil. 5.625% notes — $500 Mil.

Maturity Date 6/15/19 7.000% notes — 5/1/20 6.625% notes — 4/1/21 5.625% notes — 2/15/22 5.625% notes — 10/15/23

Ranking Senior Security Unsecured Guarantee Guaranteed on senior unsecured basis by all material domestic subsidiaries that guarantee the senior credit facility. Debt Restrictions Debt Incurrence None. Limitation on Liens Equal and ratable senior liens permitted. Limitation on Guarantees None. Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as the acquisition of more than 50% voting stock or occupation of a majority of seats on the board by nonpermitted

holders. In the event of a CoC and rating downgrade to below investment grade, or if rated below investment grade at time of CoC, there is a required put at 101.

M&A, Investments Restriction Permitted only if the company becomes the continuing corporation or the successor corporation assumes the obligations of the debt securities.

Sale of Assets Restriction None. Restricted Payments Restricted Payments None. Other Cross-Default None. Cross-Acceleration None. MAC Clause None. Equity Clawback Maximum 35% with proceeds of equity offer @ 108.5%

until June 15, 2012. 7.000% notes: maximum 35% with proceeds of equity offer @ 107% until May 1, 2013. 6.625% notes due 2021: maximum 35% with proceeds of equity offer @ 106.625% until April 1, 2014. 5.625% notes due 2022: maximum 35% with proceeds of equity offer @ 105.625% until Feb. 15, 2015. 5.625% notes due 2023: maximum 35% with proceeds of equity offer @ 105.625% until Oct. 15, 2016.




http://www.sec.gov/Archives/edgar/data/701985/000095010303001339/may2003_ex0401.txt

http://www.sec.gov/Archives/edgar/data/701985/000095010303001339/may2003_ex0401.txt

http://www.sec.gov/Archives/edgar/data/701985/000095010305001555/ex040102.htm




Leveraged Finance


Appendix D

Guaranteed Bond Covenant Summary — L Brands, Inc. Covenant Issuer L Brands, Inc. Document Date and Location Indenture dated Oct. 30, 2015

(Exhibit 4.1 to 8-K filed Nov. 3, 2015).

Description of Debt 6.875% unsecured notes. Amount $1.0 Bil. Maturity Date 11/01/35 Ranking Senior Security Unsecured Guarantee Guaranteed on senior unsecured basis by all material domestic subsidiaries that guarantee the senior credit facility. Debt Restrictions Debt Incurrence None. Limitation on Liens Equal and ratable senior liens permitted but no liens on capital stock of significant subsidiaries. Limitation on Guarantees None. Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as the acquisition of more than 50% voting stock or occupation of a majority of seats on the board by nonpermitted

holders. In the event of a CoC and rating downgrade to below investment grade, or if rated below investment grade at time of CoC, there is a required put at 101.


Sale of Assets Restriction None. Restricted Payments Restricted Payments None. Other Cross-Default None. Cross-Acceleration None. MAC Clause None.


http://www.sec.gov/Archives/edgar/data/701985/000070198515000035/a41october2015indenture.htm

http://www.sec.gov/Archives/edgar/data/701985/000070198515000035/a41october2015indenture.htm

Leveraged Finance


Appendix E

Nonguaranteed Bonds Covenant Summary — L Brands, Inc. Overview Issuer L Brands, Inc. Document Date and Location Base indenture dated Feb. 19, 2003, filed as exhibit 4 to form S-4 dated April 18, 2003.

First supplemental indenture dated May 31, 2005, filed as exhibit 4.1.2 to form S-3 dated June 6, 2005. Second supplemental indenture dated July 17, 2007, filed as exhibit 4.1.4 to form S-3 dated Oct. 1, 2007. Third supplemental indenture dated May 4, 2010, filed as exhibit 4.1.4 to form S-3 dated Nov. 5, 2010.

Description of Debt Senior unsecured notes. Original Issue/Maturity 6.900% notes $700 Mil./July 15, 2017

6.950% notes $350 Mil./March 1, 2033. 7.600% notes $300 Mil./July 15, 2037

Ranking Senior Security Unsecured Guarantee Unguaranteed Debt Restrictions Debt Incurrence None. Limitation on Liens None. Limitation on Guarantees None. Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as the acquisition of more than 50% voting stock or occupation of a majority of seats on the board by

nonpermitted holders. In the event of a CoC and rating downgrade to below investment grade or if rated below investment grade at time of CoC, there is a required put at 101.


Sale of Assets Restriction None. Restricted Payments Restricted Payments None. Other Cross-Default None. Cross-Acceleration None. MAC Clause None. Equity Clawback None.


http://www.sec.gov/Archives/edgar/data/701985/000095010303001167/apr1403_ex04.txt



http://www.sec.gov/Archives/edgar/data/701985/000095010310003271/dp19831_ex040104.htm

Leveraged Finance


Appendix F

Financial Summary — L Brands, Inc.



Months

Three Months LTM

Ended ($ Mil.) 1/28/12 2/2/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Profitability Operating EBITDAa 1,953.4 2,133.9 319.0 985.0 2,196.0 458.0 497.9 404.0 1,081.1 2,441.0 499.0 530.0 462.0 2,572.1 Operating EBITDA Margin (%) 18.8 20.4 14.7 25.8 20.4 19.2 18.6 17.4 26.6 21.3 19.9 19.2 18.6 21.7 FFO Return on Adjusted Capital (%)b 26.5 28.3 26.3 25.1 25.1 25.3 24.6 25.4 25.7 25.7 28.0 28.3 26.5 26.5 FCF Margin (%) (2.9) (6.6) (31.6) 28.8 1.9 (26.4) 8.9 (17.8) 29.1 3.3 (40.7) 5.8 (20.3) (1.5) Coverages (x) FFO Interest Coverage 6.4 5.4 2.2 12.3 5.6 2.7 4.2 3.1 13.9 5.9 3.6 4.6 4.4 6.6 Operating EBITDA/ Gross Interest Expense 7.9 6.8 4.2 12.0 7.0 5.5 6.1 5.1 13.8 7.5 6.2 6.8 5.9 8.2 FFO Fixed-Charge Coverage 2.7 2.6 1.4 4.9 2.6 1.6 2.1 1.7 5.2 2.6 1.9 2.2 2.1 2.8 FCF Debt Service Coverageb (0.2) (1.2) (0.6) 1.0 1.0 0.5 0.6 1.2 2.2 2.2 1.0 0.7 0.4 0.4 Cash Flow from Operations/Capex 3.0 2.3 (1.8) 13.8 1.8 (0.6) 2.7 (0.3) 10.9 2.5 (1.2) 2.4 (0.5) 2.3 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA — — — — — — — — — — — — — — Long-Term Secured Debt/FFO — — — — — — — — — — — — — — Total Debt with Equity Credit/ Operating EBITDA 1.8 2.1 2.2 2.3 2.3 2.2 2.2 2.1 2.0 2.0 1.9 1.9 2.2 2.2 FFO Adjusted Leverage 3.7 4.0 4.2 4.1 4.1 4.2 4.3 4.1 3.9 3.9 3.8 3.8 4.0 4.0 Total Adjusted Debt/ Operating EBITDAR 3.2 3.4 3.5 3.5 3.5 3.6 3.5 3.4 3.2 3.2 3.2 3.1 3.4 3.4 FCF/Total Adjusted Debt (%) — (7.5) (6.6) 2.1 2.1 (0.7) 0.2 2.9 3.8 3.8 (0.1) (0.9) (1.7) (1.7) Balance Sheet Short-Term Debt 57 — 216 215 215 214 214 213 — — — — 4 4 Long-Term Senior Secured Debt — — — — — — — — — — — — — — Long-Term Senior Unsecured Debt 3,481 4,477 4,762 4,761 4,761 4,758 4,758 4,759 4,765 4,765 4,760 4,759 5,757 5,757 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — 5 5 Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 3,538 4,477 4,978 4,976 4,976 4,972 4,972 4,972 4,765 4,765 4,760 4,759 5,766 5,766 Off-Balance Sheet Debtc 4,392 4,640 4,904 4,904 4,904 5,176 5,176 5,176 5,176 5,176 5,176 5,176 5,176 5,176 Total Adjusted Debt with Equity Credit 7,930 9,117 9,882 9,880 9,880 10,148 10,148 10,148 9,941 9,941 9,936 9,935 10,942 10,942 Cash Flow Funds From Operations 1,339 1,396 89 925 1,458 143 263 171 1,007 1,584 207 281 272 1,767 Change in Working Capital (73) (45) (474) 354 (210) (232) 272 (247) 409 202 (363) 250 (385) (89) Cash Flow from Operations 1,266 1,351 (385) 1,279 1,248 (89) 535 (76) 1,416 1,786 (156) 531 (113) 1,678 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (426) (588) (215) (93) (691) (150) (199) (236) (130) (715) (132) (226) (245) (733) Common Dividends (1,144) (1,449) (87) (88) (349) (392) (99) (100) (100) (691) (734) (146) (146) (1,126) FCF (304) (686) (687) 1,098 208 (631) 237 (412) 1,186 380 (1,022) 159 (504) (181) Net Acquisitions and Divestitures 124 11 — — — — — — — — — 135 61 196 Net Debt Proceeds 981 928 495 — 495 — — — (213) (213) — — 988 775 Net Equity Proceeds (1,115) (577) 12 5 (28) (26) — 6 (33) (53) (95) (177) (60) (365) Other (Investing and Financing) 119 162 54 (9) 71 50 (2) 4 (4) 48 85 14 46 141 Total Change in Cash (195) (162) (126) 1,094 746 (607) 235 (402) 936 162 (1,032) 131 531 566 Ending Cash and Securities Balance 935 773 425 1,519 1,519 912 1,147 745 1,681 1,081 649 780 1,311 1,311 Short-Term Marketable Securities — — — — — — — — — — 50 50 — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — L Brands, Inc. (Continued)



Months

Three Months LTM

Ended ($ Mil.) 1/28/12 2/2/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Income Statement Revenue 10,364.0 10,459.0 2,171.0 3,818.0 10,773.0 2,391.0 2,675.3 2,319.0 4,068.7 11,454.0 2,512.0 2,765.0 2,482.0 11,827.7 Revenue Growth (%) 0.1 0.9 5.9 (1.0) 3.0 5.4 6.3 6.8 6.6 6.3 5.1 3.4 7.0 5.6 Operating EBIT 1,597.4 1,779.9 232.0 887.0 1,828.0 358.0 398.9 306.0 980.1 2,043.0 398.0 427.0 362.0 2,167.1 Gross Interest Expense 246.3 316.0 76.0 82.0 314.0 84.0 81.6 80.0 78.4 324.0 80.0 78.0 79.0 315.4 Sector-Specific Data Comparable Store Sales (%)d 10 6 3 1 2 2 3 5 6 4 5 4 7 5 No. of Stores 2,941 2,876 2,927 2,923 2,923 2,923 2,942 2,971 2,969 2,969 2,966 2,976 3,003 3,003 Gross Margin (%) 39.3 42.3 39.5 43.0 41.1 41.1 39.0 40.8 45.1 42.0 42.0 40.3 41.5 42.6 SG&A/Revenues (%) 23.9 25.3 28.8 19.8 24.1 26.1 24.1 27.6 21.0 24.1 26.2 24.8 27.0 24.3 Operating EBIT Margin (%) 15.4 17.0 10.7 23.2 17.0 15.0 14.9 13.2 24.1 17.8 15.8 15.4 14.6 18.3 Operating EBITDAR 2,502.4 2,713.9 472.3 1,138.3 2,809.0 619.8 659.7 565.8 1,242.8 3,088.0 660.8 691.8 623.8 3,219.2 Operating EBITDAR Margin (%) 24.1 25.9 21.8 29.8 26.1 25.9 24.7 24.4 30.5 27.0 26.3 25.0 25.1 27.2 Operating EBITDAR/ (Interest + Rent) (x)b 3.1 3.0 2.1 4.8 3.0 2.5 2.7 2.3 5.2 3.2 2.7 2.9 2.6 3.3 Inventory Turnover (x)b 6.2 6.0 4.1 5.9 5.9 5.5 5.9 4.2 6.0 6.0 5.7 6.2 4.4 4.4 Accounts Payable Turnover (x)b 11.6 11.2 8.2 11.1 11.1 11.5 10.0 8.1 11.0 11.0 11.2 10.0 7.8 7.8 Return on Invested Capital (%)b 26.6 29.1 27.3 25.7 25.7 26.0 26.0 26.6 27.0 27.0 29.3 29.7 27.4 27.4 Return on Assets (%)b 13.9 12.5 12.4 12.5 12.5 13.8 13.5 13.5 13.8 13.8 17.1 16.9 14.8 14.8 Capex/Depreciation (%)b 119.7 166.1 247.1 94.9 187.8 150.0 201.0 240.8 128.7 179.6 130.7 219.4 245.0 181.0 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

Levi Strauss & Co. Full Rating Report

Key Rating Drivers Stable Top Line: Levi Strauss & Co.’s (Levi) top line has been stable on a constant currency basis, with 1%–2% annual sales growth expected beginning fiscal 2016, following expected low single-digit growth in 2015 and 3% growth in 2014. Revenue in the Americas (60% of total sales) is projected to grow 2% annually, in line with the apparel sector, while international revenue should grow 2%–3% as the company expands its presence across newer markets, including Russia, India and China, and categories in existing markets.

Improving EBITDA Story: Fitch expects 3%–4% annual EBITDA growth beginning in 2016 from the $570 million level in 2015, predicated on modest sales growth, fixed-cost leverage and benefits from the cost-reduction program management announced early 2014. SG&A spend should be flat to 2013 levels by 2017, when the program is fully realized, despite higher sales. This assumes approximately $150 million of net savings, yielding EBITDA upside if the company achieves the high end of its targeted $175 million–$200 million range.

Reasonable Credit Metrics: Levi should end fiscal 2015 with leverage around 3.6x, significantly lower than the 5.0x level from 2012, as total debt has declined 13% to $2.8 billion and EBITDA has grown 23% to a projected $568 million. Leverage is expected to remain in the mid-3.0x range over the next three years on EBITDA growth. Fitch projects minimal debt paydown following the 2016 repayment of Levi’s $33 million eurobonds, although the company could reduce leverage to the low-3.0x range through FCF deployment to debt paydown.

Strong Liquidity: Levi had $273 million of cash on hand and $549 million of revolver availability at Aug. 30, 2015. Cash on hand should approach $400 million by the end of 2015. Annual FCF should be close to $200 million through 2018. The company issued $500 million of 5% senior unsecured notes due 2025 in April 2015 to repay $525 million 7.625% senior unsecured notes due 2020, reducing annual interest expense by $15 million. Levi’s next maturities are $33 million in eurobonds due 2016 and $534 million of unsecured notes due 2022.

Rating Sensitivities Positive Rating Action: A positive rating action would be considered if Levi sustained 3%–5% revenue growth and/or mid-teens EBITDA margins, or if FCF deployment to debt paydown results in leverage trending to the 3.0x range.

Negative Rating Action: A negative rating action would be considered if EBITDA margin remains under pressure longer term due to soft sales trends and increased investment in marketing/promotion, resulting in adjusted debt/EBITDAR increasing to approximately 4.0x.

Ratings Long-Term IDR BB Revolving Credit Facility BBB– Senior Unsecured Notes BB


Rating Outlook Positive

Financial Data Levi Strauss & Co.

($ Mil.) FYE

11/30/14 LTM

8/30/15 Total Revenues 4,754.0 4,597.3 EBITDA 594.5 551.0 EBITDA Margin (%) 12.5 12.0 FCF 129.5 122.6 Total Adjusted Debt 2,779.6 2,753.3 Adj. Debt/EBITDAR (x) 3.5 3.7 EBITDAR/(Interest + Rents) (x) 2.5 2.6 No. of Stores 2,765 2,729




Leveraged Finance


Key Assumptions Fitch’s key assumptions include annual revenue growth at 1%–2% beginning in fiscal 2016; EBITDA trending toward $600 million–$625 million over the next 24 months, versus a pro forma $568 million in fiscal 2015; the company remaining FCF positive; and adjusted leverage slowly moving below approximately 3.5x.


Wide Geographic Scope Levi is a privately held company headquartered in San Francisco. It is one of the world’s largest branded apparel companies, with 2014 revenues of $4.8 billion. Levi sells its branded products in more than 110 countries through 50,000 retail outlets, including approximately 2,700 stores dedicated to Levi brands, both franchised and company operated.

Approximately 60% of Levi’s revenues are generated in the Americas, 24% in Europe and 16% in Asia-Pacific. Sales in the Americas declined by 3.1% — negative 1.2% on a constant currency basis — in the first nine months of 2015 due to lower retail traffic and the wholesale channel decline due to the exit of the Dockers brand women’s business in the U.S. beginning in third-quarter 2014. These declines were offset in part by increases in both Europe and Asia, which experienced growth on a constant currency basis of 9.6% and 5.1%, respectively, in the first nine months of 2015. Fitch projects consolidated sales will track negatively in 2015 and at a positive low single-digit pace over the next 24 months, and will continue to be constrained by FX headwinds and the difficult global consumer environment.

Fitch Base Case Assumptions — Levi Strauss & Co. ($ Mil., Year Ended November) 2014A 2015F 2016F 2017F Comments Revenue 4,754 4,593 4,678 4,779 — Revenue Growth (%)a 1.5 (3.4) 1.8 2.2 2015/2016 affected by FX. Americas 0.4 (1.4) 2.0 2.0 — Europe 3.6 (9.9) 2.0 2.0 — Asia Pacific 2.8 (1.0) 1.0 3.0 — Same-Store Sales (%) — — — — — EBITDA 595 568 602 625 — EBITDA Margin (%) 12.5 12.4 12.9 13.1 Modest improvement on

expense management. Working Capital Change (86) 37 (6) (14) — Cash Flow from Operations 233 368 367 375 — Capex (73) (105) (107) (109) — Dividends (30) (50) (60) (70) — FCF 130 213 200 196 — Share Repurchases (5) 0 0 0 — Total Debt 1,236 1,211 1,177 1,177 — Total Adjusted Debtb 2,780 2,786 2,783 2,815 — Adjusted Debt/EBITDAR (x) 3.5 3.6 3.5 3.4 — aExcludes effect of 53rd week in Fiscal 2015. bTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


Operating margins were in the mid to high teens in all three geographic segments in 2014 and the first nine months of 2015. Margins were higher in the YTD period due to the expansion of the company-operated retail network in Europe and Asia, which generally achieves higher margins than the wholesale distribution segment. Fitch expects margins to begin to recover in 2016 due to ongoing cost reductions, including the potential for some benefit from lower cotton costs beginning in the second half of 2015.

Segment Data Nine Months 2009 2010 2011 2012 2013 2014 2014 2015 Revenue ($ Mil.) Americas 2,358 2,549 2,716 2,749 2,851 2,863 1,969 1,909 Europe 1,042 1,105 1,174 1,103 1,104 1,143 847 758 Asia-Pacific 706 756 872 758 727 748 550 542 Total 4,106 4,411 4,762 4,610 4,682 4,754 3,366 3,209 Revenue Growth YoY (%) Americas (4.8) 8.1 6.5 1.2 3.7 0.4 — (3.1) Europe (12.8) 6.1 6.2 (6.0) 0.0 3.6 — (10.5) Asia-Pacific (3.1) 7.1 15.2 (13.1) (4.0) 2.8 — (1.3) Total (6.7) 7.4 8.0 (3.2) 1.5 1.5 — (4.7) Revenue Growth YoY — Constant Currency (%) Americas (3.2) 7.1 6.2 1.9 3.7 1.0 (2.1) (1.2) Europe (3.3) 7.5 3.2 1.9 (2.1) 4.1 1.0 9.6 Asia-Pacific (0.9) 0.3 10.4 (10.9) 0.4 6.7 6.3 5.1 Total (2.9) 6.0 6.2 (0.4) 1.8 2.6 (0.1) 2.2 Revenue Contribution (%) Americas 57.4 57.8 57.0 59.7 60.9 60.2 58.5 59.5 Europe 25.4 25.1 24.7 23.9 23.6 24.1 25.2 23.6 Asia-Pacific 17.2 17.1 18.3 16.4 15.5 15.7 16.3 16.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Operating Income ($ Mil.) Americas 346 403 394 432 511 531 343 350 Europe 155 164 182 178 168 181 159 142 Asia-Pacific 91 86 108 67 124 109 89 88 Total 592 652 684 677 802 821 590 580 Corporate Expenses (214) (271) (348) (343) (336) (507) (327) (310) Total 378 381 336 334 466 314 264 270 Operating Margins (%) Americas 14.7 15.8 14.5 15.7 17.9 18.5 17.4 18.3 Europe 14.9 14.8 15.5 16.2 15.2 15.8 18.8 18.8 Asia-Pacific 12.9 11.4 12.4 8.8 17.0 14.5 16.1 16.2 Total 14.4 14.8 14.4 14.7 17.1 17.3 17.5 18.1 Corporate Expenses (5.2) (6.1) (7.3) (7.4) (7.2) (10.7) (9.7) (9.7) Total 9.2 8.6 7.1 7.2 9.9 6.6 7.8 8.4 Operating Income Contribution (%) Americas 58.5 61.7 57.6 63.8 63.7 64.7 58.0 60.3 Europe 26.1 25.1 26.6 26.3 20.9 22.1 27.0 24.5 Asia-Pacific 15.4 13.2 15.8 9.9 15.4 13.2 15.0 15.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


Leveraged Finance


Pants, including jeans, casual pants and dress pants, represented 82% of total units sold, and men’s products accounted for 77% of total net sales in fiscal 2014.

The three key brands are Levi’s (85% of 2014 sales), Dockers (11%, sold mainly in the U.S.), and Signature by Levi Strauss & Co. (4%). The company launched Levi’s Revel for women line in fourth-quarter 2013, which is sold only in the company retail stores and not through wholesale. The Levi’s brand has been the main growth driver over the past five years, though the mix of the three brands was stable in 2014.

Growth Strategy Management has outlined three strategic initiatives that should provide some top-line support over time in the context of a mature business. The first is to drive the profitable core businesses and brands. The core businesses are the Levi’s men’s bottoms business globally, the Dockers brand in the U.S., and key global wholesale accounts, such as with J.C. Penney Company, Inc.

The second initiative is to expand beyond the core to build a more balanced portfolio. Businesses to expand include men’s tops and outerwear, women’s, and key emerging markets such as Russia, India and China. Levi’s new women’s line Revel, has supported growth, especially in the key emerging markets.

Finally, Levi plans to grow its omni-channel presence. The company’s own retail stores and online business accounted for 26% of sales YTD 2015, with multibrand retailers accounting for the remaining 74% of sales. Online sales were around 3% of total company sales. As the company grows its own online business, it is also working closely with retailer e-commerce teams to drive online sales.

Manufacturing/Distribution Levi is essentially a design and marketing firm. More than 95% of its products are made by contract manufacturers located in approximately 30 countries around the world. The distribution strategy is three-pronged, split among wholesale stores (department stores and chains); franchised and other stores (more than 1,400 international stores dedicated to Levi’s brands, plus

Sales Breakdown (%) 2008 2009 2010 2011 2012 2013 2014 Product Pants 85 85 84 83 86 85 82 Other 15 15 16 17 14 15 18 Total 100 100 100 100 100 100 100

Category Men’s 75 73 72 72 75 78 77 Other 25 27 28 28 25 22 23 Total 100 100 100 100 100 100 100

Brand Levi’s Brand 76 79 81 83 84 84 85 Dockers 18 16 15 12 12 12 11 Signature by Levi/Denizen 6 5 4 5 4 4 4 Total 100 100 100 100 100 100 100

Channel Online + Company Stores 8 11 15 18 21 22 25 Multibrand Retailers 92 89 85 82 79 78 75 Total 100 100 100 100 100 100 100


Leveraged Finance

Levi Strauss & Co. 205 January xx, 2016

400 dedicated shop-in-shops operated directly by Levi); and 565 company-operated stores in the Americas, Europe and Asia-Pacific as of end-2014. Sales to the top 10 wholesale customers accounted for 31% of total net revenues in 2014. No customer represented 10% or more of net revenues, although Kohl’s Corporation was the largest single customer in 2010, at nearly 10%.

2016 Outlook Fitch projects consolidated sales will be negative 3%–negative 4% in 2015 due to the strong dollar, but will grow at a low single-digit pace over the next 24 months and continue to be constrained by the difficult global consumer environment. Fitch believes EBITDA margins will continue to slowly expand over the near to medium term as cost savings from the global productivity initiative flow to the bottom line. FCF should consequently grow to approximately $200 million annually beginning in fiscal 2015 (ending November).

Fitch expects leverage to remain around 3.5x over the next 12 months due to EBITDA growth and minimal debt repayment, with modest improvement thereafter. However, should management use FCF to reduce debt levels, leverage could improve to approximately 3.0x.

Liquidity and Debt Structure Levi’s liquidity is adequate, supported by cash on hand of $273 million and revolver availability of $549 million as of Aug. 30, 2015. The $850 million facility is secured by U.S. and Canadian inventories, receivables and the U.S. Levi trademark, and benefits from upstream guarantees from the domestic operating companies.

The company amended and restated its credit facility in March 2014, extending the maturity through March 2019. The amendment also increased the amount secured by the U.S. Levi’s trademarks to $350 million from $250 million on the maximum availability of $850 million. The interest rate for borrowings under the credit facility was reduced to LIBOR plus 125 bps– 200 bps from LIBOR plus 150 bps–275 bps, depending on borrowing base availability, and the

Capital Structure ($ Mil., At Aug. 30, 2015) Description Amount (%) Secured $850 Mil. ABL Revolver due 3/21/19 114.0 9.4 Capital Leases 12.4 1.0 Total Secured 126.4 10.5 Unsecured Short-Term Borrowings (International Subsidiaries) 30.9 2.6 4.250% Yen Eurobonds due 11/22/16 33.1 2.7 6.875% Senior Notes due 5/1/22 532.4 44.0 5.000% Senior Notes due 5/1/25 486.4 40.2 Total Unsecured 1,082.8 89.5 Total 1,209.2 100.0


Scheduled Debt Maturities ($ Mil., At Aug. 30, 2015) 2016 33.1 2017 — 2018 2019 2020 Thereafter 1,018.8


Liquidity ($ Mil., At Aug. 30, 2015) Cash 272.6 Revolver Availability 549.3 Total 821.9 Note: Revolver availability is net of borrowings and outstanding letters of credit. Source: Company filings, Fitch Ratings.

Leveraged Finance


range of the rate for undrawn availability was reduced to 25 bps–30 bps from 37.5 bps– 50.0 bps, depending on the company’s credit ratings.

Availability is subject to a borrowing base, essentially defined as 95% of credit card receivables, plus 85% of net eligible accounts receivable, plus 50% of raw materials inventory, plus the trademark component, plus 95% of finished goods inventory, plus 100% of cash in the collateral account. The borrowing base totaled $724.4 million as of August 2015, which after netting $114 million of borrowings and $61.1 million for letters of credit, left net availability of $549.3 million.

Debt Structure The company has a total of $1.1 billion of senior notes due 2016–2025. As shown in the organizational structure chart in Appendix A, substantially all borrowing takes place at the Levi level. Levi is the parent and U.S. operating company. Borrowings under small, country-specific revolving credit facilities at subsidiary levels — totaling $31 million — are structurally senior to Levi’s unsecured obligations with respect to the assets at those subsidiaries. The maturity schedule is very manageable, with the nearest maturities being a $33 million yen-denominated eurobond due in November 2016.

The notes contain limitation-on-liens covenants that would permit secured debt up to approximately $2 billion — equal to 3.25x EBITDA plus 5% of consolidated net tangible assets — less the revolver commitment of $850 million, for a net amount of approximately $1.2 billion. The restricted payments basket in the note indentures is currently in excess of $700 million.

Pension Liability Levi has several noncontributory retirement plans covering mostly U.S.-based, eligible employees. The company was $411 million underfunded on a GAAP basis at end-2014, compared with a $331 million funding deficit at end-2013. The company contributed $20 million to the plans in 2014 and estimates it will contribute $33.5 million to its pension plans in 2015. The liability for other post-retirement benefits totaled $134.1 million at end-2014.

Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘BB’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes.

Fitch has assigned a ‘BBB–/RR1’ rating to the senior secured revolver, indicating outstanding recovery prospects (91%–100%) in the event of default. The unsecured eurobonds and senior notes are expected to have average recovery prospects (31%–50%) and are rated ‘BB/RR4’.


Leveraged Finance


Appendix A

Organizational Structure — Levi Strauss & Co.($ Mil., As of Aug. 30, 2015)

aDomestic subsidiaries hold primarily retail operations. IDR – Issuer Default Rating.Source: Company filings, Fitch Ratings.

Haas Family

Levi Strauss & Co.(U.S. Operating Company)

IDR — BB/Positive

Domestic Subsidiaries of LS & Co.a(Guarantors of Credit Facility) Levi Strauss International

Debt Issue$850 Mil. Credit Facility due 3/21/194.250% Unsecured Yen Eurobonds due 11/22/166.875% Senior Unsecured Notes due 5/1/225.000% Senior Unsecured Notes due 5/1/25Total

Amount 114 33

532486

1,165

RatingBBB–/RR1BB/RR4BB/RR4BB/RR4

Levi Strauss & Co. (Canada) Inc.(Co-Borrowers Under Credit Facility)

Other International Subsidiaries

Short-Term Borrowings

Amount 31

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary Levi Strauss & Co. Overview Borrower Levi Strauss & Co. (LS & Co.) and Levi Strauss & Co. (Canada) Inc. Document Date and Location Document dated Sept. 30, 2011 (Exhibit 10.1 to 8-K filed Sept. 30, 2011) Amended and Restated Credit Agreement dated March 21, 2014 (Exhibit 10.1 to 8-K filed March 24, 2014) Description of Debt Five-year senior secured revolving credit facility. Maturity Date March 21, 2019 Amount $850 Mil., of which $800 Mil. is denominated in U.S. dollars and available to the U.S. borrower (LS & Co.), and $50 Mil.

denominated in U.S. dollars or Canadian dollars, and available to either borrower. Up to $350 Mil. available for LOCs. Ranking Senior Secured. Security The facility is secured by first perfected security interest in A/R, goods and inventory in the U.S. and certain U.S. trademarks

($350 Mil.) associated with the Levi’s brand. Additionally, the obligations of LS Canada are secured by Canadian A/R, goods, inventory and other Canadian assets. The lien on the U.S. Levi’s trademarks and related intellectual property may be released at the company’s discretion, as long as it meets certain conditions; such release would reduce the borrowing base.

Guarantee Both borrowers are unconditionally guaranteed by LS & Co.’s domestic subsidiaries. The Canadian borrower is further guaranteed by LS & Co. and the Canadian subsidiaries of LS & Co (other than the Canadian borrower).

Financial Covenants Debt Restrictions Debt Incurrence Coverage Ratio Debt: None.

Notable Permitted Debt Incurrence: 1) Indebtedness of the U.S. Borrower and its Subsidiaries secured by Liens permitted by not to exceed $200 Mil.; 2) as long as the Minimum Intercompany Transaction Requirement is met (unless pro forma Availability is not less than the greater of (x) $75.0 Mil. and (y) 10% of the Line Cap, in which case, the Minimum Intercompany Transaction Requirement need not be met), indebtedness of the U.S. Borrower and its Subsidiaries to LSIFCS or any other Affiliate of the U.S. Borrower and LSIFCS or any other Affiliate of the U.S. Borrower providing services similar to the services provided by LSIFCS in the ordinary course of business; 3) indebtedness of the U.S. Borrower and its Subsidiaries of Real Estate Financing Transactions and Permitted Refinancing Indebtedness not to exceed $350 Mil.; 4) indebtedness of the U.S. Borrower and its Subsidiaries in the form of Equipment Financing Transactions and any Permitted Refinancing Indebtedness not to exceed $350 Mil.; 5) capital lease obligations not to exceed $100 Mil.; 6) indebtedness incurred for an acquisition under the U.S. borrower as long as pro forma FCCR or the FCCR ≥ 1.0X; 7) general purpose debt not to exceed the greater of a) $200 Mil. and b) 10% of consolidated net tangible assets of U.S. Borrower.

Limitation on Liens Liens on assets not securing debt are limited to the greater of (a) $1.6 Bil. minus the total revolving commitments, and (b) the amount that would cause the secured leverage ratio to exceed 3.25x. In addition, there is a general carveout of 5% of consolidated net tangible assets.

Limitation on Guarantees Governed by the limitation on investments covenant (see below). Acquisitions/Divestitures Change of Control (CoC) Prior to the first public equity offering, the permitted transferees cease to own a majority of the voting stock. After the first

public equity offering, a person or group obtains 35% voting power, and the permitted transferees own less than the other person or group.

M&A, Investments Restriction 1) Other Investments by the U.S. Borrower and its Subsidiaries in any Subsidiary of the U.S. Borrower not to exceed greater of a) $100 Mil. and b) 15% of Line Cap; 2) other investments by the U.S. Borrower and its Subsidiaries not to exceed $40 Mil., and pro forma LTM FCCR ≥ 1.0x.; 3) investments by the U.S. Borrower or any Domestic Subsidiary in Short-Term Investments not to exceed $10 Mil.

Sale of Assets Restriction 1) Standard limitations noted; 2) disposition of A/R and other payment obligations no to exceed $75 Mil; 3) limited to $50 Mil. per year, of which at least 75% received shall be cash; 4) sales of art and archived material limited to $15 Mil.


Notable Permitted RPs: 1) Purchase of equity interests from employees not to exceed $20 Mil. in any 12-month period; 2) permitted if there is no event of default, and on a pro forma basis after giving effect to such payment, average availability for the 30-day period immediately preceding the date of such transaction or payment (or declaration of payment) is the greater of $125 Mil. and 17.5% of the line cap.

Other Cross-Default Yes, exceeding $50 Mil. Cross-Acceleration No. MAC Clause The company must represent before each borrowing that there has been no material adverse change. Equity Cure None. Covenant Suspension None. Required Lenders/Voting Rights > 50% of total commitments or loans outstanding.

LSIFCS – Levi Strauss International Group Finance Coordination Services. MAC − Material adverse change. A/R − Accounts receivable. FCCR – Fixed-charge coverage ratio. Continued on next page. Source: Company filings, Fitch Ratings.


http://www.sec.gov/Archives/edgar/data/94845/000009484514000016/exhibit101-amendedandresta.htm

Leveraged Finance


Bank Agreement Covenant Summary Levi Strauss & Co. (Continued) Financial Covenants Maintenance Incurrence Leverage (Maximum) None. Coverage (Minimum) Fixed-Charge Coverage Ratio (FCCR) FCCR ≥ 1.0x when revolver availability is less than the greater of $65 Mil. or 10% of the line cap (the lesser of the aggregate

commitments and the borrowing base). Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment None. Amortization Schedule None. Callability/Optional Prepayment Voluntary prepayments are permitted. Pricing Coupon Type/Index Floating based off LIBOR Pricing Grid Average Availability Applicable Margin Trademark/Non-Trademark Loans ≥ 66.7% of line cap

< 66.7% but ≥ 33.3% of line cap < 33.3% of line cap

125 bps/125 bps 150 bps/150 bps 200 bps/175 bps


Leveraged Finance


Appendix C

Bond Covenant Summary Levi Strauss & Co. Overview Issuer Levi Strauss & Co. Document Date and Location Indenture dated May 8, 2012

(Exhibit 4.1 to 8-K filed May 11, 2012) Indenture dated Nov. 22, 1996 (Exhibit 4.2 to S-4 filed May 4, 2000)

Indenture dated April 27, 2015 (Exhibit 4.1 to 8-K filed April 27, 2015)

Description of Debt 6.875% senior notes JPY20 Bil. 4.25% bonds 5.000% senior notes Maturity Date May 1, 2022 Nov. 22, 2016 May 1, 2025 Amount USD535 Mil. JPY20 Bil. USD500 Mil. Ranking Senior Security Unsecured Guarantee None. Financial Covenants None. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Pro forma

FCCR > 2.0x. Notable Permitted Debt: 1) Debt incurred under any credit facilities at the greater of USD1.6 Bil. and 85% of A/R plus 60% of inventory; 2) general debt amounting to the greater of USD150 Mil. and 7.5% of Consolidated Net Tangible Assets; 3) debt of foreign subs not to exceed USD150 Mil.; 4) debt incurred for acquisition as long as pro forma FCCR ≥1.75x.

Coverage Ratio Debt: None. Notable Permitted Debt: None.

Coverage Ratio Debt: Pro forma FCCR > 2.0x Notable Permitted Debt: 1) Debt incurred under any credit facilities at the greater of USD 1.9 Bil. and 85% of A/R plus 60% of inventory; 2) general debt amounting to the greater of USD200 Mil. and 12% of Consolidated Net Tangible Assets; 3) debt of foreign subs not to exceed USD200 Mil.; 4) debt incurred for acquisition as long as pro form a FCCR ≥1.75x.

Limitation on Liens Liens are subject to a maximum Consolidated Secured Leverage Ratio of 3.5x plus liens on assets up to the greater of (USD125 Mil. and 5% of Consolidated Net Tangible Assets) plus any additional amount permitted by credit facilities.

Notes shall be equally and ratably secured if liens on principal properties (BV > 1% of CNTA) exceed 10% of Consolidated Net Tangible Assets.

Liens are subject to a maximum Consolidated Secured Leverage Ratio of 3.5x + liens on assets up to the greater of (USD250 Mil. and 15% of Consolidated Net Tangible Assets) + any additional amount permitted by credit facilities.

Limitation on Guarantees None. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of majority of

voting stock or gaining majority control of the board of directors, and would trigger a put at 101.

None. CoC is defined as acquisition of majority of voting stock or gaining majority control of the board of directors, and would trigger a put at 101.

M&A, Investments Restriction Merger or the transfer of all or substantially all property is allowed if the surviving entity is LS&Co or if the new entity is organized under U.S. laws, provided no EoD. Permitted investments limited to the greater of USD 180 Mil. and 7.5% of consolidated net tangible assets.

Merger or the transfer of all or substantially all property is allowed if the surviving entity is LS&Co or if the new entity is organized under U.S. laws, provided no EoD.

Merger or the transfer of all or substantially all property is allowed if the surviving entity is LS&Co or if the new entity is organized under U.S. laws, provided no EoD.

Sale of Assets Restriction Asset sales permitted provided they are at FMV, with at least 75% of consideration in cash (or purchaser assumes company’s liabilities). The proceeds may be used to repay senior debt or reinvest in business within 360 days. Excess proceeds above USD50 Mil. must be used to redeem the notes. Sale leasebacks need to meet the limitations on liens, debt incurrence and asset disposition.

Sale leasebacks subject to lien restriction. Asset sales permitted provided they are at FMV, with at least 75% of consideration in cash (or purchaser assumes company’s liabilities). The proceeds may be used to repay senior debt or reinvest in business within 360 days. Excess proceeds above USD100 Mil. must be used to redeem the notes. Sale leasebacks need to meet the limitations on liens, debt incurrence and asset disposition.

FCCR − Fixed-charge coverage ratio. A/R − Accounts receivable. BV – Book value. CNTA – Consolidated net tangible assets. EoD − Event of default. FMV − Fair market value. MW − Make-whole. MAC − Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.



http://www.sec.gov/Archives/edgar/data/94845/000095010900001806/0000950109-00-001806.txt




Leveraged Finance


Bond Covenant Summary Levi Strauss & Co. (Continued) Restricted Payments Restricted Payments (RP) RP Basket: 50% of consolidated net

income plus 100% of proceeds from equity issuance. Notable Permitted RPs: 1) USD617 Mil. (RP availability under 7 5/8% notes due 2020); 2) annual share repurchases of up to USD25 Mil. or USD50 Mil. including carryover; 3) general purpose RPs of up to USD75 Mil.; 4) annual dividend following an IPO limited to 6% of IPO proceeds (included in RP basket).

RP Basket: None. Notable Permitted RPs: None.

RP Basket: 50% of consolidated net income + 100% of proceeds from equity issuance. Subject to FCCR > 2.0x Notable Permitted RPs: 1) USD30 Mil. in any fiscal year or USD60 Mil. including carryover for share repurchases; 2) general purpose of USD150 Mil.; 3) additional payment allowed as long as consolidated total leverage ratio is less than 2.5x

Other Cross-Default No. No. No. Cross-Acceleration Yes, exceeding USD50 Mil. Yes, exceeding USD25 Mil. Yes, exceeding USD50 Mil. MAC Clause None. Callability/Equity Clawback 2017 103.438%

2018 102.292% 2019 101.146% 2020 and thereafter 100.000%

Redeemable at the greater of par and or MW + 25 bps thereafter.

2020 102.500% 2021 101.667% 2022 100.833% 2023 and thereafter 100.000%.

Covenant Suspension Covenants related to debt incurrence, RP and asset sales are suspended if upgraded to investment grade by both Moody’s and S&P.

— Covenants related to debt incurrence, RP and asset sales are suspended if upgraded to investment grade by both Moody’s and S&P.

FCCR − Fixed-charge coverage ratio. A/R − Accounts receivable.BV – Book value. CNTA – Consolidated net tangible assets. EoD − Event of default. FMV − Fair market value. MW − Make-whole. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix D

Financial Summary — Levi Strauss & Co. 12 Months Three Months



LTM Ended

($ Mil.) 11/27/11 11/25/12 8/25/13 11/24/13 11/24/13 2/23/14 5/25/14 8/24/14 11/30/14 11/30/14 3/1/15 5/31/15 8/30/15 8/30/15 Profitability Operating EBITDAa 462.6 462.6 150.5 97.4 589.5 180.9 113.7 139.2 161.2 594.9 149.9 91.2 148.8 551.0 Operating EBITDA Margin (%) 9.9 10.0 13.2 7.5 12.6 16.0 10.5 12.1 11.6 12.5 14.2 9.0 13.0 12.0 FFO Return on Adjusted Capital (%)b 15.0 18.2 23.4 21.9 21.9 21.1 19.5 18.8 20.9 20.9 18.3 16.7 17.2 17.2 FCF Margin (%) (3.2) 9.3 (0.1) 8.4 6.3 1.3 (0.8) (0.5) 9.3 2.7 1.6 (0.7) (1.4) 2.7 Coverages (x) FFO Interest Coverage 2.4 2.9 4.4 3.8 4.1 3.3 2.1 4.5 5.1 3.7 0.3 1.6 8.5 3.6 Operating EBITDA/Gross Interest Expense 3.5 3.4 4.9 2.8 4.5 5.7 3.6 5.1 5.7 5.0 6.4 4.2 8.7 6.1 FFO Fixed-Charge Coverage 1.6 1.8 2.3 2.2 2.3 1.9 1.4 2.3 2.5 2.0 0.8 1.2 3.0 1.8 FCF Debt-Service Coverageb (0.1) 2.9 2.4 2.5 2.5 2.1 0.9 0.9 1.0 1.0 1.7 1.0 0.9 0.9 Cash Flow from Operations/Capex 0.0 6.3 0.9 4.8 4.5 1.8 2.5 0.6 6.6 3.2 1.8 3.0 0.3 2.9 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA 0.2 — — — — — — — — — — — — — Long-Term Secured Debt/FFO 0.6 — — — — — — — — — — — — — Total Debt with Equity Credit/ Operating EBITDA 4.3 3.7 2.5 2.6 2.6 2.8 2.7 2.7 2.1 2.1 2.0 2.2 2.2 2.2 FFO-Adjusted Leverage 7.0 5.7 4.1 4.3 4.3 4.4 4.7 4.8 4.4 4.4 5.1 5.5 5.3 5.3 Total Adjusted Debt/Operating EBITDAR 5.3 5.0 3.8 4.0 4.0 4.1 4.1 4.1 3.5 3.5 3.5 3.7 3.7 3.7 FCF/Total Adjusted Debt (%) (4.4) 13.3 8.7 9.5 9.5 6.9 3.8 3.7 4.7 4.7 4.9 4.8 4.5 4.5 Balance Sheet Short-Term Debt 156.5 61.5 39.0 42.5 42.5 35.5 137.9 130.2 131.5 131.5 33.8 140.3 144.9 144.9 Long-Term Senior Secured Debt 100.0 — — — — — — — — — — — — — Long-Term Senior Unsecured Debt 1,719.6 1,669.7 1,512.2 1,514.3 1,514.3 1,521.0 1,313.9 1,307.2 1,104.1 1,104.1 1,103.0 1,063.1 1,064.3 1,064.3 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 1,976.1 1,731.2 1,551.2 1,556.7 1,556.7 1,556.5 1,451.9 1,437.4 1,235.6 1,235.6 1,136.9 1,203.4 1,209.3 1,209.3 Off-Balance Sheet Debtc 1,396.8 1,488.8 1,556.0 1,556.0 1,556.0 1,544.0 1,544.0 1,544.0 1,544.0 1,544.0 1,544.0 1,544.0 1,544.0 1,544.0 Total Adjusted Debt with Equity Credit 3,372.9 3,220.0 3,107.2 3,112.7 3,112.7 3,100.5 2,995.9 2,981.4 2,779.6 2,779.6 2,680.9 2,747.4 2,753.3 2,753.3 Cash Flow Funds From Operations 180.0 251.1 105.3 97.6 406.1 73.3 34.7 96.0 115.4 319.3 (16.5) 12.5 129.0 240.5 Change in Working Capital (178.2) 279.8 (85.7) 39.8 5.1 (37.6) 2.1 (87.1) 36.2 (86.4) 54.1 52.4 (121.2) 21.5 Cash Flow from Operations 1.8 531.0 19.6 137.5 411.3 35.7 36.7 8.9 151.6 232.9 37.6 64.9 7.8 262.0 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (130.6) (83.9) (21.1) (28.8) (91.8) (20.4) (14.9) (15.1) (22.9) (73.4) (21.2) (22.0) (23.2) (89.3) Dividends (20.0) (20.0) — — (25.1) — (30.0) — — (30.0) — (50.0) — (50.0) FCF (148.8) 427.1 (1.5) 108.7 294.4 15.2 (8.1) (6.3) 128.7 129.5 16.5 (7.1) (15.5) 122.6 Net Acquisitions and Divestitures 0.2 0.6 2.0 0.1 2.3 — 1.4 (0.2) 6.9 8.0 — 8.5 (1.8) 13.6 Net Debt Proceeds 109.3 (223.7) (9.4) 1.5 (198.5) (7.5) (106.1) (7.1) (184.8) (305.6) (97.3) 84.6 4.6 (193.0) Net Equity Proceeds (0.5) (0.6) — (5.4) (5.7) — (4.7) (0.5) (0.1) (5.3) — (2.2) (0.1) (2.4) Other (Investing and Financing) (25.4) (1.9) 1.4 2.0 (9.3) 5.9 0.8 (4.7) (19.7) (17.7) (14.7) (2.0) 0.7 (35.6) Total Change in Cash (65.2) 201.6 (7.5) 106.9 83.1 13.6 (116.8) (18.7) (69.1) 191.0) 95.5) 81.9 (12.1) (94.8) Ending Cash and Securities Balance 204.5 406.1 382.3 489.3 489.3 502.8 386.1 367.4 298.3 298.3 202.7 284.6 272.6 272.6 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — Levi Strauss & Co. (Continued) 12 Months Three Months



LTM Ended

($ Mil.) 11/27/11 11/25/12 8/25/13 11/24/13 11/24/13 2/23/14 5/25/14 8/24/14 11/30/14 11/30/14 3/1/15 5/31/15 8/30/15 8/30/15 Income Statement Revenue 4,674.4 4,610.2 1,141.3 1,294.8 4,681.7 1,130.0 1,081.8 1,154.1 1,388.0 4,754.0 1,055.1 1,012.2 1,142.0 4,597.3 Revenue Growth (%) 6.0 (1.4) 3.7 (0.2) 1.6 (1.5) (1.6) 1.1 7.2 1.5 (6.6) (6.4) (1.1) (1.4) Operating EBIT 344.8 339.9 121.1 68.3 473.8 153.9 87.2 111.5 132.8 485.4 123.4 67.2 123.8 447.2 Gross Interest Expense 132.0 134.7 30.9 34.3 130.2 31.8 31.3 27.2 28.2 118.5 23.3 21.9 17.1 90.5 Sector-Specific Data Same-Store Sales (%) — — — — — — — — — — — — — — No. of Stores — — — — — — — — — — — — — — Gross Margin (%) 47.2 47.7 50.2 49.2 50.2 51.0 49.0 48.7 49.0 49.4 50.9 49.4 50.2 49.8 SG&A/Revenues (%) 41.7 40.3 39.6 43.9 40.1 37.4 41.0 39.1 39.4 39.2 39.2 42.8 39.4 40.1 Operating EBIT Margin (%) 7.4 7.4 10.6 5.3 10.1 13.6 8.1 9.7 9.6 10.2 11.7 6.6 10.8 9.7

Operating EBITDAR 637.2 648.7 199.1 146.0 784.0 229.1 161.9 187.5 209.4 787.9 198.1 139.5 197.0 1,322.5 Operating EBITDAR Margin (%) 13.6 14.1 17.4 11.3 16.7 20.3 15.0 16.2 15.1 16.6 18.8 13.8 17.3 28.8 Operating EBITDAR/(Interest + Rent) (x)b 2.1 2.0 2.5 1.8 2.4 2.9 2.0 2.5 2.7 2.5 2.8 2.0 3.0 2.6 Inventory Turnover (x)b 4.1 4.3 3.9 4.2 4.2 3.8 3.8 3.5 4.0 4.0 3.8 3.6 3.3 3.3 Accounts Payable Turnover (x)b 11.8 11.2 9.7 9.7 9.7 9.4 10.4 9.2 9.8 9.8 10.6 9.7 8.5 8.5 Return on Invested Capital (%)b 16.1 16.8 21.5 20.1 20.1 19.2 19.2 18.7 22.5 22.5 22.4 21.0 21.1 21.1 Return on Assets (%)b 4.2 4.5 8.4 7.3 7.3 5.5 4.5 4.2 3.6 3.6 3.5 3.5 3.6 3.6 Capex/Depreciation (%)b 110.9 68.4 72.0 98.8 79.3 75.8 56.3 54.6 80.9 67.0 79.9 91.7 93.1 93.1 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

The Men’s Wearhouse, Inc. Credit Profile

Credit Profile Summary Jos. A. Bank’s Difficult Transition: After acquiring Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) in June 2014, management’s strategy to improve margins by reducing promotions has resulted in weak comparable store sales (comps). Comps were negative 15% in third-quarter 2015, with approximately negative 30% expected in fourth-quarter 2015. While gross margin is increasing due to higher prices, traffic declines have been more than expected, and Fitch Ratings believes negative trends will continue until the company cycles through the reductions in mid-2016.

Sales Obscure Acquisition Synergies: The Men’s Wearhouse, Inc. (Men’s Wearhouse) has targeted $100 million in cost synergies from Jos. A. Bank, generating $75 million (annualized) by the end of 2015. The company also expects combined merchandising efforts to drive $50 million in EBITDA through additional revenue, though current sales trends cast doubt on this opportunity. Fitch expects 2017 EBITDA to be essentially flat to the pro forma combined EBITDA of approximately $415 million in 2013, versus management’s targeted EBITDA level of $700 million.

Reasonably Positioned Long Term: The company operates two of the only nationally recognized men’s-only specialty apparel retailers, and is focused on categories with less short-term fashion risk, such as suiting and officewear. Given heightened competition and general lack of new products in fashion, Fitch believes these categories are among the most stable in apparel. Men’s Wearhouse differentiates itself within the sector through national advertising, exclusive brands and investments in services businesses (tailoring, formalwear rental, etc.).

Positive Cash and Comfortable Liquidity: Men’s Wearhouse had $53.7 million of cash on hand and $437 million of credit facility availability as of Oct. 31, 2015. FCF after dividends has historically been positive — around $45 million–$65 million in recent years — but was negative $36 million in fiscal 2014 due to the Jos. A. Bank integration. Fitch expects Men’s Wearhouse to generate $20 million–$50 million in FCF in 2015 and 2016 given current operational challenges, increasing to around $70 million on potential EBITDA improvement in 2017.

Leverage to Remain Near 6.0x: To fund the Jos. A. Bank acquisition, Men’s Wearhouse entered into a $1.1 billion term loan facility ($400 million of which was refinanced in April 2015), issued $600 million of 7.0% senior unsecured notes and borrowed $340 million under its new asset-backed loan (ABL) facility. Lease-adjusted pro forma leverage consequently rose to 5.5x from 3.3x in 2014. Fitch expects leverage to increase to 5.9x in 2015 on Jos. A. Bank’s sales decline and then decline modestly over the next 24 months, versus prior expectations of leverage trending toward 5.0x.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers are centered on a turnaround at Jos. A. Bank yielding sustained top-line growth in the low single digits and EBITDA growth in the midsingle digits, driving adjusted leverage below the mid-5.0x range.

Negative Drivers: Negative credit profile drivers would include continued negative Jos. A. Bank trends beyond 2016 leading to further EBITDA declines and persistently negative FCF.



Credit Opinion The Men’s Wearhouse, Inc. carries a ‘b*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data The Men’s Wearhouse, Inc.

($ Mil.) FYE

1/31/15a LTM

10/31/15 Total Revenue 3,596.8 3,599.0 EBITDA 414.0 406.8 EBITDA Margin (%) 11.5 11.3 FCF (36.5) 2.6 Total Adjusted Debt 3,568.0 3,537.0 Total Adjusted Debt/EBITDAR (x)a 5.6 5.5 EBITDAR/ (Interest + Rent) (x) 2.1 1.9 No. of Stores 1,758 1,748 aPro forma to include Jos A. Bank for a full year.




Leveraged Finance


Business Profile Following its 2014 acquisition of Jos. A. Bank, Men’s Wearhouse is the third largest retailer in the U.S. men’s apparel space, trailing Macy’s Inc. and Kohl’s Corp., and with similar market share as J. C. Penney Company, Inc. The company operated 1,748 stores as of Oct. 31, 2015, primarily under the Men’s Wearhouse and Jos. A. Bank brands. The company is uniquely positioned as a retailer of men’s apparel only, limiting exposure to fashion trends, which are significantly more volatile in women’s fashion.

The company’s revenue mix is 37% tailored clothing — including suits, sport coats and slacks — and 30% nontailored clothing. Tuxedo rentals represent 17% of sales, sales to corporate accounts generate 10%, and alterations and other services make up the remaining 6%. Approximately half of the company’s assortment is replenishment product, with the remainder fashion merchandise.

The company operates under several brands, including Men’s Wearhouse and Men’s Wearhouse and Tux (49% of total sales), Jos. A. Bank (27%), K&G (9%) and Moore’s (6%). All stores are located in the U.S. except the Moore’s The Suit People Inc. (Moore’s) chain, which is in Canada. The company’s exposure to traditional enclosed malls is limited, with approximately one-third of units in lifestyle/power centers and only 13% and 17% of Men’s Wearhouse and Jos. A. Bank units in malls, respectively. The company competes with a variety of men’s apparel businesses, including department stores, other specialty stores, off-price retailers and online-only retailers.

The company differentiates itself in a number of ways. It operates as a portfolio of men’s-only retailers, which is unique among its competitive set. It also offers a robust suite of services, including formalwear rentals and tailoring, and has developed key strategic partnerships with wedding-related brands to build its rental business. The company’s merchandise is primarily exclusive to its brands, with approximately 50% of Men’s Wearhouse and nearly 100% of Jos. A. Bank inventory unavailable to customers elsewhere. To support this differentiating factor, Men’s Wearhouse purchased the Joseph Abboud brand for $97.5 million in cash, using cash

Fitch Base Case Assumptions — The Men’s Wearhouse, Inc. ($ Mil.) 2014Aa 2015F 2016F 2017F Comments Revenue 3,597 3,523 3,531 3,606 — Revenue Growth (%)b 2.6 (2.1) 0.2 2.1 — Retail Clothing 2,710 2,621 2,586 2,621 2016 growth assumed to be 2% at Men’s

Wearhouse and negative 8% at Jos. A. Bank, with 1%–3% growth at both brands thereafter.

Tuxedo Rental 443 441 459 477 — Alteration and Other 187 214 229 245 — Corporate Apparel 257 253 258 263 — EBITDA 414 376 387 423 — EBITDA Margin (%) 11.5 10.7 10.9 11.7 EBITDA projected to stabilize in 2016 on

integration synergies, mitigated by continued weakness at Jos. A. Bank.

Working Capital Change (29) (42) (2) (19) — Cash Flow from Operations 95 188 210 237 — Capex (96) (130) (130) (130) — Dividends (35) (35) (35) (35) — FCF (36) 24 45 72 — Share Repurchases — — — — — Total Debt 1,687 1,676 1,665 1,654 — Total Adjusted Debtc 3,568 3,753 3,804 3.857 — Adjusted Debt/EBITDAR (x) 5.7 5.9 5.8 5.5 — aIncome statement items pro forma to include a full year of Jos A. Bank. bGiven lack of square footage growth, comparable store sales growth approximates revenue growth. cTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


on hand and revolver borrowings, in 2013 to relaunch as an exclusive brand for Men’s Wearhouse and Jos. A. Bank. The company also has exclusive brand right offerings, including Pronto Uomo and Vera Wang for tuxedos.

Segment trends have somewhat diverged for Men’s Wearhouse’s primary two brands in recent years. Men’s Wearhouse brand comps have been positive since 2010, with 2015 comps of 5.0% through the third quarter, on top of 3.1% comps in the same period the prior year. Jos. A. Bank has reported negative comps for several years, including negative 2.5% in 2014. The opportunity to use Men’s Wearhouse’s competitive advantages to reverse Jos. A. Bank’s revenue slide was a key reason behind the 2014 acquisition. However, recent promotional changes have only worsened Jos. A. Bank’s revenue trend.

Jos. A. Bank Acquisition Men’s Wearhouse purchased Jos. A. Bank in 2014 after protracted negotiations for approximately $1.8 billion in cash, or 10.0x LTM EBITDA. At $1 billion of sales in 2013, Jos. A. Bank added over 40% to Men’s Wearhouse’s $2.5 billion revenue base. To fund the Jos. A. Bank acquisition, Men’s Wearhouse entered into a $1.1 billion term loan facility ($400 million of which was refinanced in April 2015), issued $600 million of 7.0% senior unsecured notes and borrowed $340 million under its new ABL facility, which was later repaid in full. The strategy behind the acquisition was to combine two similar concepts, allowing operational synergies in merchandising and marketing to generate approximately $50 million in EBITDA through sales acceleration.

The company has also targeted $100 million in annualized cost synergies, generating $35 million in synergies in 2014 and an expected annualized run rate of $75 million at the end of fiscal 2015. Cost synergies are targeted in a number of functional areas across the company. The company expects to save approximately $46 million in cost of goods sold through supplier consolidation, leveraging company size and sharing best practices. Men’s Wearhouse projects approximately $30 million in savings from reducing spend in duplicative departments, including finance, legal and HR, as well as centralized nonmerchandise purchasing. The company expects approximately $14 million in savings from centralizing tailoring operations and insourcing tux rentals. Finally, the company projects approximately $14 million in marketing savings from leveraging company scale in advertising purchases and sharing best practices.

Together with accelerated revenue growth, these synergies were targeted to drive fiscal 2017 sales of $3.7 billion and EBITDA over $630 million, versus 2013 pro forma sales and EBITDA of approximately $3.5 billion and $400 million, respectively.

As part of the strategy to improve gross margins and wean customers off purchasing only during periods of promotional activity, management significantly reduced the number of events at Jos. A. Bank in 2015 where customers could purchase one item and receive two or three for free. This strategy has negatively affected Jos. A. Bank’s sales significantly more than anticipated, with comps running down 15% in the third quarter of 2015 despite continued positive comps at the Men’s Wearhouse brand. Fitch expects comps to remain in the negative double-digit range at least through mid-2016, as the company cycles through a year of the reduced event strategy. Fitch consequently sees 2017 EBITDA reaching only the low $400 million range, modestly above 2013 pro forma combined EBITDA.

Leveraged Finance


2016 Outlook Fitch expects pro forma 2015 sales for the combined company to decline 2% on weakness at Jos. A. Bank, though reported sales should increase around 8% as the company annualizes the Jos. A. Bank acquisition. EBITDA is expected to be around $375 million in 2015 from pro forma combined EBITDA of $414 million in 2014, due to sales weakness at the Jos. A. Bank brand. This EBITDA estimate assumes the company hits its targeted $75 million of synergies on a run-rate basis by the end of the year.

EBITDA is projected to be slightly higher in 2016, as the continued Jos. A. Bank sales decline and EBITDA deleverage is mitigated by modestly positive comps at the Men’s Wearhouse brand and the realization of cost synergies. EBITDA growth should accelerate in 2017 to reach $415 million–$425 million, assuming Jos. A. Bank’s sales rebound to slightly positive growth. This is well short of management’s 2014 Analyst Day expectation of reaching over $630 million in annual EBITDA by 2017.

Store Formats Overview Division

No. Storesa

Avg. Store Size (Sq Ft) Description Target Customer

Men’s Wearhouse 709 5,640 Broad selection of exclusive and non-exclusive merchandise at regular and sale prices, including suits and suit separates (43% of total assortment), dress shirts and pants (18%), shoes and accessories (18%), sportswear and sports coats (20%), and overcoats. Located in neighborhood, power and lifestyle centers.

Male consumers of ages 25–55 who are style conscious and contemporary, with an annual household income of $75,000.

Men’s Wearhouse and Tuxb

195

Jos A Bank 633 4,601 Exclusive brand name only; about one-third of the stores are located in lifestyle/power centers; another one-third in neighborhood centers, malls and on the street; the rest are positioned in strip and power centers.

Traditional and conservative men aged 35–59, with an annual household income of $100,000–$125,000.

Moores 123 6,301 Located in Canada, Moores offers the same broad selection of assortments and targets similar customers as Men's Wearhouse. Stores are primarily located in regional strip and specialty retail shopping centers.

Target customer is similar to Men's Wearhouse.

K&G 88 23,717 Operates in a superstore format with a broad offering across major categories. K&G carries apparel and accessories comparable in quality to traditional department stores, at up to a 70% discount to the department stores prices.

K&G targets a more price-sensitive consumer than Men's Wearhouse or Moores.

Twin Hill (U.S.)/ Alexandra and Yiffy (U.K.)

— — These labels offer corporate clothing uniforms and work-wear to workforces through managed corporate accounts, catalogs and the Internet. Alexandra and Yiffy is 86% owned by Men’s Wearhouse.

Target customers are corporations and businesses with uniformed staff.

aAs of Oct. 31, 2015. bMen’s Wearhouse signed a 10-year agreement with Macy’s in June 2015 to operate men’s tuxedo rental shops inside 300 Macy’s stores. The company operated 12 of these stores as of Oct. 31, 2015. Sq ft – Square feet. Source: Company filings.

Leveraged Finance


Segment Data

2007 2008 2009 2010 2011 2012 2013 2014a LTM 3Q15 Sales by Store ($ Mil.) Men’s Wearhouseb 1,413 1,322 1,282 1,346 1,472 1,581 1,606 1,687 1,771 Moores 250 230 222 247 268 274 254 258 232 K&G 408 376 370 360 375 366 336 334 340 MW Cleaners 22 23 22 23 25 28 30 32 33 Jos A Bank 604 696 770 858 980 1,049 1,032 1,028 974 Total Retail Sales 2,696 2,647 2,666 2,834 3,119 3,298 3,258 3,339 3,350 Twin Hill 20 21 13 21 25 30 38 41 40 Dimensions and Alexandra (U.K.) — — — 105 218 210 209 217 209 Total Corporate Apparel 20 21 13 126 244 239 247 257 248 Total Net Sales 2,113 1,972 1,910 2,103 2,383 2,488 2,473 3,253 3,599

YoY Growth (%) Men’s Wearhouseb 17.0 (6.5) (3.0) 5.0 9.3 7.4 1.6 5.0 —

Moores 9.2 (7.8) (3.6) 11.1 8.5 2.3 (7.2) 1.5 — K&G (2.5) (7.8) (1.6) (2.7) 4.1 (2.4) (8.1) (0.6 — MW Cleaners 13.4 5.1 (2.6) 6.2 5.4 12.6 6.5 7.8 — Jos A Bank 10.6 15.2 10.6 11.4 14.2 7.0 (1.6) (0.4) — Total Retail Sales 11.4 (1.8) 0.7 6.3 10.0 5.7 (1.2) 2.5 — Twin Hill 188.4 6.3 (37.3) 59.3 18.3 16.2 27.7 7.6 — Dimensions and Alexandra (U.K.) — — — — 108.3 (3.9) (0.4) 3.7 — Total Corporate Apparel 188.4 6.3 (37.3) 837.4 93.0 (1.8) 3.1 4.3 — Total Net Sales 12.3 (6.6) (3.2) 10.1 13.3 4.4 (0.6) 31.5 —

Contribution of Sales by Store (%) Men’s Wearhouseb 66.9 67.0 67.1 64.0 61.8 63.5 64.9 51.9 49.2

Moores 11.8 11.7 11.6 11.7 11.2 11.0 10.3 7.9 6.5 K&G 19.3 19.1 19.4 17.1 15.7 14.7 13.6 10.3 9.4 MW Cleaners 1.0 1.1 1.2 1.1 1.0 1.1 1.2 1.0 0.9 Jos A Bank 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 27.1 Total Retail Sales 99.0 98.9 99.3 94.0 89.8 90.4 90.0 71.0 93.1 Twin Hill 1.0 1.1 0.7 1.0 1.1 1.2 1.5 1.2 1.1 Dimensions and Alexandra (U.K.) 0.0 0.0 0.0 5.0 9.2 8.4 8.5 6.7 5.8 Total Corporate Apparel 1.0 1.1 0.7 6.0 10.2 9.6 10.0 7.9 6.9 Total Net Sales 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Comps (%) Men’s Wearhouse (0.4) (9.0) (4.0) 4.7 9.1 4.8 0.7 3.9 5.0

Moores (10.9) (11.7) (0.9) 2.2 4.5 1.5 (4.1) 8.6 (1.4) K&G 1.5 (5.6) (1.9) (1.5) 3.6 (4.3) (5.5) 3.7 6.0 Jos A Bank 3.8 8.9 6.3 7.0 7.6 (0.5) (5.8) (2.5) (8.6)

Segment Sales Mix (%) Retail

Men’s Tailored Clothing Product 40.1 39.5 39.9 37.6 37.1 37.0 36.6 38.6 38.9 Men’s Nontailored Clothing Product 34.1 32.9 31.3 29.1 27.6 27.8 27.8 31.5 31.2 Ladies Clothing Product 3.2 3.3 3.9 3.7 3.3 3.3 3.0 2.3 2.3 Other — — — — — — 0.1 0.3 0.3 Total Retail 77.4 75.8 75.1 70.4 68.0 68.0 67.4 72.7 72.7 Tuxedo Rental Services 15.4 16.7 17.5 17.3 15.8 16.3 16.7 13.6 13.7 Alteration and Other

Alteration Services 5.2 5.3 5.6 5.1 5.0 5.0 4.7 4.8 4.8 Retail Dry Cleaning Services 1.0 1.1 1.2 1.1 1.0 1.1 1.2 1.0 1.0 Total Alteration and Other 6.2 6.4 6.7 6.3 6.0 6.1 5.9 5.7 5.8 Corporate Apparel Clothing Product 1.0 1.1 0.7 6.0 10.2 9.6 10.0 7.9 7.7 Total Net Sales 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 aIncludes Jos A. Bank beginning mid 2Q. bIncludes Men’s Wearhouse, Men’s Wearhouse and Tux Stores and JA Holding. Comps – Comparable store sales. N.A. – Not available. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


FCF is expected to be positive $24 million in 2015, versus negative $37 million in 2014, which was affected by increased inventory levels from the Jos. A. Bank acquisition. Capex is projected to be $130 million annually, higher than the reported $96 million in 2014, to support store remodels, IT investments and other projects for the combined organization.

FCF is projected at around $40 million and $70 million in 2016 and 2017, respectively. Management had previously indicated an intention to pay down $75 million of its term loan in 2015, but has decided not to make this payment due to operational challenges. Fitch notes the company does not have a significant maturity until 2021.

Lease-adjusted leverage is anticipated to be 5.9x in 2015, versus 5.7x in 2014 and 3.3x in 2013, prior to the incremental debt related to the Jos. A. Bank acquisition. Fitch expects leverage to modestly improve to around mid-5.0x over the next 24–36 months as EBITDA improves beginning 2017.

Liquidity and Debt Structure Men’s Wearhouse had $53.7 million of cash on hand as of Oct. 31, 2015, and $436.5 million available under the revolving credit facility. The company entered into a term loan agreement in June 2014, which provides for a $1 billion senior secured term loan and a $500 million asset-based revolving credit agreement that may increase to $650 million. The term loan matures in 2021 and the revolver matures in 2019. The company also issued $600 million of 7.00% senior unsecured notes due 2022.

Proceeds from the $1.1 billion term loan, $600 million of senior unsecured notes, and $340 million drawn on the ABL facility were used to pay $1.8 million for the acquisition of Jos. A. Bank and to repay Men’s Wearhouse’s existing $95 million term loan. ABL facility borrowings were repaid in full post acquisition, using Jos. A. Bank’s cash on hand.

The ABL facility and term loan are secured on a senior basis by a first-priority lien on substantially all of the assets of the company, certain of its U.S. subsidiaries, and in the case of the ABL Facility, Moore’s (the Canadian operations). Moore’s is a co-borrower on the ABL facility, and the ABL facility has priority payment over the term loan.

Segment Data (Continued)

2007 2008 2009 2010 2011 2012 2013 2014a LTM 3Q15 Geographic Sales

U.S. — 1,742 1,688 1,751 1,897 2,004 2,010 2,777 N.A. Canada — 230 222 247 268 274 254 258 N.A. U.K. (Corp. Apparel — Alexandra & Yaffy) — — — 105 218 210 209 217 N.A. Total — 1,972 1,910 2,103 2,383 2,488 2,473 3,253 N.A.

Geographic Sales Growth YoY (%) U.S. — — (3.1) 3.8 8.3 5.7 0.3 38.2 N.A.

Canada — — (3.6) 11.1 8.5 2.3 (7.2) 1.6 N.A. U.K. (Corp. Apparel — Alexandra & Yaffy) — — — — 108.0 (3.8) (0.4) 3.7 N.A. Total — — (3.2) 10.1 13.3 4.4 (0.6) 31.5 N.A.

Geographic Sales Contribution (%) U.S. — 88.3 88.4 83.3 79.6 80.6 81.3 85.4 N.A.

Canada — 11.7 11.6 11.7 11.2 11.0 10.3 7.9 N.A. U.K. (Corp. Apparel — Alexandra & Yaffy) — 0.0 0.0 5.0 9.2 8.4 8.5 6.7 N.A. Total — 100.0 100.0 100.0 100.0 100.0 100.0 100.0 N.A. aIncludes Jos A. Bank beginning mid 2Q. bIncludes Men’s Wearhouse, Men’s Wearhouse and Tux Stores and JA Holding. Comps – Comparable store sales. N.A. – Not available. Source: Company filings, Fitch Ratings.

Leveraged Finance


The ABL requires the fixed-charge coverage ratio to be at least 1.0x, which the company was in compliance with as of Jan. 31, 2015. The term loan contains a restrictive covenant restricting the company from incurring additional indebtedness if the total leverage ratio (total debt/EBITDA) exceeds 3.75x and the amount issued cannot exceed $50 million.

Recovery Analysis Fitch estimates the recovery prospects to Men’s Wearhouse creditors based on a distressed enterprise value of $1.6 billion. Enterprise value is based on a going concern EBITDA value of approximately $289 million, which assumes a 20% decline in revenue from the LTM level and a sustainable 10%–11% EBITDA margin. Deducting 10% for administrative claims leaves $1.4 billion of value to its creditors. Fitch consequently expects the lenders in the credit facility and the term loan to have outstanding recovery prospects (91%–100%), while the unsecured creditors, comprising senior unsecured noteholders and operating lease claims, would have below average recovery prospects (0%–10%).

Capital Structure ($ Mil., At Oct. 31, 2015) Description Amount (%) Secured Debt $500 Mil. ABL Revolver due 6/18/19 0.0 0.0 $1.1 Bil. Term Loan due 6/18/21 1,091.0 64.5 Total Secured Debt 1,091.0 64.5 Unsecured Debt 7.00% Senior Unsecured Notes due 6/18/22 600.0 35.5 Total Unsecured Debt 600.0 35.5 Total Debt 1,691.0 100.0


Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015) 2016 10.9 2017 10.9 2018 10.9 2019 10.9 2020 10.9 Thereafter 1,636.5




Leveraged Finance



Recovery Analysis The Men’s Wearhouse, Inc. ($ Mil., Except Where Noted; Credit Opinion: b*)

Distressed Enterprise Value (EV) as a Going Concern (GC) Liquidation Value (LV)

Book Value

Advance Rate (%)

Avail. to Creditors

Going Concern EBITDA 289 Cash 53.7 0 — GC EV Multiple (x) 5.5 A/R 66.9 80 53.5 EV on GC Basis 1,589 Inventory 1,060.2 70 742.2 Net PPE 548.5 20 109.7 Total LV 905.4






Recovered Recovery


Credit Opinion

Sr. Secured Facility 350.0 350.0 100 rr1* +3 bb* Sr. Secured Term Loan 1,091.0 1,079.7 99 rr1* +3 bb*

Concession Payment Availability Table Adjusted EV Available for Claims 1,429.7 Less Secured Debt Recovery 1,429.7 Remaining Recovery for Unsecured Claims —


Value Recovered

Recovery (%)


Credit Opinion

Sr. Unsecured 655.9a — — rr6* –2 ccc+* aIncludes $55.9 Mil. of operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

Leveraged Finance


Appendix A

Organizational Structure — The Men’s Wearhouse, Inc.($ Mil., As of Oct. 31, 2015)


Moores The Suit People Inc.(Guarantor and Co-Borrower of Credit Facility)

The Men’s Wearhouse, Inc.CO — b*/Stable

Debt Issue $500 Mil. ABL Credit Facility due June 2019$1.1 Bil. Senior Secured Term Loan due June 20217.000% Senior Unsecured Notes due June 2022Total

Amount —

1,091600

1,691

K&G Men’s Company Inc. Twin Hill Acquisitions

Domestic Subsidiaries

JA Holding Inc.

Foreign Subsidiaries

MWUK Holding Company Limited

Moores Retail Group Inc.

100%

100%

86%

JA Apparel Corp.

100%

JAVA CORP.

Jos A. Bank

CObb*/rr1*

bb*/rr1* ccc+*/rr6*

• Incorporated in the U.K.• Operates under brand names:

Dimensions, Alexandra and Yiffy

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — The Men’s Warehouse, Inc. Overview Borrower Men’s Warehouse, Inc. (Parent), and Moores The Suit People Inc. (Canadian Borrower) Document Date and Location Credit Agreement dated June 18, 2014 (exhibit 10.1 to 8-K filed June 20, 2014) Description of Debt Senior secured credit facility Maturity Date June 18, 2019 Amount $500 Mil. in total commitment for the revolver (sublimit of $100 Mil. for the Canadian commitment).

For LOC, the U.S. obligations are limited to $120 Mil. and the Canadian obligations are limited to $30 Mil. Ranking Senior secured. Security Secured by first-priority perfected liens on all material owned assets of subsidiaries and all capital stock (65% of voting capital stock of

foreign subsidiaries). Guarantee Men’s Warehouse Inc. and direct and indirect wholly owned domestic subsidiaries. Debt Restrictions Debt Incurrence Leverage Ratio Debt: Allowed if total leverage ratio is less than 4.0x. Restricted U.S. subsidiaries that are not borrowers are limited to

incur no more than 50 Mil. in debt. Notable Permitted Debt: 1) Debt incurred to acquire, construct or improve capital assets allowed up to $50 Mil. in total; 2) total term loan allowed up to 1.5 Bil.; 3) indebtedness of foreign subsidiaries not to exceed $25 Mil. 4) additional all-purpose debt up to $50 Mil.

Limitation on Liens Generally not allowed other than existing liens and additional secured debt up to $50 Mil. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) Event of Default. Defined as transactions that result in change of ownership with respect to 50% of voting power. M&A, Investments Restriction No restriction if either (A) availability is greater than the greater of 50 Mil. and 15% of line cap and Fixed-Charge Coverage Ratio is more

than 1.0x or (B) availability is greater than the greater of 65 Mil. and 20% of line cap. Sale of Assets Restriction Other than routine sales of inventory and other dispositions in the ordinary course of business, asset sales are limited to 10% of total

assets each fiscal year and the total asset sales allowed throughout the life the agreement are limited to 25% of total assets. Restricted Payments Restricted Payments (RP) RP Basket: None

Notable Permitted Restricted Payments: 1) Parent can pay $10 Mil. in cash dividend. Special Condition: No restriction if (A) availability is greater than the greater of 65 Mil. and 17.5% of line cap and Fixed-Charge Coverage Ratio is more than 1.1x or (B) availability is greater than the greater of 85 Mil. and 25% of line cap.

Other Cross-Default Yes, exceeding $50 Mil. Cross-Acceleration N.A. MAC Clause None. Equity Cure None. Covenant Suspension None. Financial Covenants Leverage (Maximum) — Coverage (Minimum) Fixed-Charge Coverage Ratio is no less than 1.0x if availability is less than the greater of 10% of the line cap and $40 Mil. Current Ratio (Minimum) Net Worth (Minimum) Pricing Quarterly Average Availability Applicable Rate Coupon Type/Index ≥ 66.67% LIBOR + 150 bps or BR + 50 bps ≥ 33.33% but < 66.67% LIBOR + 175 bps or BR + 75 bps < 33.33% LIBOR + 200 bps or BR + 100 bps

MAC − Material adverse change. N.A. − Not applicable. Source: Company filings, Fitch Ratings.


Leveraged Finance


Appendix C

Term Loan Covenant Summary — The Men’s Warehouse, Inc. Overview Borrower Men’s Warehouse, Inc. (Parent), and Moores The Suit People Inc. (Canadian Borrower) Document Date and Location

Term Loan Agreement dated June 18, 2014 (exhibit 10.2 to 8-K filed June 20, 2014) Incremental Supplement to Term Loan Agreement dated April 7, 2015 (exhibit 10.1 to 8-K filed April 8, 2015)

Description of Debt Term Loan Maturity Date June 18, 2021 Amount $700 Mil. for the Term Loan Tranche B-1 and $400 Mil. for the Fixed-Rate Term Loans. Ranking Senior secured. Security Secured by first-priority perfected liens on all material owned assets of subsidiaries and all capital stock (65% of voting capital stock of foreign

subsidiaries). Guarantee Men’s Warehouse Inc. and direct and indirect wholly owned domestic subsidiaries. Debt Restrictions Debt Incurrence Leverage Ratio Debt: Allowed if total leverage ratio is less than 3.75x. Restricted U.S. subsidiaries that are not borrowers are limited to incur

no more than $50 Mil. in debt. Notable Permitted Debt: 1) Debt incurred to acquire, construct or improve capital assets allowed up to $50 Mil. in total; 2) total term loan allowed up to 1.5 Bil.; 3) indebtedness of foreign subsidiaries not to exceed $25 Mil.; 4) indebtedness under the ABL Credit Agreement not to exceed $650 Mil.; 5) additional all-purpose debt up to $50 Mil.

Limitation on Liens Generally not allowed other than existing liens and additional secured debt up to $50 Mil. Limitation on Guarantees

Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Acquisitions/Divestitures

Change of Control (CoC) Event of Default: Defined as transactions that result in change of ownership with respect to 50% of voting power. M&A, Investments Restriction

Permitted as long as the Total Leverage Ratio does not exceed 3.75x and total amount in consideration does not exceed $50 Mil.

Sale of Assets Restriction

Other than routine sales of inventory and other dispositions in the ordinary course of business, asset sales are limited to 10% of total assets each fiscal year.


RP Basket: None. Notable Permitted Restricted Payments: 1) Parent can pay $10 Mil. in cash dividend. If the Senior Secured Leverage Ratio is less than 2.0x, payment for dividends increases to $15 Mil.; 2) Restricted Payments not to exceed $5 Mil. in any fiscal year pursuant to and in accordance with stock option plans or other benefit plans for management or employees; 3) general payments not to exceed $50 Mil.

Other Cross-Default Yes, exceeding $50 Mil. Cross-Acceleration N.A. MAC Clause None. Equity Cure None. Covenant Suspension None. Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum) Pricing Coupon Type/Index 1) Fixed-Rate Term Loans of $400 Mil. at a fixed rate of 5.0%

2) Term Loan B-1 of $700 Mil. at (i) 3.50% in the case Eurodollar Tranche B Term Loans and (ii) 2.50% in the case of ABR Tranche B Term Loans; subject to a LIBOR floor of 1.0%.

ABL – Asset-based loan. MAC − Material adverse change. N.A. − Not applicable. Source: Company filings, Fitch Ratings.



Leveraged Finance


Appendix D

Senior Unsecured Notes Covenant Summary — The Men’s Wearhouse, Inc. Overview Issuer Men’s Warehouse, Inc. Document Date and Location Indenture dated June 18, 2014 (exhibit 4.1 to 8-K filed June 20, 2014) Maturity Date June 18, 2022 Description of Debt 7.000% Senior Notes Amount $600 Mil. Ranking Senior unsecured. Security None. Guarantee Each of the issuer’s direct or indirect wholly owned restricted domestic subsidiaries. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x. Nonguarantor restricted subsidiaries are only allowed $75 Mil.

Notable Permitted Debt Incurrence: 1) Borrowings under the credit facility not to exceed $1.35 Bil.; 2) acquisition debt of new restricted subsidiaries if fixed-charge coverage ratio is larger than 2.0x and does not increase; 3) capital lease obligations up to $85 Mil.; 4) foreign subsidiaries debt up to $45 Mil.; 5) additional all-purpose debt up to $85 Mil.

Limitation on Liens Other than liens on the credit facility and other customary liens incurred during the ordinary course of business, additional liens are allowed if the consolidated secured leverage ratio is less than 2.0x.

Limitation on Guarantees Governed by Debt Incurrence. Acquisitions/Divestitures Change of Control (CoC) Put Option at 101: 50% or more of voting power changes ownership, sale of substantially all assets and liquidation of the company. M&A, Investments Restriction Governed by restricted payments. Sale of Assets Restriction Proceeds can be used to repay secured debt, reinvest and prepay other debt (as long as it is not subordinated). After 360 days, the

remaining proceeds must be used to repay the notes. Restricted Payments Restricted Payments (RP) RP Basket: Equals i) 50% of consolidated net income commencing 6/18/14 plus ii) 100% of net proceeds from equity and debt

issuances plus iii) other customary items. Subject to fixed-charge coverage ratio > 2.0x. Notable Permitted Restricted Payments: 1) Pay dividend on company’s stock up to $15 Mil. a year; 2) additional all-purpose payments up to $75 Mil.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $50 Mil. Callability Redeemable, at the company’s option, in whole or in part, on and after July 1, 2017, at the applicable redemption price below.

2017: 105.250% 2018: 103.500% 2019: 101.750% 2020: 100.000%

Equity Clawback None. Covenant Suspension Covenants related to debt incurrence, restricted payments, asset sales and limitation on guarantees of debt by restricted subsidiaries

will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.



Leveraged Finance


Appendix E

Financial Summary — The Men’s Wearhouse, Inc. 12 Months Three Months



LTM Ended

($ Mil.) 1/28/12 2/2/13 8/3/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Profitability Operating EBITDAa 281.0 300.5 105.8 93.4 (3.1) 274.6 79.6 80.4 101.0 61.2 386.3 104.3 143.0 98.3 406.8 Operating EBITDA Margin (%) 11.8 12.1 16.3 14.4 (0.6) 11.1 12.6 10.0 11.3 6.6 11.9 11.8 15.5 11.4 11.3 FFO Return on Adjusted Capital (%)b 17.3 15.3 15.8 14.9 14.2 14.2 12.3 7.9 8.6 9.4 9.4 9.9 11.3 11.2 11.2 FCF Margin (%) 1.9 2.7 (0.9) 3.1 (1.0) 1.8 6.1 (10.3) 0.6 0.3 (1.1) 1.1 1.2 (2.4) 0.1 Coverages (x) FFO Interest Coverage 167.1 134.7 122.2 65.8 (17.5) 56.8 46.2 3.4 3.9 (0.2) 2.9 3.0 4.1 3.4 2.6 Operating EBITDA/ Gross Interest Expense 194.4 194.7 195.8 76.5 (2.8) 85.7 70.2 6.1 4.0 2.3 5.9 3.9 5.4 3.7 3.8 FFO Fixed-Charge Coverage 2.4 2.2 2.5 2.8 0.6 2.0 1.9 1.4 1.9 0.6 1.4 1.6 2.0 1.8 1.5 FCF Debt Service Coverage (LTM)b 32.7 44.5 52.7 5.8 3.7 3.7 3.7 (0.5) (0.1) 0.4 0.4 0.3 1.2 1.0 1.0 Cash Flow from Operations/Capex 1.8 1.9 1.1 2.0 1.1 1.8 3.1 (3.1) 1.4 1.5 1.0 1.6 1.7 0.6 1.3 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA — — — — — — — 4.3 4.2 3.3 2.8 3.1 2.6 2.6 2.6 Long-Term Secured Debt/FFO — — — — — — — 7.6 8.0 8.7 8.7 8.6 6.2 6.3 6.3 Total Debt with Equity Credit/ Operating EBITDA — — — 0.3 0.4 0.4 0.4 6.8 6.6 5.2 4.4 4.9 4.1 4.1 4.1 FFO-Adjusted Leverage 3.3 3.6 3.7 3.9 4.2 4.2 5.3 9.8 9.0 8.4 8.4 7.9 6.9 7.0 7.0 Total Adjusted Debt/ Operating EBITDAR 3.0 2.9 3.0 3.2 3.3 3.3 4.2 7.8 7.5 6.4 5.7 6.1 5.5 5.5 5.5 FCF/Total Adjusted Debt (%) — 5.0 5.5 4.6 3.0 3.0 2.4 (0.8) (1.3) (1.0) (1.0) (1.8) 0.8 0.1 0.1 Balance Sheet Short-Term Debt — — — 10.0 10.0 10.0 10.0 11.0 11.0 11.0 11.0 7.0 7.0 7.0 7.0 Long-Term Senior Secured Debt — — — — — — — 1,078.2 1,078.6 1,076.2 1,076.2 1,079.6 1,079.9 1,049.2 1,049.2 Long-Term Senior Unsecured Debt — — — 90.0 87.5 87.5 85.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 600.0 Long-Term Subordinated Debt — — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — — Total Debt with Equity Credit — — — 100.0 97.5 97.5 95.0 1,689.2 1,689.6 1,687.2 1,687.2 1,686.6 1,686.9 1,656.2 1,656.2 Off-Balance Sheet Debtc 1,320.8 1,355.2 1,407.2 1,407.2 1,407.2 1,407.2 1,880.8 1,880.8 1,880.8 1,880.8 1,880.8 1,880.8 1,880.8 1,880.8 1,880.8 Total Adjusted Debt with Equity Credit 1,320.8 1,355.2 1,407.2 1,507.2 1,504.7 1,504.7 1,975.8 3,570.0 3,570.4 3,568.0 3,568.0 3,567.4 3,567.7 3,537.0 3,537.0 Cash Flow Funds From Operations 240.6 207.0 65.6 79.0 (20.3) 179.2 51.3 31.9 72.1 (31.7) 123.7 52.9 81.2 64.6 167.0 Change in Working Capital (77.8) 18.7 (35.1) (20.9) 49.8 9.7 18.5 (87.8) (27.0) 67.4 (28.9) (3.9) (35.2) (47.3) (19.0) Cash Flow from Operations 162.8 225.7 30.6 58.1 29.5 188.9 69.8 (55.9) 45.1 35.7 94.8 49.0 45.9 17.3 148.0 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — — Capex (91.8) (121.4) (27.1) (29.3) (26.7) (108.2) (22.5) (18.3) (31.6) (24.0) (96.4) (30.4) (26.4) (29.6) (110.4) Dividends (25.1) (37.1) (9.1) (8.6) (8.6) (35.5) (8.8) (8.6) (8.7) (8.7) (34.8) (8.9) (8.7) (8.7) (34.9) FCF 45.9 67.2 (5.6) 20.3 (5.7) 45.2 38.5 (82.9) 4.9 3.1 (36.4) 9.7 10.9 (21.0) 2.6 Net Acquisitions and Divestitures 0.1 — 0.2 (91.8) 0.8 (90.8) — (1,491.4) 0.2 — (1,491.2) — — 2.6 2.6 Net Debt Proceeds — — — 100.0 (2.5) 97.5 (2.5) 994.0 600.0 (2.8) 1,588.8 (4.5) — (1.8) (9.0) Net Equity Proceeds (55.6) (32.8) (115.1) 2.9 2.4 (141.4) 4.1 601.8 (599.1) 1.0 7.8 0.6 1.1 0.5 3.1 Other (Investing and Financing) (1.4) (3.7) (2.0) 0.9 (0.5) (7.3) (3.4) (50.2) (8.5) (3.7) (65.9) (6.3) (0.3) (0.1) (10.4) Total Change in Cash (11.1) 30.8 (122.6) 32.3 (5.5) (96.8) 36.7 (28.7) (2.5) (2.5) 3.0 (0.5) 11.6 (19.7) (11.1) Ending Cash and Securities Balance 125.3 156.1 32.5 64.8 59.3 59.3 95.9 67.2 64.7 62.3 62.3 61.8 73.4 53.7 53.7 Short-Term Marketable Securities — — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — The Men’s Wearhouse, Inc. (Continued) 12 Months Three Months



LTM Ended

($ Mil.) 1/28/12 2/2/13 8/3/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Income Statement Revenue 2,382.7 2,488.3 647.3 648.9 560.6 2,473.2 630.5 803.1 890.6 928.4 3,252.5 885.1 920.1 865.4 3,599.0 Revenue Growth (%) 0.1 4.4 (2.3) 2.8 (7.9) (0.6) 2.3 24.1 37.3 65.6 31.5 40.4 14.6 (2.8) 24.8 Operating EBIT 205.1 215.6 83.7 71.2 (26.2) 185.9 57.7 52.6 70.2 29.2 273.6 72.4 109.6 65.4 276.6 Gross Interest Expense 1.4 1.5 0.5 1.2 1.1 3.2 1.1 13.2 25.1 26.6 66.0 26.5 26.5 26.5 106.0 Sector-Specific Data Comparable Store Sales (%)d 9.3 4.8 (2.1) 1.6 (3.0) 0.8 2.9 4.4 2.2 6.8 3.9 6.8 3.1 5.3 5.3 No. of Stores 1,166.0 1,143.0 1,137.0 1,133.0 1,124.0 1,124.0 1,128.0 1,756.0 1,760.0 1,758.0 1,758.0 1,758.0 1,754.0 1,748.0 1,748.0 Gross Margin (%) 44.0 44.5 47.7 45.2 37.2 44.0 44.9 45.4 43.8 39.1 43.1 43.2 45.6 43.1 42.8 SG&A/Revenues (%) 35.4 35.9 34.8 34.3 41.9 36.5 35.8 38.8 35.9 36.0 34.7 35.0 33.7 35.6 35.1 Operating EBIT Margin (%) 8.6 8.7 12.9 11.0 (4.7) 7.5 9.2 6.5 7.9 3.1 8.4 8.2 11.9 7.6 7.7 Operating EBITDAR 446.1 469.9 149.7 137.4 40.9 450.5 138.4 139.2 159.8 120.0 621.4 163.1 201.7 157.1 641.9 Operating EBITDAR Margin (%) 18.7 18.9 23.1 21.2 7.3 18.2 22.0 17.3 17.9 12.9 19.1 18.4 21.9 18.2 17.8 Operating EBITDAR/ (Interest + Rent) (x)b 2.7 2.7 3.4 3.0 0.9 2.5 2.3 1.9 1.9 1.4 2.1 1.9 2.4 1.8 1.9 Inventory Turnover (x)b 2.5 2.4 2.4 2.2 2.4 2.4 2.2 1.8 1.9 2.4 2.4 2.5 2.1 1.9 1.9 Accounts Payable Turnover (x)b 10.8 11.2 10.8 8.3 10.2 10.2 8.4 8.5 7.6 10.3 10.3 10.0 10.6 8.3 8.3 Return on Invested Capital (%)b 15.7 15.5 15.9 14.9 14.2 14.2 12.4 7.8 8.1 9.8 11.2 10.1 11.3 11.3 11.3 Return on Assets (%)b 8.6 8.8 8.6 6.9 5.4 5.4 4.1 1.0 0.1 — — (0.2) 0.8 (0.1) (0.1) Capex/Depreciation (%)b 120.9 142.9 122.8 131.7 115.6 121.9 102.8 65.7 102.3 75.0 85.6 95.2 79.2 90.0 84.8 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

The Michaels Companies, Inc. Credit Profile

Credit Profile Summary Category Leader: The Michaels Companies, Inc. (Michaels) is the leader in arts and crafts retail. The company has been resilient to discounters given the breadth/depth of merchandise required in this category, as well as customer loyalty-driving initiatives such as in-store classes. Michaels has succeeded against online retailers due to the low average ticket (making shipping economics difficult) and customers’ desire to handle products before purchase. Michaels’ customer service focus has helped it defend share from both of these threats.

Consistent Annual Growth: Comparable store sales (comps) growth has ranged from 1.5% to 3.2% on an annual basis since 2010, proving the consistency of the Michaels model. Improved sales productivity and fixed-cost leverage have allowed EBITDA margins to expand from 15.8% in 2010 to an expected 17.0% in 2015 on around 2.4% constant currency comps. Beginning in 2016, Fitch Ratings expects 2%–3% annual square footage growth and 1%–2% annual comps growth to drive modest margin expansion and 4%–5% annual EBITDA growth.

Reduced Leverage Post 2014 IPO: Michaels redeemed $181 million of the 7.50%/8.25% payment-in-kind notes in May 2015, reducing adjusted leverage from 5.9x in 2013 to 5.0x as of Oct. 31, 2015. Fitch anticipates Michaels will initiate a dividend and/or share buyback program in 2016. Fitch expects leverage could trend toward the mid-4.0x range over the next two to three years on EBITDA growth and assuming no debt-financed share buybacks. Management will review its capital structure and could establish leverage targets in early 2016.

Good FCF Profile: Michaels has consistently generated positive FCF for the last four years, supported by strong EBITDA growth and moderate capex needs. Projected FCF of approximately $300 million has been partially used for $200 million in debt paydown in 2015. Fitch expects FCF to trend from $345 million in 2016 toward $390 million by 2018, and anticipates FCF will be applied to share repurchase and/or dividends.

Comfortable Liquidity and Light Maturity Schedule: Liquidity is adequate, with $115 million of cash and $587 million in revolver availability at the end of the third quarter of 2015. The maturity schedule is light, with the nearest maturity being the revolver in 2017. Given the company’s category leadership and positive operating trends, Fitch believes refinancing risk is low.

Credit Profile Drivers Positive Drivers: Given Fitch’s expectations of leverage trending toward the mid-4.0x range over the next three years on business growth and flat debt levels, a commitment by management to sustain leverage below 5.0x following its capital structure review in early 2016 would be a positive credit profile driver.

Negative Drivers: Negative credit profile drivers include increasing operating or competitive pressures that could cause negative comps trends, leading to margin pressure and a weakening of cash flow and credit metrics, with adjusted leverage sustaining above the mid-5.0x range.



Credit Opinion The Michaels Companies, Inc. carries a ‘b+*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data The Michaels Companies, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 4,738.0 4,838.3 EBITDA 787.0 818.3 EBITDA Margin (%) 16.6 16.9 FCF 302.0 287.3 Total Adjusted Debt 6,165.0 5,965.7 Total Adjusted Debt/EBITDAR (x) 5.3 5.0 EBITDAR/ (Interest + Rent) (x) 2.0 2.3 Comparable Store Sales (%)a 1.7 1.1 Real Estate Owned 0 0 No. of Stores 1,288 1,314 aComparable store sales for the LTM reflect the performance for the nine months ended Oct. 31, 2015.

Analysts David Silverman +1 212 908-0840 [email protected]






Leveraged Finance


Business Profile Assessment Michaels is the largest national arts and crafts specialty retailer, with 1,196 stores in the U.S. and Canada as of Oct. 31, 2015. The merchandise offering includes a wide assortment of products for general and children’s crafts (51% of 2014 sales), home décor and seasonal (20%), framing (10%) and scrapbooking (19%). The company also operates 118 Aaron Brothers stores, focused on framing and art supplies.

Management believes the combined U.S. and Canadian markets can support a total footprint of 1,500 Michaels stores, compared with a current store base of 1,196 units. Fitch believes the company will continue to add to its store base in the low single-digit percentage range annually. Substantially all stores are leased, with the majority having lease terms of about 10 years.

The company completed an IPO in July 2014, but is still controlled by Bain Capital Partners, LLC and The Blackstone Group (purchased in October 2006), which together own approximately 70% of the outstanding shares.

Traffic Trends Indicate Resiliency As shown in the Quarterly Comps Summary table, a healthy blend of both positive transaction counts and a higher average ticket drove comparable store sales increases from 2010 to 2013. Michaels’ business profile is highly resilient, as customers continue to pursue their low-ticket hobbies, home décor/seasonal projects and items needed for kids’ school tasks. These types of traffic-generating occasions tend to be recurring and skew toward the nondiscretionary.

A healthy long-term trend in comps is a function of the company’s merchandise offering, strong brand name and loyal customer base. Comps sales over the past several quarters have been uneven due to strong sales of Rainbow Loom in 2013–2014, which were lapped in the first half of this year. Fitch expects Michaels to report modestly positive annual comps in 2016/2017.

Fitch Base Case Assumptions — The Michaels Companies, Inc. ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 4,738 4,883 5,029 5,228 — Revenue Growth (%) 3.7 3.1 3.0 3.9 — Comparable Store Sales (%) 1.7 1.0 2.0 2.0 — EBITDA 787 832 865 906 — EBITDA Margin (%) 16.6 17.0 17.2 17.3 — Working Capital Change (15) (18) (6) (7) — Cash Flow From Operations 441 442 496 522 — Capex (138) (145) (150) (156) — Dividends (1) — — — — FCF 302 297 346 366 — Share Repurchases (21) — (300) (350) — Total Debt 3,149 2,948 2,923 2,898 — Total Adjusted Debta 6,165 6,085 6,185 6,291 Reflects increased rent

expense. Total Adjusted Debt/EBITDAR (x) 5.3 5.0 4.9 4.7 Assumes no increase

in book debt. aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


Stable Margin Trends The company saw strong EBITDA margin expansion between 2008 and 2014 to 16.6% from 12.6%, primarily on gross margin expansion. Enhanced private-label offerings and an emphasis on direct import were key drivers, in addition to fixed-cost leverage. Private brands were 51% of total sales in 2014, and are expected to grow from that level. The EBITDA margin improved to 16.9% in the LTM period ended Oct. 31, 2015, as expense leverage offset modest gross margin contraction. EBITDA margins are expected to improve modestly in 2016–2017.

Breakdown Across Stores, Geography and Merchandise ($ Mil.) 2009 2010 2011 2012 2013 2014

LTM 10/31/15

Total Net Sales 3,888 4,031 4,210 4,408 4,570 4,738 4,838 YoY Growth (%) 1.9 3.7 4.4 4.7 3.7 3.7 3.3 Sales Contribution by Category (%) General and Children’s Crafts 44.0 44.4 45.3 47.2 51.9 50.8 — Home and Seasonal 21.0 20.0 19.9 20.2 19.6 20.5 — Scrapbooking 18.0 15.9 15.7 13.6 9.6 9.6 — Framing 17.0 19.7 19.1 19.0 18.9 19.1 — Total 100.0 100.0 100.0 100.0 100.0 100.0 — Comps (%) Ticket (2.9) 1.2 1.2 0.7 3.3 — — Transactions 3.2 1.3 2.0 0.8 (0.4) — — Total 0.2 2.5 3.2 1.5 2.9 1.7 — Net Sales by Geography U.S. 3,572 3,673 3,825 3,989 4,132 4,277 4,392 Canada 316 358 385 419 438 461 446 Total 3,888 4,031 4,210 4,408 4,570 4,738 4,838 YoY Growth (%) U.S. 1.6 2.8 4.1 4.3 3.6 3.5 3.9 Canada 5.3 13.3 7.5 8.8 4.5 5.3 (2.2) Sales Contribution by Geography (%) U.S. 92.0 91.0 90.9 90.5 90.4 90.3 90.8 Canada 8.0 9.0 9.1 9.5 9.6 9.7 9.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Store Count Michaels Stores 1,023 1,045 1,064 1,099 1,136 1,168 1,196 YoY Change 14 22 19 35 37 32 28 Aaron Brothers Stores 152 137 134 125 121 120 118 YoY Change (9) (15) (3) (9) (4) (1) (2) Total Store Count 1,175 1,182 1,198 1,224 1,257 1,288 1,314

YoY – Year-over-year. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

Leveraged Finance


Dominant Player in a Niche, Fragmented Category Michaels competes with other specialty retailers including A.C. Moore Arts & Crafts (140 stores), Jo-Ann Fabric and Craft (850 stores) and Hobby Lobby Stores, Inc. (over 600 stores), with the greatest merchandise overlap in that order. The company also competes with discounters Wal-Mart Stores Inc. and Target Corp., particularly for high-turning items that may be more price sensitive, such as glue or other basic supplies. However, Fitch does not believe mass merchants are a pressing competitive threat, because they concentrate on a small number of high turning SKUs and do not offer the depth and breadth of assortment found at a Michaels store.

Similarly, mom-and-pop retailers cannot match Michaels’ broad selection. Michaels also competes with online retailers, including Amazon.com. Fitch believes Michaels is insulated from online competition due to the low average ticket of purchases (making shipping economics challenging) and in-person nature of many purchases, both for product inspection and to expedite the transaction.

Quarterly Comps Summary (%) 5/3/08 8/2/08 11/1/08 1/31/09 Annual 1/31/09 2008 Comps (2.9) (2.6) (6.5) (5.6) (4.6) Ticket (2.8) (1.0) (2.8) (5.0) (2.5) Transactions (0.1) (1.6) (3.9) (0.6) (2.1) 2009 5/2/09 8/1/09 10/31/09 1/30/10 Annual 1/30/10 Comps (2.0) (0.8) 1.3 1.5 0.2 Ticket (5.2) (7.0) (3.5) 1.6 (2.9) Transactions 3.6 6.2 4.7 (0.1) 3.2 2010 5/1/10 7/31/10 10/30/10 1/29/11 Annual 1/29/11 Comps 4.9 2.3 2.9 0.7 2.5 Ticket 3.7 1.8 0.7 0.3 1.2 Transactions 1.2 1.4 2.4 0.4 1.3 2011 4/30/11 7/30/11 10/29/11 1/28/12 Annual 1/28/11 Comps 4.3 1.8 1.6 4.4 3.2 Ticket 1.5 2.6 1.6 (0.5) 1.2 Transactions 2.4 (0.8) 0.3 4.9 2.0

2012 4/28/12 7/28/12 10/27/12 2/2/13 Annual 2/2/13 Comps 1.5 2.9 (0.2) 1.7 1.5 Ticket (0.1) (1.0) 0.9 2.3 0.7 Transactions 2.5 3.0 (1.1) (0.6) 0.8 2013 5/4//13 8/3/13 11/2/13 2/1/14 Annual 2/1/14 Comps (0.7) (1.3) 7.9 4.6 2.9 Ticket 1.7 2.7 3.8 4.2 3.3 Transactions (3.0) (3.6) 3.9 0.5 (0.4) 2014 5/3/14 8/2/14 11/1/14 1/31/15 Annual 1/31/15 Comps 3.8 3.2 (0.8) 1.4 1.7 Ticket 2.4 — — — — Transactions 1.3 — — — — 2015 5/2/15 8/1/15 10/31/15 Comps 0.3 1.6 1.5 Ticket — — — Transactions — — —

Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

Leveraged Finance


2016 Outlook Fitch expects demand for core category products will remain strong and Michaels will generate modestly positive comps in 2016. While gross margins may further contract modestly due to promotional activity and the strong U.S. dollar (pressuring Canada margins), Fitch expects a relatively steady EBITDA margin in excess of 17% in 2016. Fitch expects annual FCF to be in the $340 million–$350 million range, and anticipates the company will direct FCF toward share repurchases and/or a dividend, causing leverage to end 2016 in the 4.9x range. With improving EBITDA and no debt paydown, leverage could trend to the mid-4.0x range by year-end 2018, compared with 5.2x at year-end 2014.

Liquidity and Debt Structure Liquidity is solid, with $115 million of cash and $587 million in revolver availability as of Oct. 31, 2015. The nearest maturity is in 2017, when the $650 million asset-based loan (ABL) revolver expires. Given the company’s category leadership and positive operating trends, Fitch believes ongoing refinancing risk is low.

Michaels FinCo, Inc. issued $800 million of holding company (holdco) notes in July 2013, with the proceeds used to fund a cash dividend to the parent’s equityholders. Michaels redeemed $439 million of the holdco notes with proceeds from its IPO in July 2014. The company repaid an additional $180 million of holdco notes during the fourth quarter of 2014, and the remaining $181 million was redeemed in May 2015.

In June 2014, Michaels Stores, Inc. (MSI), a subsidiary of Michaels, issued an additional $250 million of 5.875% senior subordinated notes maturing in November 2020. In July 2014, MSI also issued an additional $850 million of debt under its existing term loan facility maturing in January 2020, bringing the total term loan to $2.5 billion. The proceeds from these issues were used to fully redeem the $1 billion of 7.75% senior unsecured notes due 2018, and to pay the make-whole premium.

Capital Structure ($ Mil., At Oct. 31, 2015) Description Amount (%) Secured Debt $650 Mil. ABL Revolver due 9/17/17 — — Senior Secured Term Loan due 1/28/20 2,435.6 82.7 Total Secured Debt 2,435.6 82.7 Unsecured Debt 5.875% Sr. Subordinated Notes due 12/15/20 510.0 17.3 Total Unsecured Debt 510.0 17.3 Total Debt 2,945.6 100.0



2016 24.6 2017 24.6 2018 24.6 2019 24.6 2020 2,841.0 Thereafter —



Cash 114.7 Revolver Availability 586.7 Total 701.4


Leveraged Finance


Following this refinancing, Michaels’ debt structure consists of an undrawn $650 million revolver due September 2017, a $2.5 billion term loan due in January 2020 and $510 million of 5.875% senior subordinated notes due November 2020. The revolver is subject to a borrowing base consisting of 90% of eligible inventories and receivables, and has a second lien on all other tangible and intangible assets. The term loan has a second-priority interest in inventory and accounts receivable, and a first lien on all other assets. There are no maintenance covenants.

Recovery Analysis Fitch’s recovery analysis is based on a going concern value of $2.6 billion, versus approximately $970 million from an orderly liquidation of assets, which are composed primarily of inventory. Post-default EBITDA was estimated at $475 million, assuming approximately one-third of stores close, productivity reductions at the remaining stores and minimal sales recapture online. After deducting 10% for administrative claims, the remaining $2.4 billion would lead to outstanding recovery prospects (91%–100%) for the ABL revolver, which is assigned a ‘bb+*/rr1*’ and superior recovery prospects (71%–90%) for the term loan lenders, which is assigned a ‘bb*/rr2*’. The unsecured creditors would be expected to have poor recovery prospects (0%–10%) and thus the notes are assigned a ‘b–*/rr6*’.

Recovery Analysis The Michaels Companies, Inc. ($ Mil., Except Where Noted: Credit Opinion: b+*)



Advance Rate (%)

Avail. to Creditors

Projected Post-Default EBITDA 475 Cash 114.7 0 GC EV Multiple (x) 5.5 A/R 80 Distressed EV on GC Basis 2,610 Inventory 1,277.1 50 893.9 Net PPE 385.4 20 77.1 Total LV 971.0






Recovered Recovery


Credit Opinion

Sr. Secured Facilitya 455.0 455.0 100 rr1* +3 bb+* Sr. Secured Term Loan 2,435.6 1,894.3 78 rr2* +2 bb*

Concession Payment Availability Table Adjusted EV Available for Claims 2,349.3 Less Secured Debt Recovery 2,349.3 Remaining Recovery for Unsecured Claims


Value Recovered

Recovery (%)


Credit Opinion

Sr. Unsecuredb 125.7 Sr. Subordinated 510.0 rr6* –2 b–* Subordinated — aFitch assumes the $650 Mil. credit facility is 70% drawn in a distressed scenario. bReflects estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Fitch Ratings.

Leveraged Finance



Leveraged Finance


Appendix A

Organizational Structure — The Michaels Companies, Inc. ($ Mil., As of Oct. 31, 2015)

Michaels Stores, Inc.CO — b+*/Stable

CO – Credit Opinion. ABL – Asset-based loans. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Company filings, Fitch Ratings.

Subsidiary GuarantorsNonguarantor Subsidiaries

The Michaels Companies, Inc.CO — b+*/Stable

Bain Blackstone

32% 31%8% 2%

Michaels Funding, Inc.

Michaels FinCo Holdings, LLC

Public Shareholders Management and DirectorsPrice T. Rowe Associates

27%

Michaels FinCo, Inc.

Debt Issue Maturity Amount CO$650 Mil. Senior Secured ABL Facility 9/17/17 — bb+*/rr1*Senior Secured Term Loan 1/28/20 2,436 bb*/rr2*5.875% Senior Subordinated Notes 12/15/20 510 b–*/rr6*Total 2,946 —

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — Michaels Stores, Inc. Overview Borrower Michaels Stores, Inc. Document Date and Location Second Amended and Restated Credit Agreement dated Sept. 17, 2012 (exhibit 10.1 to 8-K filed Sept. 18, 2012), previously amended

and restated as of Feb. 18, 2010. First Amendment to Second Amended and Restated Credit Agreement dated June 6, 2014 (exhibit 10.2 to 8-K filed June 11, 2014)

Description of Debt Senior secured asset-based revolving credit facility subject to a borrowing base equal to 90% of eligible credit/debit card receivables plus 90% of eligible inventory at net appraised orderly liquidation value and letters of credit.

Maturity Date 9/17/17 Amount $650 Mil. Ranking Senior secured Security Secured by a first lien on A/R and inventory, second lien on all other tangible and intangible assets; second-priority pledge of 100% of

stock of U.S. subsidiaries and 65% of foreign subsidiaries. Guarantee Guaranteed by all existing subsidiaries on a senior secured basis. Financial Covenants Fixed-Charge Coverage Consolidated fixed-charge coverage ratio shall be at least 1.0x if excess availability of the revolver is less than the greater of (i) 10% of

loan cap (lesser of then borrowing base or total commitments), and (ii) $50 Mil. for 30 consecutive days. Debt Restrictions Debt Incurrence No cap on subordinated debt and other unsecured non-amortizing debt provided the payment conditions are satisfied (please refer to

definition at the bottom of this page); no cap on unsecured debt owed to the sponsor and/or other stockholders of the parent and their respective affiliates provided payment in cash of principal or interest does not exceed 10% per annum prior to the revolver maturity date; no cap on holding company debt; general carveout of $300 Mil.

Limitation on Liens General carveout of $30 Mil. Limitation on Guarantees Guarantees are defined as debt and investments and hence governed by the debt and investment restrictions. Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as the acquisition of more than 50% (or more than 35% after an IPO) of voting stock by nonpermitted holders and

constitutes an event of default. M&A, Investments Restriction General carveout of $50 Mil. Sale of Assets Restriction Carveouts: Store closures and related inventory dispositions are limited to 10% in any fiscal year and to 25% in aggregate;

dispositions of property other than inventory, accounts and IP are limited to $250 Mil. in any fiscal year or $500 Mil. in aggregate, provided no event of default.

Restricted Payments Restricted Payments (RPs) Carveouts: Share repurchase from parent no greater than $15 Mil. per fiscal year ($30 Mil. after an IPO). The unused amounts can

be carried over but no greater than $30 Mil. per calendar year (up to $60 Mil. if pro forma availability is equal to or greater than 15% of loan cap). RPs are made to the holding company with proceeds from permitted holding company debt.

Other Cross-Default Yes, for material indebtedness of more than $50 Mil. (no materiality threshold for senior notes, senior subordinated notes,

subordinated discount notes, and the term loan facility). Cross-Acceleration N.A. MAC Clause Yes. Equity Cure None. Cash Dominion Event The company’s funds will be swept daily to reduce the borrowings outstanding under the credit facility upon occurrence of a cash

dominion event, which means either (i) the occurrence and continuance of any specified default, or (ii) the borrowers’ failure to maintain availability of at least the greater of 12.5% of loan cap or $65 Mil. for five consecutive days.

Key Definitions Payment Conditions: With respect to a specified payment (a) no event of default exists or would arise therefrom; (b) pro forma availability will be equal to or greater than 15% of the loan cap for each of the six fiscal months following, and (c) either revolver availability immediately following the specified payment is greater than 25% or pro forma consolidated fixed charge coverage ratio is no less than 1.0x.

Pricing Coupon Type/Index Floating based off LIBOR or PR or BR. Pricing Grid ABL Facility: LIBOR + 150 bps−200 bps or PR + 50 bps−100 bps, depending on average daily availability.

Commitment Fee: 0.250%–0.375% based on usage.

ABL − Asset-based loans. A/R − Accounts receivable. N.A. – Not applicable. MAC − Material adverse change. Source: Company filings, Fitch Ratings.




Leveraged Finance


Term Loan Agreement Covenant Summary — Michaels Stores, Inc. Overview Borrower Michaels Stores, Inc. Document Date and Location Amended and Restated Credit Agreement dated Jan. 28, 2013 (exhibit 10.1 to 8-K filed Feb. 1, 2013)

First Amendment to Amended and Restated Credit Agreement dated June 10, 2014 (exhibit 10.3 to 8-K filed June 11, 2014) Description of Debt Senior secured term loan Maturity Date 1/28/20 Amount $2,478 Mil./$2,436 Mil. Ranking Senior secured Security Secured by a first lien on all other tangible and intangible assets, first-priority pledge of 100% of stock of U.S. subsidiaries and 65% of

foreign subsidiaries, second lien on A/R and inventory. Guarantee Guaranteed by all existing subsidiaries on a senior secured basis. Debt Restrictions Debt Incurrence Ratio Debt: The borrower may incur debt if the pro forma fixed-charge coverage ratio is greater than 2.0x provided debt issued by

restricted subsidiaries that are not guarantors shall not exceed $250 Mil. at any time. Carveouts: ABL loan up to the greater of $1.2 Bil. or 90% of A/R plus 90% of inventory (at net appraised orderly liquidation value); incremental term loan commitment of $500 Mil. provided pro forma consolidated secured debt ratio is no more than 3.25x; debt to finance property or equipment purchase up to the greater of $125 Mil. and 6.5% of total assets; foreign subsidiary debt up to the greater of $125 Mil. and 6.5% of total assets of the subsidiary; $150 Mil. for debt assumed in an acquisition or incurred to refund debt for an acquisition; general carveout of $200 Mil.

Limitation on Liens Liens securing new indebtedness permitted under debt incurrence covenant provided no event of default and pro forma consolidated secured debt ratio is no greater than 3.25x; general carveout of $50 Mil.

Limitation on Guarantees Guarantees are defined as debt and investments and hence governed by the debt and investment restrictions. Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as the acquisition of more than 50% of voting stock by nonpermitted holders and constitutes an event of default. M&A, Investments Restriction Investments in similar businesses having aggregate fair market value up to the greater of $125 Mil. and 6.5% of total assets; other

investments not to exceed the greater of $150 Mil. and 7.9% of total assets. Sale of Assets Restriction Permitted as long as at least 75% of total consideration is in cash and noncash consideration is no more than 7.5% of Total Assets. Restricted Payments Restricted Payments (RPs) RP Basket: Assuming no event of default and a pro forma Fixed-Charge Coverage Ratio of at least 2.0x, 50% of consolidated net

income beginning Oct. 28, 2012, plus 100% of proceeds from equity issuances. Carveouts: There is a general carveout of $100 Mil.; investment in unrestricted subsidiaries having a fair market value no greater than $100 Mil. is permitted; dividends post-IPO of up to 6% of IPO proceeds; share repurchases up to $30 Mil. annually, and $60 Mil. post-IPO, with unused amounts carrying forward to succeeding calendar years, subject to a maximum of $60 Mil. ($120 Mil. post-IPO) in any given calendar year; and other restricted payments so long as no event of default has occurred and the Consolidated Total Leverage Ratio is less than or equal to 3.25x.

Other Cross-Default Yes, for material indebtedness (more than $50 Mil.). Cross-Acceleration N.A. MAC Clause Yes. Equity Cure None. Covenant Suspension None. Required Lenders/Voting Rights 50% of total commitments.

A/R − Accounts receivable. ABL − Asset-based loans. N.A. – Not applicable. MAC − Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.



Leveraged Finance


Term Loan Agreement Covenant Summary — Michaels Stores, Inc. (Continued) Financial Covenants Leverage (Maximum) Coverage (Minimum) — Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment 50% of excess cash flow, with a stepdown to 25% if total leverage is less than 6.0x, then 0% if total leverage is less than 5.0x;

100% of net proceeds from asset sale subject to company’s reinvestment rights; 100% of net proceeds from debt issuance other than debt permitted under the credit facilities.

Callability/Optional Prepayment Optional prepayment with or without prepayment penalty. Pricing Coupon Type/Index Floating based off LIBOR or PR or BR. Pricing Grid Term Loan: LIBOR + 275 bps or BR + 175 bps (incremental term loan priced at L+300 with 1% LIBOR floor); term loan pricing is

subject to a step-down of 25 bps if consolidated secured debt ratio is less than 1.50x.

PR − Prime rate. BR − Base rate. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix C

Bond Covenant Summary — Michaels Stores, Inc. Covenant Description Issuer(s) Michaels Stores, Inc. Document Date and Location Indenture dated 12/19/13 (Exhibit 4.1 of 8-K filed 12/19/13)

Supplemental Indenture dated 6/5/14 2014 (Exhibit 10.1 to 8-K filed June 11, 2014) Description of Debt 5.875% senior subordinated notes Amount $510 Mil. Maturity Date Dec. 15, 2020 Ranking The notes are the company’s and the guarantors’ unsecured senior subordinated obligations. Security Unsecured Guarantee The notes are guaranteed, jointly and severally, fully and unconditionally, on an unsecured senior subordinated basis, by each of

the company’s subsidiaries that guarantee indebtedness under the company’s senior secured term loan credit facility and senior secured revolving credit facility.

Debt Restrictions Debt Incurrence Company may issue debt or preferred stock if the pro forma fixed-charge coverage ratio is more than or equal to 2.0x for the

company and restricted subsidiaries; debt of nonguarantor subsidiaries limited to $275 Mil; debt of nonguarantor restricted subs limited to greater of $125 Mil. or 8% of total assets; debt to finance property or equipment purchase limited to $125 Mil. or 8% of total assets; debt assumed in an acquisition or incurred to refund debt for an acquisition limited to $150 Mil.

Limitation on Liens Issuer may not incur any Lien (except permitted liens) that secures obligations under any indebtedness ranking pari passu with or subordinated to the notes on any asset or property of the issuer. There is a general carveout of $50 Mil.

Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as the acquisition of more than 50% of voting stock and it triggers an offer to purchase the notes at 101. M&A, Investments Restriction Carveouts for Permitted Investments: Investments in similar businesses of up to the greater of $150 Mil. and 9.5% of total

assets; loans and advances to officers/employees up to $15 Mil. Sale of Assets Restriction Standard restrictions on asset sales of at least $30 Mil. Restricted Payments Restricted Payments (RP) Ratio Test: RP are permitted provided (i) no event of default (ii) borrower can incur $1 of debt under the 2.0x fixed-charge

coverage ratio debt test. RP Basket: Cumulative sum of 50% consolidated net income commencing 7/30/06 plus 100% of the net proceeds from an equity issuance and other adjustments. Carveouts: Share repurchases up to $30 Mil. in any year ($60 Mil. post-IPO), with unused amounts carried over to succeeding years of up to $60 Mil. ($120 Mil. post-IPO); dividend payment subject to fixed-charge coverage ratio of at least 2x; investments in unrestricted subs of up to $100 Mil.; general carveout of $100 Mil.; any restricted payment so long as the pro forma consolidated total leverage ratio is less than or equal to 3.25x.

Other Cross-Default None. Cross-Acceleration Yes, on debt of more than $85 Mil. MAC Clause None. Equity Clawback Until 12/15/16, the company may use the proceeds of an equity offering to redeem up to 40% of the principal amount at 105.875%

of principal plus accrued and unpaid interest. Callability/Optional Prepayment Redeemable, at the company’s option, in whole or in part, prior to 12/15/16 at the principal amount plus the applicable premium.

On and after 12/15/16, the company may redeem all or part of the notes at the following prices beginning on dates set forth below: 12/15/16 102.938% 12/15/17 101.469% 12/15/18 and thereafter 100.000%.

Covenant Suspension Covenants related to debt incurrence, restricted payments, disposition of assets, change of control and mergers will be suspended if (a) the notes have investment grade ratings by two rating agencies and (b) there is no event of default. If any of these conditions fails to be met at a subsequent date, the covenants shall be reinstated on that later date.




Leveraged Finance


Appendix D

Financial Summary — The Michaels Companies, Inc. 12 Months Three Months



LTM Ended

($ Mil.) 2/1/12 2/2/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Profitability Operating EBITDAa 673.0 718.0 165.0 324.0 750.0 170.0 114.0 176.0 327.0 787.0 174.6 128.1 188.5 818.3 Operating EBITDA Margin (%) 16.0 16.3 14.8 20.8 16.4 16.2 12.0 15.6 20.3 16.6 16.2 13.0 16.1 16.9 FFO Return on Adjusted Capital (%)b 35.7 27.4 — 22.7 25.2 24.8 24.0 24.5 25.5 25.5 24.6 24.9 25.8 25.8 FCF Margin (%) 7.1 4.0 5.6 22.6 (9.4) (10.0) (9.0) 10.8 23.0 6.4 (10.3) (4.0) 5.8 5.9 Coverages (x) FFO Interest Coverage 2.5 2.6 2.5 6.3 2.8 2.3 0.2 4.3 8.3 3.3 3.0 (0.1) 6.7 4.6 Operating EBITDA/ Gross Interest Expense 2.7 2.9 2.7 7.0 3.5 3.0 1.9 4.3 8.2 4.0 4.6 3.7 5.6 5.6 FFO Fixed-Charge Coverage 1.6 1.6 1.6 2.6 1.7 1.5 0.7 2.0 3.2 1.8 1.6 0.7 2.5 2.0 FCF Debt Service Coverageb 2.2 1.1 — (1.1) (0.9) (1.3) 1.6 1.2 2.2 2.2 1.2 2.4 2.5 2.5 Cash Flow from Operations/Capex 3.8 2.4 3.0 12.7 4.0 (2.4) (1.5) 4.2 11.6 3.2 (2.2) (0.4) 3.6 3.3 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA — 2.1 — 2.1 2.1 2.1 3.2 2.9 3.1 3.1 2.8 3.0 2.9 2.9 Long-Term Secured Debt/FFO — 3.9 — 4.1 4.1 4.0 6.7 5.5 5.3 5.3 4.9 5.2 4.6 4.6 Total Debt with Equity Credit/ Operating EBITDA — 4.2 — 4.9 4.9 4.8 4.4 4.3 4.0 4.0 4.0 3.7 3.6 3.6 FFO Adjusted Leverage 2.8 6.0 — 7.3 6.8 6.8 6.6 6.4 6.0 6.0 6.1 6.0 5.7 5.7 Total Adjusted Debt/ Operating EBITDAR 2.7 5.5 — 6.3 5.9 5.9 5.5 5.4 5.3 5.3 5.3 5.1 5.0 5.0 FCF/Total Adjusted Debt (%) 10.9 3.0 — (6.1) (6.4) (7.7) 3.5 4.5 4.9 4.9 4.8 5.7 4.8 4.8 Balance Sheet Short-Term Debt — 150 203 16 16 16 48 205 25 25 206 49 25 25 Long-Term Senior Secured Debt — 1,491 1,616 1,612 1,612 1,607 2,441 2,255 2,428 2,428 2,242 2,417 2,411 2,411 Long-Term Senior Unsecured Debt — 1,007 1,007 1,006 1,006 1,006 — — — — — — — — Long-Term Subordinated Debt — 393 1,055 1,060 1,060 1,060 876 876 696 696 695 514 514 514 Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit — 3,041 3,881 3,694 3,694 3,689 3,365 3,336 3,149 3,149 3,143 2,980 2,950 2,950 Off-Balance Sheet Debtc 2,760 2,840 2,840 3,320 2,960 3,016 3,016 3,016 3,016 3,016 3,016 3,016 3,016 3,016 Total Adjusted Debt with Equity Credit 2,760 5,881 6,721 7,014 6,654 6,705 6,381 6,352 6,165 6,165 6,159 5,996 5,966 5,966 Cash Flow Funds From Operations 385 381 91 245 390 76 (48) 135 293 456 77 (39) 194 525 Change in Working Capital 24 (82) 4 135 59 (150) (2) 25 112 (15) (154) 28 (99) (113) Cash Flow from Operations 409 299 95 380 449 (74) (50) 160 405 441 (76) (11) 95 412 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (109) (124) (32) (30) (112) (31) (34) (38) (35) (138) (35) (28) (26) (125) Common Dividends — — — 1 (766) — (1) — — (1) (0) (0) (0) (0) FCF 300 175 63 351 (429) (105) (85) 122 370 302 (112) (39) 68 287 Net Acquisitions and Divestitures — — — — — — — — — — — — — — Net Debt Proceeds (241) (465) (18) (191) 636 (16) (368) (25) (197) (606) (11) (172) (22) (402) Net Equity Proceeds — — — (3) (3) (3) 441 5 9 452 17 9 3 38 Other (Investing and Financing) (7) (25) (28) 9 (21) — (13) (1) 5 (9) — — (5) — Total Change in Cash 52 (315) 17 166 183 (124) (25) 101 187 139 (106) (202) 44 (77) Ending Cash and Securities Balance — 56 73 239 239 115 90 194 378 378 273 70 115 115 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Financial Summary — The Michaels Companies, Inc. (Continued) 12 Months Three Months



LTM Ended

($ Mil.) 2/1/12 2/2/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Income Statement Revenue 4,210 4,408 1,118 1,555 4,570 1,052 948 1,130 1,608 4,738 1,078 984 1,168 4,838 Revenue Growth (%) — 4.7 — — 3.7 5.9 4.9 1.1 3.4 3.7 2.4 3.8 3.4 3.3 Operating EBIT 572 621 141 292 644 143 88 147 298 676 147 100 159 704 Gross Interest Expense 254 245 62 46 215 57 61 41 40 199 38 34 34 146 Sector-Specific Data Comparable Store Sales (%)d 3.2 1.5 7.9 4.6 2.9 3.8 3.2 (0.8) 1.4 1.7 0.3 1.6 1.5 1.1 No. of Stores 1,198 1,225 1,259 1,257 1,257 1,262 1,264 1,287 1,288 1,288 1,295 1,304 1,314 1,314 Gross Margin (%) 39.9 40.0 40.5 40.1 39.9 40.8 37.7 40.0 41.2 40.1 41.0 37.9 39.8 40.2 SG&A/Revenues (%) 26.3 26.0 27.9 21.3 25.8 27.2 28.4 27.0 22.7 25.9 27.4 27.8 26.2 25.6 Operating EBIT Margin (%) 13.6 14.1 12.6 18.8 14.1 13.6 9.3 13.0 18.5 14.3 13.6 10.2 13.6 14.5 Operating EBITDAR 1,018.0 1,073.0 253.8 427.8 1,120.0 264.3 208.3 270.3 421.3 1,164.0 268.9 222.3 282.8 1,195.3 Operating EBITDAR Margin (%) 24.2 24.3 22.7 27.5 24.5 25.1 22.0 23.9 26.2 24.6 25.0 22.6 24.2 24.7 Operating EBITDAR/ (Interest + Rent) (x)b 1.7 1.8 1.7 2.9 1.9 1.7 1.3 2.0 3.1 2.0 2.0 1.7 2.2 2.3 Inventory Turnover (x)b — — — — 3.1 3.1 3.0 2.5 3.1 3.1 3.0 2.9 2.4 2.4 Accounts Payable Turnover (x)b — 20.1 — 14.9 8.7 10.2 9.3 5.8 7.0 7.0 8.4 7.8 5.5 5.5 Return on Invested Capital (%)b 33.2 27.3 — 24.0 26.2 26.0 25.8 25.9 26.0 26.0 25.6 26.7 26.7 26.7 Return on Assets (%)b — 12.9 — 14.0 13.4 14.7 10.5 10.0 12.3 10.8 14.0 18.9 17.5 17.5 Capex/Depreciation (%)b 107.9 127.8 133.3 93.8 105.7 114.8 130.8 131.0 120.7 124.3 125.1 101.0 90.0 109.0 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

NBTY, Inc. Credit Profile

Credit Profile Summary Solid Business Profile: NBTY, Inc. (NBTY) has a strong market position within the vitamins, minerals and herbal supplements (VMHS) sector. The business is diversified by geography (40% of sales outside the U.S.), channel (wholesale, retail and catalog/e-commerce) and product line. Fitch Ratings expects NBTY to generate top-line growth of 2%–3% annually on a constant currency basis over the next two to three years, on a current base of $3.2 billion, primarily driven by growth in its international retail business.

Mixed Results: Reported international sales grew 1.6% in fiscal 2015 on 14% (constant currency) growth in European retail. However, domestic sales were flat, as declines in private-label product sales and negative Vitamin World trends mitigated increases to sales of branded products. U.S. VMHS has recently been adversely affected by negative media attention, pricing pressure due to heavy competition and dislocation due to market share shift toward natural products. Fitch’s longer term expectations are for midsingle-digit international growth and low single-digit domestic growth.

EBITDA Margin Has Stabilized: NBTY’s EBITDA margin rebounded 40 bps to 15.7% in fiscal 2015, after falling nearly 300 bps from fiscal 2012–2014 on higher promotional activity; advertising costs; and selling, general and administrative expenses. Fitch expects NBTY’s EBITDA to grow from a base of $504 million in fiscal 2015 to the $550 million–$560 million range over the next two to three years, and the EBITDA margin to stabilize in the low 16% range, given modest recovery in the domestic business and ongoing international growth.

Moderate FCF After Dividend: FCF after dividends was $97 million in fiscal 2015. Fitch expects FCF to track in the $100 million–$140 million range, after approximately $80 million of annual dividends that finance interest expense on the holding company (holdco) notes, over the next two to three years. Fitch notes NBTY will need to refinance both its $1.5 billion term loan and $1.0 billion holdco notes that are due late 2017 by fall 2016.

Modest Improvement in Leverage: After peaking in 2014 following increased debt and an EBITDA decline, NBTY’s adjusted leverage moderated from 6.8x in fiscal 2014 to 6.7x in September 2015 due to a 3% EBITDA rebound. Assuming flattish debt levels, Fitch expects leverage to improve to the low-6.0x level in next 24–36 months due to EBITDA growth in line with expected annual sales growth of 2%–3%.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers are centered on sustaining top-line growth in the midsingle digits with EBITDA growth and/or deploying FCF toward debt paydown, which would drive adjusted leverage down to the mid-5.0x range.

Negative Drivers: Negative credit profile drivers would include deteriorating operating momentum, shareholder-friendly activity and/or debt-financed acquisitions that would materially increase leverage and lead to flat to negative FCF.



Credit Opinion NBTY, Inc. carries a ‘b*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data NBTY, Inc.

($ Mil.) FYE

9/30/14 FYE

9/30/15 Total Revenue 3,205.8 3,226.1 EBITDA 487.2 503.8 EBITDA Margin (%) 15.2 15.6 FCF (62.5) 96.7 Total Adjusted Debt 4,397.5 4,395.1 Total Adjusted Debt/EBITDAR (x) 6.8 6.7 EBITDAR/(Interest +Rent) (x) 2.2 2.3 Same-Store Sales (Holland & Barrett International) (%)a 4.2 9.5 Same-Store Sales (Vitamin World) (%) (3.0) (5.0) Real Estate Owned 0 0 No. of Storesb 1,430 1,456

aHolland & Barrett same-store sales in local currency. bNo. of stores includes company-owned and franchised stores.






Leveraged Finance


Business Profile Assessment NBTY is the leading global vertically integrated manufacturer, distributor and retailer of a broad line of vitamins, nutritional supplements and related products. The company markets products under many owned and private-label brands, including Nature’s Bounty, Ester-C, Balance Bar, MET-Rx, Osteo Bi-Flex, Puritan’s Pride, Holland & Barrett and Vitamin World. Products are marketed through four operating segments: Consumer Products Group, Holland & Barrett International, Puritan’s Pride and Vitamin World.

Approximately 60% of sales are generated in the U.S., 25% in the U.K., and the remainder in Canada and a handful of European countries. This geographic diversity is viewed as a credit strength. NBTY also manufactures the nutritional supplements it sells, which Fitch views favorably, as it enables the company to maintain better control over quality and costs, and respond to market trends.

NBTY has historically been acquisitive, purchasing 30 companies since 1986, with a small ($85,000 purchase price) U.K.-based natural skin care line the latest to be announced in 2015. Fitch expects NBTY to continue to pursue strategic acquisitions opportunistically.

Segment Trends Mixed As shown in the Segment Overview table on the next page, Consumer Products Group is the company’s largest segment, contributing approximately 58% of revenue and 54% of EBITDA. In this segment, NBTY offers both branded (approximately 75%) and private-label (approximately 25%) products to a broad customer set, of which Wal-Mart Stores, Inc. is the largest, at about 18% of segment revenues and 11% of total company sales. Sales in the Consumer Products Group segment were up 0.2% in 2015, with increases in domestic branded product sales being largely offset by a decrease in domestic contract manufacturing and private-label products. Fitch expects wholesale growth to return to modest, low single-digit growth over the next year, given an expected rebound in the domestic VMHS industry and continued strong growth internationally.

Sales in the Holland & Barrett International segment, which makes up 27% of revenue and 49% of EBITDA, primarily the Holland & Barrett (855 stores) retail chain in the U.K, grew 4.1% in 2015 with strong same-store sales of 9.5%. Fitch expects continued strong growth in this segment. This growth was driven by higher sales volume from existing stores, new store

Fitch Base Case Assumptions — NBTY, Inc. ($ Mil., Year Ended Sept. 30) 2015A 2016F 2017F 2018F Comments Revenue 3,226 3,258 3,340 3,423 — Revenue Growth (%) 0.6 1.0 2.5 2.5 2015/2016 affected by FX. EBITDA 504 521 548 557 — EBITDA Margin (%) 15.6 16.0 16.4 16.3 — Working Capital Change 9 (31) (16) (18) — Cash Flow From Operations 291 300 334 340 — Capex (116) (114) (117) (120) — Dividends (78) (78) (78) (78) — FCF 97 109 140 143 — Share Repurchases — — — — — Total Debt 3,205 3,205 3,205 3,097 — Total Adjusted Debta 4,395 2,793 2,653 2,511 — Total Adjusted Debt/EBITDAR (x) 6.7 6.6 6.3 6.1 — aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


openings — net 55, including franchised stores to a total of 1,071 at September 2015 — and favorable exchange rate fluctuations.

The Puritan’s Pride segment, which makes up 8% of revenue and 9% of EBITDA, is a blend of catalog and e-commerce activity, of which online sales make up 75%. This segment offers a full line of VMHS products, and select personal care and sports nutrition under the Puritan’s Pride trade name brands. Revenue from Puritan’s Pride declined 0.5% in fiscal 2015, compared with an average growth rate of 2.9% over the previous three years, on heightened online competition.

The smallest contributor is the Vitamin World retail business, which makes up 7% of revenue, but is experiencing operating losses. This segment operates mainly through its 385 Vitamin World stores and its online operations. The Vitamin World segment experienced a 7.6% sales decline in fiscal 2015, due to 29 net store closures, declines in mall traffic and a reduction in sales of weight loss products. Management has expressed a commitment to this segment as a test channel to identify potentially successful trends and products for its wholesale platform.

Industry Trends The approximately $35 billion VMHS industry (according to the Nutrition Business Journal) has proven to be recession resistant by growing over time at a midsingle-digit percentage rate, although the growth rate has recently slowed. The consumable nature of the products and frequent use by loyal customers as part of a daily regimen drive the stability and defensibility of the business. Fitch expects the VMHS industry to continue midsingle-digit growth over the next several years, making it one of the faster-growing segments within retail.

In recent years, the industry has been affected by negative media around FDA recalls, studies regarding the efficacy of certain product categories, and legal action taken by the Department of Justice and state authorities against product manufacturers and retailers. Industry players have recalled or removed products from retail shelves in response to legal mandate and/or negative publicity. Fitch believes these actions have affected customer sentiment regarding VMHS, including key categories to which NBTY is exposed. While Fitch believes long-term trends in the VMHS sector will remain in the midsingle-digit range, it notes the risk of additional negative media and legal action is somewhat unique to this segment.

Segment Overview Division

% of Revenue/ EBITDA Description Brands Comments

Consumer Products Group

58/54 Distributes products under various brand names and third-party private labels to major mass merchandisers, club stores, drug store chains and supermarkets. Also sells to independent pharmacies, health food stores, the military and other retailers.

Approximately 75% branded and 25% private label. Brands include Nature’s Bounty, Osteo Bi-Flex, Pure Protein, Sundown, Met-Rx, Ester-C, Body Fortress and Balance Bar, among others.

Leading private-label supplier to accounts including Wal-Mart, Walgreens, CVS, Target, Kroger and Costco.

Holland & Barrett International

27/49 Primarily the Holland & Barrett retail store footprint in the U.K. (843 stores, including franchises). Also includes 161 De Tuinen stores in the Netherlands.

Fruits, nuts and a broad range of VMHS products.

Holland & Barrett is the leading player in the U.K. specialty retail VMHS business.

Purtian’s Pride 8/9 Sells proprietary brand and third-party products primarily through mail-order catalog and the Internet.

Puritan’s Pride. This segment is approximately 75% Internet and 25% catalog.

Vitamin World 7/(12) 385 Vitamin World stores selling proprietary brand and third-party products.

Full line of store brand products and products manufactured by third parties.

Smallest contributor to operating income.

VMHS − Vitamins, minerals and herbal supplements. Source: Company filings, Fitch Ratings estimates.

Leveraged Finance


Regulation Dietary supplements are regulated under the FDA through the Dietary Supplement Health and Education Act of 1994 (DSHEA). As authorized by DSHEA, the FDA adopted good manufacturing practices (GMPs) specifically for dietary supplements. These GMP regulations require, among other things, dietary supplements to be prepared, packaged and held in compliance with specific rules, and require quality-control provisions similar to those in the GMP regulations for drugs. NBTY maintains its manufacturing and distribution practices in compliance with these rules.

2016 Outlook After a slowdown in the domestic business in 2014–2015, Fitch expects total top-line growth in the low single digits over the next two to three years on a constant currency basis, driven by cycling through reductions to NBTY’s private-label contract manufacturing business. Fitch anticipates the international business, which makes up 40% of total revenue, to be the major driver of revenue and to sustain growth in the 3%–4% range over the next few years. Fitch expects EBITDA to grow to the $550 million–$560 million range from its current base of approximately $500 million over the next two to three years.

Fitch expects FCF to track in the $100 million–$140 million range, after approximately $80 million of annual dividends that finance interest expense on the holdco notes, over the next two to three years, assuming modest EBITDA growth and capex needs of approximately $110 million–$130 million. Fitch expects NBTY’s leverage, including parent company debt, could improve from 6.7x currently to the low-6.0x level over the next 24–36 months, assuming flat debt levels.


Liquidity Is Comfortable NBTY had $303 million of cash on hand as of Sept. 30, 2015 and $169 million available under its $175 million revolver, net of $6.1 million letters of credit outstanding. The revolver and the $1.5 billion term loan B are secured by a first-priority lien on substantially all the assets of the borrower and its subsidiaries. The credit facility, term loan and $1.0 billion unsecured holdco notes are all due in late 2017. NBTY also has $650 million of 9.0% senior unsecured notes due October 2018.

Holdco Notes Holdco issued $550 million in aggregate principal amount of 7.75%/8.50% contingent cash pay senior notes (holdco notes) in October 2012 that mature on Nov. 1, 2017. Holdco completed a $450 million tack-on note offering in December 2013, bringing the total notes outstanding to $1 billion. The proceeds from the notes were used to pay a dividend to The Carlyle Group. Interest on the notes of $77.5 million annually will be serviced through dividends from NBTY.

Leveraged Finance


Capital Structure ($ Mil., At Sept. 30, 2015) Description Amount (%) Secured Debt $175 Mil. Revolver due 9/1/17 — — Senior Secured Term Loan due 10/1/17 1,507.5 47.0 Total Secured Debt 1,507.5 47.0 Unsecured Debt 9.000% Sr. Unsecured Notes due 10/1/18 650.0 20.3 7.750%/8.500% Holdco Notes due 11/1/17 1,000.0 31.2 Capital Lease Obligations 47.4 1.5 Total Unsecured Debt 1,697.4 53.0 Total Debt 3,204.9 100.0




Scheduled Debt Maturities ($ Mil., At Sept. 30, 2015) 2016 — 2017 2,507.5 2018 650.0 2019 — 2020 — Thereafter —

Note: Excludes borrowings under credit facility and other debt. Source: Company filings, Fitch Ratings.

Leveraged Finance


Recovery Analysis Fitch estimates the recovery prospects to NBTY’s creditors based on a distressed going concern value of approximately $2.1 billion. Fitch estimates a going concern EBITDA of $350 million, approximately 30% below LTM results, on the loss of several of NBTY’s major customers (5%–10% each) in addition to sales declines elsewhere. Deducting 10% for administrative claims leaves $1.9 billion of value to its creditors. The credit facility and term loans are expected to have outstanding recovery prospects (91%–100%) and are assigned a ‘bb*/rr1*’. NBTY’s unsecured debt, comprising senior unsecured noteholders and operating lease claims, would have average recovery prospects (31%–50%) and is assigned a ‘b*/rr4*’. The senior unsecured holdco notes are expected to have poor recovery prospects (0%–10%) and are assigned ‘ccc+/rr6*’.

Recovery Analysis — NBTY, Inc. ($ Mil., Except Where Noted; Credit Opinion: b*)



Book Value

Advance Rate (%)

Avail. to Creditors

Going Concern EBITDA 350 Cash 303.4 0 — GC EV Multiple (x) 6.0 A/R 198.7 80 159.0 Distressed EV on GC Basis 2,101 Inventorya 844.2 50 422.1 Net PPEb 605.7 20 121.1 Total LV 702.2






Recovered Recovery


Credit Opinion

Sr. Secured Facilityc 122.5 122.5 100 rr1* +3 bb* Sr. Secured Term Loan 1,507.5 1,507.5 100 rr1* +3 bb*

Concession Payment Availability Table Adjusted EV Available for Claims 1,890.8 Less Secured Debt Recovery 1,630.0 Remaining Recovery for Unsecured Claims 260.8


Value Recovered

Recovery (%)


Credit Opinion

Sr. Unsecuredd 701.6 260.8 37.0 rr4* 0 b* Sr. Unsecured — Holdcoe 1,000.0 0.0 rr6* –2 ccc+* Sr. Subordinated 0.0 0.0 aApproximately 21% is raw materials. bNBTY owns 2.5 Mil. square feet of administrative, manufacturing, warehouse and distribution space in the U.S., plus another 0.7 Mil. square feet across various facilities in Canada, the U.K. and China. Approximately 36% of gross property, plant and equipment is land and buildings and leasehold improvements. cFitch assumes the $175 Mil. credit facility is 70% drawn in a distressed scenario. dSenior unsecured debt includes $650 Mil. of senior notes and $48.9 Mil. of rent expense (one-third rents). eThe $1.0 Bil. of senior unsecured notes, which includes the $450 Mil. issued in December 2013, held by Alphabet Holdings, are not guaranteed by NBTY, Inc. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Fitch Ratings.

Leveraged Finance



Leveraged Finance


Appendix A

Organizational Structure — NBTY, Inc. ($ Mil., As of Sept. 30, 2015)

NBTY, Inc.CO — b*/Stable

Alphabet Holding Company, Inc.(Holdings)

Carlyle (Majority Holder)

Domestic Subsidiaries Foreign Subsidiaries

Guarantee

Guarantee

Guaranteed by 65% of capital stockof first tier foreign subsidiaries


Debt Issue Amount CO7.750%8.500% Senior Unsecured Notes due 11/1/17 1,000 ccc+*/rr6*

Debt Issue Amount CO$175 Mil. Revolver due 9/1/17 — bb*/rr1*Senior Secured Term Loan due 10/1/17 1,508 bb*/rr1*9.000% Senior Unsecured Notes due 10/1/18 650 b*/rr4*Capital Lease Obligations 47 —Total 2,205 —

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — NBTY, Inc. Covenant Borrower NBTY, Inc. Document Date and Location Credit Agreement, exhibit 10.12 filed to S4 dated Oct. 1, 2010 and First Amendment and Refinancing to Credit Agreement, exhibit

10.13 filed to S4 dated March 1, 2011 in an S-4 dated March 21, 2011. Fourth Amendment and Third Refinancing to Credit Agreement, exhibit 10.27 filed to 10-K dated Nov. 20, 2014 Maturity Date Facility Type Maturity Date Revolver Sept. 1, 2017 Term B -1 Oct. 1, 2017 Description of Debt Senior Credit Facility of $175 Mil. revolver, $1,507.5 Term Loan B. Amount ($ Mil.) Facility Type Commitment Outstanding Revolver 175.0 0.0 Term B-1 1,507.5 1,507.5 Ranking Senior Secured Security First-priority lien on substantially all the assets of the borrower and its subsidiaries except for excluded property. Guarantee Guaranteed by Holdings, and each of NBTY Inc.’s current and future direct and indirect subsidiaries other than: (i) foreign

subsidiaries, (ii) unrestricted subsidiaries, (iii) non-wholly owned subsidiaries, (iv) certain receivables financing subsidiaries, (v) certain immaterial subsidiaries and vi) certain holding companies of foreign subsidiaries.

Debt Restrictions Debt Incurrence Shall not incur or permit any of its restricted subsidiaries directly or indirectly, to incur, additional indebtedness except: (i) $650 Mil. in

aggregate principal amount of senior notes; (ii) attributable indebtedness and purchase money obligations to finance the purchase or improvement not to exceed the greater of $50 Mil. and 1.25% consolidated total assets; (iii) restricted foreign subsidiaries not to exceed the greater of $75 Mil. or 1.75%; (iv) deferred consideration of restricted subsidiaries that are not loan partners to no exceed $50 Mil.; (v) indebtedness of any restricted subsidiary existing under a permitted acquisition or permitted investment not to exceed the greater of $75 Mil. and 1.75%; (vi) indebtedness in aggregate principal amount not to exceed the greater of $100 Mil. and 2.25% of consolidated total assets; (vii) indebtedness to finance a permitted acquisition or permitted investment to not exceed the greater of $75 Mil. or 1.75% consolidated total assets; (viii) permitted ratio debt to not exceed $150 Mil.; (ix) permitted receivables financing that is nonrecourse, with proceeds in excess of $25 Mil., used as a mandatory prepayment.

Limitation on Liens The credit agreement contains restrictions on NBTY, Inc. and its subsidiaries ability to grant liens on any of its property. The covenant contains exceptions typically found in senior secured credit agreements. Other liens securing indebtedness outstanding in aggregate or in principal amount not to exceed the greater of $87.5 mil. and 2.0% of total assets.

Acquisitions/Divestitures Change of Control (CoC) CoC represents and event of default. M&A, Investments Restriction Shall not consolidate or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all its properties or assets

unless: (i) the issuer is the surviving person or person formed by or surviving; (ii) subsidiary that is not a loan party may merge with any other nonloan party; (iii) any restricted subsidiary may dispose of all or substantially all of its assets to the borrower or another restricted subsidiary provided that if the transfer is a guarantor than the transferee must be the borrower or guarantor.

Sale of Assets Restriction Shall not make an asset sale unless: (i) receives fair market value with 75% in cash consideration; (ii) the aggregate book value of property not to exceed $150 Mil. with the purchase price of such property in excess of $10 Mil. to be paid to in 75% cash consideration.

Restricted Payments Restricted Payments (RP) NBTY, Inc. and its restricted subsidiaries to make, declare any restricted payment except for: (i) may declare or make dividend

distributions solely in the form of equity interests, (ii) payments to holdings provided that proceeds are used for operating expense, interest, taxes, or retire or acquire equity interests of Holdings (not to exceed $7.5 Mil. prior to an IPO per annum and $15 Mil. after and can be increased by proceeds of any key-man life insurance), (iii) permitted acquisitions. Additional restricted payments not to exceed the sum of: (i) $50 Mil., plus (ii) the portion of cumulative credit on the date of such election the amount thereof elected to be so applied (provided that no event of default exists and pro forma compliance with total leverage ratio of 4.5:1.0 is met).

Other Cross-Default Yes, > $40 Mil. Cross-Acceleration No. MAC Clause No provision noted. Equity Cure Yes, such that (i) in each four consecutive fiscal-quarter period there shall be at least two fiscal quarters in respect of which the

Cure Right is not exercised, (ii) there can be no more than four fiscal quarters in respect of which the Cure Right is exercised during the term of the Term B Facility, (iii) the Cure Amount utilized shall be no greater than the amount required for purposes of complying with the covenants.

Covenant Suspension No provision noted. Required Lenders/Voting Rights Standard MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/70793/000104746911002408/a2202571zex-10_12.htm




Leveraged Finance


Bank Agreement Covenant Summary — NBTY, Inc. (Continued) Financial Covenants Leverage (Maximum) Senior Secured Leverage Only applicable when Revolver or Letters of Credit Outstanding

12/31/15–9/30/16 3.50x 12/31/16–Maturity 3.25x

Principal Repayments Mandatory/Tax Prepayment

Mandatory Prepayment with proceeds from: • Excess cash: 50% (Reduced to 25% or 0% if Sr. Secured Leverage is less than 2.5x and 2.0x, respectively) • Asset sale: In Excess of $15 Mil. 100% of net proceeds • Specified Refinancing debt any nonpermitted debt equals 100%

Amortization Schedule None. On Dec. 30, 2011, NBTY prepaid $225 Mil. of principal on the term loan B-1. As a result, no scheduled payments of principal will be required until the maturity date of October 2017. $4.375 Mil.

Callability/Optional Prepayment Optional prepayment without prepayment penalty/Prepayment of Term B-1 tranche pursuant to a repricing transaction before Oct. 10, 2013, shall be subject to a 1% prepayment premium.

Pricing Coupon type/Index Eurodollar Rate Floor of 1.00% and Base Rate Floor of 2.00% Pricing Grid Senior Secured

Leverage Ratio Eurodollar Rate (%)

Base Rate (%)

Revolver < 2.50:1.00 3.00 2.00 Term Loan B-1 — 3.25 2.25


Leveraged Finance


Appendix C

Bond Covenant Summary — NBTY, Inc. Covenant Issuer NBTY, Inc. Document Date and Location Filed as exhibit 4.1 in an S-4 dated March 21, 2011 Maturity Date Oct. 1, 2018 Description of Debt Amount ($ Mil.) $650 Mil. Ranking Senior Unsecured Notes Security None. Guarantee Restricted Subsidiaries that Guarantee the Credit Agreement Debt Restrictions Debt Incurrence Shall not incur or permit any of its restricted subsidiaries directly or indirectly, incur, any indebtedness (including acquired debt) or

preferred stock unless for the most recent four full fiscal quarters the fixed-charge coverage ratio would have been at least 2.0 to 1.0. Carveout: Preferred Stock of nonguarantors shall not exceed the greater of $150 Mil. and 3.5% of total assets at the time of incurrence. Credit agreement debt not to exceed $2,300 Mil. Capital leases not to exceed $75 Mil. and 1.75% of total assets.

Limitation on Liens Cannot create liens except for permitted liens, without providing that the notes are secured equally and ratably with the obligations so secured.

Limitation on Guarantees No provision noted. Acquisitions/Divestitures Change of Control (CoC) Yes, put at 101% M&A, Investments Restriction Shall not consolidate or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all its properties or assets

unless: (i) the issuer is the surviving person or person formed by or surviving; (ii) successor company assumes all obligations of the issuer under the indenture; (iii) and after such transaction has occurred, the company on a pro forma four-quarter period be able to either (a) incur at least $1.00 of additional indebtedness under its fixed charge coverage ratio test, (b) the fixed coverage ratio is equal to or greater than such ratio prior to such transaction.

Sale of Assets Restriction Shall not make an asset sale unless: receives fair market value with 75% of the consideration received is in the form of cash or cash equivalents or replacement assets. Provided that any non-cash received does not exceed the greater of $100 Mil. and 2.25% of total assets. Net cash proceeds within 365 days can be applied at its option to: (i) reduce any secured indebtedness; (ii) reduce obligations under other pari passu indebtedness of the issuer and guarantors to all holders at a purchase price at 100%; (iii) investment in any business in the form of capital stock, assets, property or capex; (iv) replacement assets; (v) any combination of the foregoing.

Restricted Payments Restricted Payments (RP) The issuer and any of its restricted subsidiaries shall not directly or indirectly declare: (i) dividends; (ii) purchase or acquire or retire any

equity issues of the issuer or holdings; (iii) make principal payment on, or redeem, purchase, defease any scheduled payment or maturity; (iv) any restricted investments. Restricted Payment Basket: Restricted payments can be made so long as immediately after making such transaction on a pro forma basis, the company could incur an additional $1.00 of debt under its fixed-coverage charge ratio and the restricted payment together with all restricted payments made by the issuer and its restricted subsidiaries after the issue date is less than the sum of: (i) 50% of consolidated net income for period Oct. 1, 2010, to end of the most recent year end (if net income is negative, than minus 100% of the deficit); plus (ii) 100% aggregate net proceeds of cash and the fair market value of other assets received for equity interests; plus (iii) 100% of the aggregate amount of contributions to the capital of the issuer; plus (iv) the principal amount of any indebtedness or disqualified stock that has been converted into or exchange for equity interests; plus (v) 100% of proceeds received for the sale of restricted investments; plus (vi) the proceeds from the sale of any employee stock; plus (vii) 100% of any distribution or dividend from an unrestricted subsidiary; plus (viii) in the event any unrestricted subsidiary has been redesignated as a restricted subsidiary after the issue date, the fair market value of investment of the issuer in the unrestricted subsidiary. Carveouts: Aggregate amount paid on an annual basis not to exceed $10 Mil., provided that subsequent to the consummation of an underwritten public equity offer (IPO) the annual amount increases to $20 Mil., with unused amounts in any calendar year permitted to be carried over for the next two succeeding calendar years of up to $15 Mil. or $25 Mil. post-IPO in aggregate. However the amount in any calendar year may be increased by an amount not to exceed: the cash proceeds received from the sale of equity interests to employees plus the cash proceeds of key man life insurance policies received. General carveout not to exceed $75 Mil. and 1.75% of total assets at any one time outstanding. Preferred Dividends the declaration and payment of dividends or distributions to the holders of any class or series of designated preferred stock and payment of dividends to Holdings or any other direct or indirect parent of the issuer provided that: after giving effect of such dividends the most recent four full fiscal quarters fixed charge coverage ratio is at least 2.0:1.0 and the aggregate amount of the dividends does not exceed the proceeds actually received by the issuer from the sale of designated preferred stock. Common Dividends of up to 6.0% per annum of net cash proceeds received from any public offering. Affiliate Transaction: Not to exceed $10 Mil. unless upon Board of Director approval of up to $30 Mil.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $45 Mil. MAC Clause No provision noted. Equity Clawback No provision noted. Covenant Suspension Provided notes have investment-grade ratings from both Moody’s and S&P rating agencies and no event of default exists, certain covenants:

(i) debt incurrence, (ii) restricted payment, (ii) dividends, (iv) asset sales, (v) affiliate transactions, vi) mergers and acquisitions. Note covenants will be reinstated if rating reverts to below IG.



Leveraged Finance


Bond Covenant Summary — NBTY, Inc. (Continued) Financial Covenants Leverage (Maximum) Consolidated Leverage Coverage (Minimum) (and) Fixed-Charge Coverage > 2.0x (for Debt Incurrence) Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Bullet Repayment Callability/Optional Prepayment 10/1/14 and after 100.00% Pricing Coupon Type/Index 9.000% Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix D

Holdco Bond Covenant Summary — Alphabet Holding Company, Inc. Overview Issuer Alphabet Holding Company, Inc. Document Date and Location Filed as exhibit 99.1 in NBTY 10-K dated Nov. 27, 2012 Maturity Date Nov. 1, 2017 Description of Debt Amount ($ Mil.) $1 Bil. Ranking Senior Unsecured Notes Security None. Guarantee None. Debt Restrictions Debt Incurrence Shall not incur or permit any of its restricted subsidiaries directly or indirectly, incur, any indebtedness (including acquired debt) or preferred

stock unless for the most recent four full fiscal quarters the fixed-charge coverage ratio would have been at least 2.0 to 1.0. Carveout: Preferred Stock of restricted subsidiaries shall not exceed the greater of $150 Mil. and 3.5% of total assets at the time of incurrence. Credit agreement debt not to exceed $2,300 Mil. Capital leases not to exceed $75 Mil. and 1.75% of total assets.

Limitation on Liens Cannot create liens except for permitted liens, without providing that the notes are secured equally and ratably with the obligations so secured. Liens for pari passu debt allowed if consolidated senior secured debt ratio is less than 4.0x.

Limitation on Guarantees Subject to subordination if underlying debt is subordinated to the Notes. Acquisitions/Divestitures Change of Control (CoC) Yes, put at 101% M&A, Investments Restriction Shall not consolidate or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all its properties or assets

unless: (i) the issuer is the surviving person or person formed by or surviving; (ii) successor company assumes all obligations of the issuer under the indenture; (iii) and after such transaction has occurred, the company on a pro forma four-quarter period be able to either (a) incur at least $1.00 of additional indebtedness under its fixed-charge coverage ratio test, (b) the fixed coverage ratio is equal to or greater than such ratio prior to such transaction.

Sale of Assets Restriction Shall not make an asset sale unless: receives fair market value with 75% of the consideration received is in the form of cash or cash equivalents or replacement assets. Provided that any noncash received does not exceed the greater of $100 Mil. and 2.25% of total assets. Net cash proceeds within 365 days can be applied at its option to: (i) reduce any secured indebtedness; (ii) reduce obligations under other pari passu indebtedness of the issuer and guarantors to all holders at a purchase price at 100%; (iii) investment in any business in the form of capital stock, assets, property or capex; (iv) replacement assets; (v) any combination of the foregoing. Any net cash proceeds not applied under the foregoing provisions shall be deemed “Excess Proceeds,” which if greater than $30 Mil. shall be used to make an offer to repurchase the Notes and other similar debt, on a pro rata basis at 100% of principal plus accrued interest.

Restricted Payments Restricted Payments (RP) The issuer and any of its restricted subsidiaries shall not directly or indirectly declare: (i) dividends; (ii) purchase or acquire or retire

any equity issues of the issuer or holdings; (iii) make principal payment on, or redeem, purchase, defease any scheduled payment or maturity of subordinated debt; (iv) any restricted investments. Restricted Payment Basket: Restricted payments can be made so long as immediately after making such transaction on a pro forma basis, the company could incur an additional $1.00 of debt under its fixed-charge coverage ratio and the restricted payment together with all restricted payments made by the issuer and its restricted subsidiaries after the issue date is less than the sum of: (i) 50% of consolidated net income for period July 1, 2012, to end of the most recent fiscal quarter end. (if net income is negative, than minus 100% of the deficit); plus (ii) 100% aggregate net proceeds of cash and the fair market value of other assets received for equity interests; plus (iii) 100% of the aggregate amount of contributions to the capital of the issuer; plus (iv) the principal amount of any indebtedness or disqualified stock that has been converted into or exchange for equity interests; plus (v) 100% of proceeds received for the sale of restricted investments; plus (vi) the proceeds from the sale of any employee stock; plus (vii) 100% of any distribution or dividend from an unrestricted subsidiary; plus (viii) in the event any unrestricted subsidiary has been redesignated as a restricted subsidiary after the issue date, the fair market value of investment of the issuer in the unrestricted subsidiary. Carveouts: Aggregate amount paid on an annual basis not to exceed $10 Mil., provided that subsequent to the consummation of an underwritten public equity offer (“IPO”) the annual amount increases to $20 Mil., with unused amounts in any calendar year permitted to be carried over for the next two succeeding calendar years of up to $15 Mil. or $25 Mil. post IPO in aggregate. However the amount in any calendar year may be increased by an amount not to exceed: the cash proceeds received from the sale of equity interests to employees plus the cash proceeds of key man life insurance policies received. General carveout not to exceed $75 Mil. and 1.75% of total assets at any one time outstanding. Preferred Dividends: the declaration and payment of dividends or distributions to the holders of any class or series of designated preferred stock and payment of dividends to Holdings or any other direct or indirect parent of the issuer provided that: after giving effect of such dividends the most recent four full fiscal quarters fixed charge coverage ratio is at least 2.0:1.0 and the aggregate amount of the dividends does not exceed the proceeds actually received by the issuer from the sale of designated preferred stock. Common Dividends of up to 6.0% per annum of net cash proceeds received from any public offering. Affiliate Transaction: Not to exceed $10 Mil. unless upon Board of Director approval of up to $30 Mil.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $45 Mil. MAC Clause No provision noted. Equity Clawback No provision noted. Covenant Suspension Provided notes have investment-grade (IG) ratings from both Moody’s and S&P rating agencies and no event of default exists, certain

covenants: (i) debt incurrence, (ii) restricted payment, (ii) dividends, (iv) asset sales, (v) affiliate transactions, vi) mergers and acquisitions. Note covenants will be reinstated if rating reverts to below IG.

MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.


Leveraged Finance


Holdco Bond Covenant Summary — Alphabet Holding Company, Inc. (Continued) Financial Covenants Leverage (Maximum) Consolidated Senior Secured Debt (net of cash, limited to $125 Mil.) < 4.0x (for Permitted Liens) Coverage (Minimum) Fixed-Charge Coverage > 2.0x (for Debt Incurrence) Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Bullet Repayment Callability/Optional Prepayment 11/1/14 102.00% 11/1/15 101.00% 11/1/16 and after 100.00% Pricing Coupon Type/Index 7.750% Cash/8.500% PIK

PIK – Payment-in-kind. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix E

Financial Summary — NBTY, Inc.

12 Months

Three Months



12 Months

($ Mil.) 9/30/11 9/30/12 9/30/13 9/30/13 12/31/13 3/31/14 6/30/14 9/30/14 9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 9/30/15 Profitability Operating EBITDAa 522.3 547.5 136.3 536.9 148.7 96.7 124.6 117.3 487.2 142.7 111.6 139.0 110.6 503.8 Operating EBITDA Margin (%) 17.7 18.3 16.8 17.0 18.0 12.4 15.4 14.8 15.2 17.3 14.2 17.0 13.9 15.6 FFO Return on Adjusted Capital (%)b 12.6 11.6 11.1 11.1 11.1 11.7 11.1 11.2 11.2 11.3 11.3 11.6 11.7 11.7 FCF Margin (%) 8.1 4.9 8.1 (1.1) (10.0) 1.5 (4.3) 5.4 (2.0) 9.1 5.6 0.6 (3.4) 3.0

Coverages (x) FFO Interest Coverage 2.5 2.7 3.2 2.7 3.6 2.6 2.7 2.8 2.9 3.4 2.5 3.4 3.1 3.1 Operating EBITDA/ Gross Interest Expense 2.7 3.5 4.0 3.7 4.3 2.9 3.7 3.4 3.6 4.1 3.4 4.3 3.3 3.8 FFO Fixed-Charge Coverage 1.8 1.9 2.1 1.9 2.2 1.7 1.8 1.8 1.9 2.2 1.7 2.1 2.0 2.0 FCF Debt Service Coverageb 2.0 1.9 0.8 0.8 1.5 1.1 0.7 0.5 0.5 1.7 1.9 2.2 1.4 1.4 Cash Flow from Operations/Capex 6.4 2.7 3.0 2.4 (1.9) 1.5 1.2 2.3 1.0 7.0 2.6 2.2 0.1 2.5

Leverage (x)b Long-Term Secured Debt/ Operating EBITDA 3.3 2.8 2.8 2.8 2.8 2.9 3.0 3.1 3.1 3.1 3.0 3.0 2.9 2.9 Long-Term Secured Debt/FFO 5.7 5.4 5.9 5.9 5.6 4.9 5.5 5.8 5.8 5.9 6.0 5.5 5.2 5.2 Total Debt with Equity Credit/ Operating EBITDA 4.6 3.9 4.0 5.0 5.9 6.0 6.2 6.5 6.5 6.6 6.4 6.2 6.4 6.4 FFO Adjusted Leverage 5.6 5.7 6.0 7.0 7.8 7.4 7.8 8.0 8.0 8.0 8.1 7.8 7.8 7.8 Total Adjusted Debt/ Operating EBITDAR 5.4 4.8 4.9 5.7 6.4 6.5 6.7 6.8 6.8 6.9 6.7 6.6 6.7 6.7 FCF/Total Adjusted Debt (%) 6.4 4.4 (1.0) (0.9) 1.6 0.2 (0.9) (1.4) (1.4) 2.2 2.9 3.8 2.2 2.2

Balance Sheet Short-Term Debt 17.5 — 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.2 0.2 — 34.5 34.5 Long-Term Senior Secured Debt 1,736.9 1,507.5 1,507.1 1,507.1 1,507.2 1,507.2 1,507.2 1,507.2 1,507.2 1,507.3 1,507.3 1,507.5 1,473.0 1,473.0 Long-Term Senior Unsecured Debt 632.5 650.0 650.0 650.0 650.0 650.0 650.0 650.0 650.0 650.0 650.0 650.0 697.4 697.4 Long-Term Subordinated Debt — — — 550.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 Other Debt — — 1.3 1.3 1.2 1.1 1.0 0.8 0.8 0.7 0.5 — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 2,386.9 2,157.5 2,158.8 2,708.8 3,158.7 3,158.6 3,158.5 3,158.3 3,158.3 3,158.2 3,158.0 3,157.5 3,204.9 3,204.9 Off-Balance Sheet Debtc 1,351.2 1,230.1 1,174.7 1,174.7 1,239.1 1,239.1 1,239.1 1,239.1 1,239.1 1,190.1 1,190.1 1,190.1 1,190.1 1,190.1 Total Adjusted Debt with Equity Credit 3,738.1 3,387.6 3,333.5 3,883.5 4,397.8 4,397.7 4,397.6 4,397.5 4,397.5 4,348.4 4,348.1 4,347.6 4,395.1 4,395.1

Cash Flow Funds From Operations 302.1 277.1 75.1 257.3 89.5 52.3 57.1 61.6 260.5 84.0 49.0 77.9 70.4 281.3 Change in Working Capital (17.5) (45.6) 23.4 54.2 (129.6) (14.3) (28.0) 14.1 (157.8) 49.1 22.0 4.1 (66.0) 9.2 Cash Flow from Operations 284.6 231.5 98.5 311.6 (40.1) 38.0 29.1 75.7 102.7 133.1 71.0 82.0 4.5 290.5 Total Non-Operating/ Nonrecurring Cash Flow — 2.5 — — — — — — — — — — — — Capex (44.2) (86.3) (32.4) (129.2) (21.2) (26.0) (25.2) (32.8) (105.2) (19.1) (26.9) (37.6) (31.9) (115.5) Common Dividends — — — (216.9) (21.3) — (38.8) — (60.1) (38.8) 0.0 (39.6) — (78.4) FCF 240.4 147.7 66.2 (34.6) (82.6) 12.0 (34.9) 43.0 (62.5) 75.2 44.1 4.7 (27.4) 96.7 Net Acquisitions and Divestitures (3,987.8) — (0.0) (74.9) — — — 7.2 7.2 0.2 0.1 0.7 — 0.9 Net Debt Proceeds 2,386.1 (229.4) (0.2) (0.6) (0.1) (0.1) (0.1) (0.1) (0.4) (0.1) (0.2) (0.5) (0.1) (0.9) Net Equity Proceeds 1,550.4 0.0 — — — — — — — — — — — — Other (Investing and Financing) (141.2) 2.4 5.2 (6.5) 1.0 0.2 0.4 (5.0) (3.4) (2.8) (5.6) 27.6 47.9 67.1 Total Change in Cash 47.9 (79.3) 71.2 (116.6) (81.8) 12.2 (34.5) 45.1 (59.1) 72.6 38.4 32.5 20.4 163.9 Ending Cash and Securities Balance 394.4 315.1 198.6 198.6 116.8 128.9 94.4 139.5 139.5 212.0 250.4 282.9 303.4 303.4 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense.

SG&A – Selling, general and administrative. Continued on next page. Source: Company reports.

Leveraged Finance


Financial Summary — NBTY, Inc. (Continued)

12 Months

Three Months



12 Months

($ Mil.) 9/30/11 9/30/12 9/30/13 9/30/13 12/31/13 3/31/14 6/30/14 9/30/14 9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 9/30/15 Income Statement Revenue 2,958.5 2,999.7 813.1 3,163.0 827.1 779.0 807.0 792.7 3,205.8 825.8 787.9 815.6 796.9 3,226.1 Revenue Growth (%) 4.7 1.4 17.6 5.4 4.8 2.8 0.5 (2.5) 1.4 (0.2) 1.1 1.1 0.5 0.6 Operating EBIT 419.0 445.2 109.7 426.2 123.1 70.8 97.2 89.5 380.7 114.6 81.9 104.8 67.1 368.4 Gross Interest Expense 195.5 158.6 34.4 147.1 34.8 33.1 33.8 34.3 136.0 34.7 32.4 32.6 33.2 132.9 Sector-Specific Data Same-Store Sales (%) — — — — — — — — — — — — — — No. of Stores — — — — — — — — — — — — — — Gross Margin (%) 47.2 46.4 46.7 46.3 46.6 44.7 46.6 44.9 45.7 46.1 44.3 47.3 45.7 45.9 SG&A/Revenues (%) 33.1 31.5 33.5 31.8 31.7 35.6 34.5 33.7 33.8 32.2 33.9 34.4 37.3 34.4 Operating EBIT Margin (%) 14.2 14.8 13.5 13.5 14.9 9.1 12.1 11.3 11.9 13.9 10.4 12.9 8.4 11.4 Operating EBITDAR 691.2 701.3 173.1 683.7 187.4 135.4 163.3 156.1 642.1 179.8 148.8 176.2 147.8 652.6 Operating EBITDAR Margin (%) 23.4 23.4 21.3 21.6 22.7 17.4 20.2 19.7 20.0 21.8 18.9 21.6 18.5 20.2 Operating EBITDAR/ (Interest + Rent) (x)b 1.9 2.2 2.4 2.3 2.5 1.9 2.3 2.1 2.2 2.5 2.1 2.5 2.1 2.3 Inventory Turnover (x)b 2.3 2.3 2.3 2.3 2.2 2.2 2.2 2.2 2.2 2.1 2.1 2.1 2.1 2.1 Accounts Payable Turnover (x)b 9.5 8.1 7.2 7.2 6.8 7.1 7.0 7.1 7.1 6.3 6.6 6.4 6.8 6.8 Return on Invested Capital (%)b 11.1 11.8 11.6 11.6 11.2 11.1 10.9 10.9 10.9 10.9 11.2 11.2 10.7 10.7 Return on Assets (%)b 0.6 2.9 2.6 2.6 2.7 3.1 2.7 (0.9) (0.9) (1.2) (1.2) (1.1) 1.5 1.5 Capex/Depreciation (%)b 42.8 84.4 214.9 116.8 152.2 181.8 159.3 199.2 98.7 114.3 145.9 165.9 99.4 85.3 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense.

SG&A – Selling, general and administrative. Source: Company reports.

Leveraged Finance


Retailing / U.S.A.

Neiman Marcus Group LTD LLC Credit Profile

Credit Profile Summary Comp Declines on Luxury Weakness: Comparable store sales (comps) trends have decelerated markedly over the last three quarters — turning negative 5.6% in the company’s fiscal first quarter ended Oct. 31, 2015 — after sustaining positive midsingle-digit comps for a number of years. This reflects the adverse impact of the strong dollar on tourist traffic in key gateway markets and the impact of lower crude oil prices on the net worth of many of Neiman Marcus Group LTD LLC’s (Neiman) core customers.

EBITDA Could Decline 25%: Fitch Ratings expects comps to decline 6% in fiscal 2016 (ended July) and be flat in fiscal 2017, assuming the materially negative trend lasts for the next 2–3 quarters. EBITDA could decline to $500 million in fiscal 2016 from an LTM level of $660 million given higher markdowns and promotional costs incurred due to lower expected volumes.

Negative FCF, but Adequate Liquidity: Neiman had approximately $59 million in cash on hand and $470 million of availability under its asset-based revolver (ABL) as of Oct. 31, 2015. Fitch expects FCF to be negative $100 million in fiscal 2016 and negative $50 million in fiscal 2017, assuming annual interest expense of approximately $270 million and gross capex of $325 million, and prior to any material swings in working capital. Liquidity is expected to be adequate over the next 24 months, and Neiman could pay in kind interest on $600 million notes due 2021 and pull back on capex given a prolonged retraction in top line.

Increase in Leverage: Fitch expects Neiman’s adjusted debt/EBITDAR, which was 7.5x on an LTM basis, could increase to the 9.0x-plus range at the end of fiscal 2016 on our EBITDA projections, and could remain close to 9.0x until comps turn solidly positive on a sustained basis.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers would include strong operating trends and FCF use toward debt paydown, leading to improvement in leverage metrics to below 6.0x.

Negative Drivers: Negative credit profile drivers would include a worse than expected or prolonged decline in comps, leading to reduced financial flexibility.

Ratings Long-Term IDRa n.r.

aFitch withdrew its public ratings on Neiman Marcus Group LTD LLC on Oct. 10, 2013.IDR – Issuer Default Rating. n.r. – Not publicly rated.

Credit Opinion Neiman Marcus Group LTD LLC carries a ‘b*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data Neiman Marcus Group LTD LLC

($ Mil.) FYE

8/1/15 LTM

10/31/15 Total Revenue 5,095.1 5,073.5 EBITDA 687.8 660.7 EBITDA Margin (%) 13.5 13.0 FCF (42.1) (103.5) Total Adjusted Debt 5,647.5 5,850.2 Total Adjusted Debt/EBITDAR (x) 7.0 7.5 EBITDAR/(Interest + Rent) (x) 2.0 1.9 Comparable Store Sales (%)a 3.9 (5.6) Real Estate Owned (%)b 58 58 No. of Storesc 86 86 aComparable store sales for the LTM reflect the performance for the three months ended Oct. 31, 2015. bReflects Neiman Marcus full-line stores. The two Bergdorf Goodman stores, Last Call and CUSP stores are 100% leased. cExcludes CUSP stores.






Leveraged Finance



Strong Dollar and Weak Crude Oil Prices Hit Luxury Sales Comps trends have decelerated markedly over the last three quarters — turning negative 5.6% in the company’s fiscal first quarter ended Oct. 31, 2015 — after sustaining positive midsingle-digit comps for a number of years.

This reflects the adverse impact of the strong dollar on international tourist traffic in key gateway markets of South Florida; New York City; Las Vegas; Washington, D.C. and Hawaii, which together account for 25% of full-line square footage. Fitch estimates the two Bergdorf stores in New York alone account for approximately 13% of Neiman’s total revenue. Some of Neiman’s customers have been taking advantage of the strong U.S. dollar and are shopping abroad for luxury products.

Neiman also believes it is feeling the negative effects of lower crude oil prices, as many of its customers have direct or indirect oil and gas investments. Lower prices for crude oil adversely affects oil company profits and the personal balance sheet and investment portfolios of those who work for or invest in these companies. Neiman operates seven stores, or 20% of its full-line square footage, in its core Texas market.

Fitch expects comps could decelerate further to approximately 7% for fiscal second and third quarters, ended January 2016 and April 2016, respectively, with the above issues compounded by the overall weakness in seasonal apparel sales this holiday and significant inventory buildup. Fitch expects comps to stabilize in calendar 2017, barring any prolonged weakness in the luxury apparel and accessories market.

EBITDA Could Decline to $500 Million in Fiscal 2016 EBITDA could decline to $500 million in fiscal 2016 from an LTM level of $660 million due to the decline in revenue and gross margin compression, given higher markdowns and promotional costs incurred from lower expected volumes. Gross margin declined 180 bps in the first quarter, driven by 150 bps lower product margins due to higher markdowns and promotional costs and approximately 30 bps of deleverage in buying and occupancy costs. Fitch expects similar or modestly worse gross margin trends over the remainder of fiscal 2016. EBITDA is expected to recover modestly in fiscal 2017, assuming flat comps.

Fitch Base Case Assumptions — Neiman Marcus Group LTD LLC ($ Mil., Year Ended July) 2015A 2016F 2017F 2018F Revenue 5,095 4,841 4,920 5,113 Revenue Growth (%) 5.3 (5.0) 1.6 3.9 Comparable Store Sales (%) 3.9 (5.9) 0.9 3.6 EBITDA 688 502 536 590 EBITDA Margin (%) 13.5 10.4 10.9 11.5 Working Capital Change 98 (5) 5 (2) Cash Flow From Operations (95) 227 270 317 Capex (270) (325) (325) (325) Dividends — — — — FCF (366) (97) (55) (8) Share Repurchases — — — — Total Debt 4,711 4,796 4,852 4,862 Total Adjusted Debta 5,648 5,761 5,838 5,898 Total Adjusted Debt/EBITDAR (x) 7.0 9.3 8.9 8.2 aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


Luxury retailers typically have flexible cost structures, driven by commission-based selling expenses. As seen in fiscal first-quarter 2016, selling, general and administrative (SG&A) expense growth moderated to 2.8% after midsingle to low double-digit increases over the prior quarters. Fitch projects 2%–3% growth in SG&A through fiscal 2017 given our comps expectations.

Neiman’s fiscal 2015 EBITDA of $688 million reached fiscal 2007 peaks for the first time after hitting a trough of $274 million in fiscal 2009.

Negative FCF, but Adequate Liquidity Neiman’s total liquidity as of Oct. 31, 2015 was $529 million — reflecting $59 million in cash on hand and $470 million of availability under its ABL — compared with $580 million in the year-ago period. The availability in both periods reflects seasonal working capital buildup.

Fitch expects FCF to be negative $100 million in fiscal 2016 and negative $50 million in fiscal 2017, assuming annual interest expense of approximately $270 million and gross capex of $325 million, and prior to any material swings in working capital.

Liquidity is nonetheless expected to be adequate over the next 24 months. Fitch expects liquidity at the end of fiscal 2016 (ending July) to be over $500 million.

Additional liquidity could be obtained if the company elects to pay in kind the interest on its $600 million senior payment-in-kind (PIK) toggle notes, similar to what it did during the recession in 2009. Paying the interest in kind at a rate of 9.5%, versus with cash at 8.75%,

(30)

(20)

(10)

0

10

20

(1,200)

(800)

(400)

0

400

800

Gross Margin Change (LHS) Comp Sales (RHS) Comp Inventory, Beg. (RHS)

Comp Sales, Comp Inventory and Gross Margin Relationship

Note: Data shown are calendarized with fiscal years ending January. Source: Company filings, Fitch Ratings.

(bps) (%)

ABL Availability — Neiman Marcus Group LTD LLC Facility Borrowing Borrowing Revolver Total LTM ($ Mil.) Cash Size Base Capacitya LOC Availability Liquidity EBITDA CFO Capex FCF 2Q14 147.2 800.0 720.0 0.0 0.0 720.0 867.2 488.2 302.3 (142.7) 159.6 3Q14 115.8 800.0 720.0 45.0 0.0 675.0 790.8 676.3 217.2 (154.5) 62.7 4Q14 196.5 800.0 720.0 0.0 0.0 720.0 916.5 677.4 295.7 (174.0) 121.7 1Q15 81.6 900.0 810.0 230.0 0.0 580.0 661.6 668.9 184.2 (194.4) (10.2) 2Q15 127.1 900.0 810.0 125.0 0.0 685.0 812.1 678.7 285.6 (223.9) 61.7 3Q15 82.2 900.0 810.0 150.0 0.0 660.0 742.2 690.1 317.4 (245.4) 72.0 4Q15 73.0 900.0 810.0 130.0 0.0 680.0 753.0 687.8 228.4 (270.5) (42.1) 1Q16 58.6 900.0 810.0 340.0 0.0 470.0 528.6 660.7 185.5 (289.1) (103.5) aNet of 10% required availability on the revolver. ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Leveraged Finance


would increase Neiman’s liquidity position by $53 million on an annual basis. The company could also scale back on its capex by moderating its remodeling activity.

Fitch expects Neiman’s adjusted debt/EBITDAR, which was 7.5x on an LTM basis, could increase to the 9.0x-plus range at the end of fiscal 2016 on our EBITDA projections, and could remain close to 9.0x until comps turn solidly positive on a sustained basis.

Competitive Market Position Neiman is the country’s premier luxury department store chain, with LTM revenue of $5.0 billion as of Oct. 31, 2015. Neiman retail stores have historically been highly productive. The company’s annual sales per square foot for Neiman full-line stores, excluding Bergdorf Goodman, is estimated at approximately $510 for fiscal 2015, and while below peak levels of $575 in 2007, remains well ahead of Nordstrom Inc.’s full-line stores, which are at about $370. Saks Incorporated is estimated to be running in a similar range.

Neiman’s position as the leading luxury department store chain in the U.S. is characterized by its superior real estate locations, customer service with a relationship-driven sales focus, and narrowly distributed brands with long-standing and strategic vendor relationships. Approximately 55% of its revenue is generated from its 41 full-line Neiman stores, and another 6% is generated at its 43 clearance centers (Neiman Last Call) and five CUSP stores. The two Bergdorf Goodman stores in New York account for about 13% of total revenue. In total, the specialty retail business accounts for 74% of revenue.

The company also has a direct business — online operations and catalogs — under the Neiman Marcus, Horchow and Bergdorf Goodman names, which currently accounts for 27% of total sales. Neiman has the highest online penetration among all the major department stores, and operating margin for its online business, as last reported in fiscal 2014, was healthy in the mid-teens and running above the store operations. However, the differential in operating margin between online and stores has narrowed over the past two years given increased pressure on the online business from infrastructure investments and free shipping. Neiman highlighted in its fiscal first-quarter 2016 earnings call that online and in-store merchandise margins were comparable.

The company acquired MyTheresa, a luxury retailer headquartered in Munich, Germany, in October 2014. The operations of MyTheresa are primarily conducted through the MyTheresa.com global luxury website. The key categories are women’s ready to wear, shoes, handbags and accessories. The company’s annual revenues were approximately $130 million at the time of the acquisition. The purchase price paid to acquire MyTheresa, net of cash acquired, was $181.7 million, which the company financed through a combination of cash and debt. The acquisition is part of Neiman’s strategic steps toward serving more customers internationally.

Leveraged Finance


Segment Revenue and Profit Breakdown — Neiman Marcus Group LTD LLC ($ Mil., Fiscal Years Ended July) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

LTM 10/31/15

Net Sales Retail 3,375 3,675 3,853 2,991 3,011 3,245 3,467 3,617 3,691 3,763 3,691 Direct 655 715 747 652 682 757 879 1,031 1,149 1,332 1,383 Total 4,106 4,390 4,601 3,643 3,693 4,002 4,345 4,648 4,839 5,095 5,074 YoY Growth (%) Retail 8.8 8.9 4.9 (22.4) 0.7 7.8 6.8 4.3 2.0 2.0 (0.9) Direct 10.7 9.2 4.5 (12.8) 4.6 11.0 16.1 17.4 11.3 16.0 17.9 Total 7.4 6.9 4.8 (20.8) 1.4 8.4 8.6 7.0 4.1 5.3 3.6 Segment as % of Total Sales Retail 82.2 83.7 83.8 82.1 81.5 81.1 79.8 77.8 76.3 73.9 72.7 Direct 16.0 16.3 16.2 17.9 18.5 18.9 20.2 22.2 23.7 26.1 27.3 Operating Income (Before Allocation of Corporate Expenses and Amortization of Intangible Assets) Retail 404 491 477 124 273 345 391 411 427 N.A. N.A. Direct 98 116 118 73 113 113 132 158 161 N.A. N.A. Total 502 606 594 198 385 458 524 569 588 N.A. N.A. Operating Margin (%) Retail 12.0 13.4 12.4 4.2 9.1 10.6 11.3 11.4 11.6 N.A. N.A. Direct 15.0 16.2 15.7 11.2 16.5 14.9 15.1 15.3 14.0 N.A. N.A. Total 12.2 13.8 12.9 5.4 10.4 11.4 12.0 12.2 12.2 N.A. N.A. Segment as % of Total Operating Profit Retail 80.5 80.9 80.2 62.9 70.8 75.3 74.7 72.3 72.6 N.A. N.A. Direct 19.6 19.1 19.8 37.1 29.2 24.7 25.3 27.7 27.4 N.A. N.A.

YoY – Year-over-year. N.A. – Not available. Source: Company filings, Fitch Ratings.

Breakdown of Retail and Direct Revenues by Channel — Neiman Marcus Group LTD LLC ($ Mil., Except Sales Per Sq Ft Data, Fiscal Years Ended July) 2007 2008 2009 2010 2011 2012 2013 2014 2015 Retail Revenues 3,675 3,853 2,991 3,011 3,245 3,467 3,617 3,691 3,763 Neiman Marcus 3,145 3,275 2,540 2,520 2,700 2,882 3,013 3,064 3,123 Neiman Marcus Full Line (Estimate) 2,952 3,002 2,313 2,251 2,426 2,585 2,657 2,753 2,799 Sales/Sq Ft (Estimate) 574 563 420 404 436 461 475 499 508 Neiman Marcus Last Call/CUSP (Estimate) 194 273 227 269 274 296 355 311 325 Sales/Sq Ft (Estimate) 359 433 307 323 315 328 372 309 305 Bergdorf Goodman 529 578 452 491 545 585 604 627 640 Sales/ Sq Ft 1,675 1,829 1,429 1,553 1,725 1,851 1,911 1,984 2,024 Direct Revenues 715 747 652 682 757 879 1,031 1,148 1,332 Internet 498 565 518 574 654 879 1,031 1,148 1,332 Catalog (Not Reported Separately Since Fiscal 2012) 217 182 134 108 103 — — — — % of Total Revenue Retail 83.7 83.8 82.1 81.5 81.1 79.8 77.8 76.3 73.9 Neiman Marcus 71.6 71.2 69.7 68.2 67.5 66.3 64.8 63.3 61.3 Neiman Marcus Full Line (Estimate) 67.2 65.3 63.5 60.9 60.6 59.5 57.2 56.9 54.9 Neiman Marcus Last Call/CUSP (Estimate) 4.4 5.9 6.2 7.3 6.9 6.8 7.6 6.4 6.4 Bergdorf Goodman 12.1 12.6 12.4 13.3 13.6 13.5 13.0 13.0 12.6 Direct 16.3 16.2 17.9 18.5 18.9 20.2 22.2 23.7 26.1 Internet 11.4 12.3 14.2 15.5 16.3 20.2 22.2 23.7 26.1 Catalog (Not Reported Separately Since FY12) 4.9 4.0 3.7 2.9 2.6 — — — — YoY Growth (%) Retail 8.9 4.9 (22.4) 0.7 7.8 6.8 4.3 2.0 2.0 Neiman Marcus 8.0 4.1 (22.5) (0.8) 7.1 6.7 4.6 1.7 2.0 Neiman Marcus Full Line (Estimate) 7.6 1.7 (23.0) (2.7) 7.8 6.6 2.8 3.6 1.7 Neiman Marcus Last Call/CUSP (Estimate) 15.1 40.9 (17.0) 18.9 1.8 8.0 20.0 (12.6) 4.5 Bergdorf Goodman 14.4 9.2 (21.8) 8.7 11.1 7.3 3.2 3.8 2.0 Direct 9.2 4.5 (12.8) 4.6 11.0 16.1 17.4 11.4 16.0 Internet 22.8 13.4 (8.3) 10.8 13.9 34.4 17.4 11.4 16.0 Catalog (Not Reported Separately Since Fiscal 2012) (13.0) (16.0) (26.5) (19.4) (4.3) — — — — Comps Retail 6.2 1.3 (23.2) (1.2) 7.5 6.0 2.2 3.4 2.6 Direct 9.2 3.8 (12.2) 4.6 11.0 16.1 15.7 12.9 13.0 Total 6.7 1.7 (21.4) (0.1) 8.1 7.9 4.9 5.5 3.9 Sq Ft – Square foot. YoY – Year-over-year. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

Leveraged Finance


Strong Loyal Customer Base Neiman’s core customers are aged 51 years on average, with approximately 48% being 50 or younger. About 79% of the customers are female and the average household income for 38% of customers is over $200,000. Revenues from the company’s InCircle Rewards program, which have accounted for approximately 40% of Neiman’s overall sales, have historically driven significant customer traffic and profitability. Neiman has expanded its range of payment types to include Visa, MasterCard and Discover cards since fiscal 2012 to drive incremental customer traffic and sales growth, particularly with younger demographics on top of the InCircle customer base.

Neiman’s customers want to be the first to adopt new fashion trends, and have high brand loyalty and low price sensitivity. They are consequently willing to pay full price at the beginning of each season, and margins are therefore strongest at the beginning of the fall and spring seasons, which are the fiscal first and third quarters, respectively. The Christmas quarter — fiscal second quarter — is largest in terms of sales, at about 30% of revenue.

The core luxury consumer spends primarily from her wealth, and is relatively unaffected by trends in employment, gas prices, etc. However, as seen in late 2008, 2009 and more recently over the last three quarters, spending by wealthy consumers may vary with swings in asset values and business profitability, as they affect a customer’s willingness to spend. Luxury retailers also cater to aspirational shoppers who occasionally reach up to buy a handbag or pair of shoes. These customers will tend to fall away if the economy softens.

Capital Spending Initiatives Neiman ramped up gross capex to $271 million in fiscal 2015, compared with $140 million–$180 million over the prior three fiscal years. The company currently projects gross capex of $300 million–$350 million in fiscal 2016. The increase in capex is primarily related to extensive remodels; three new planned store openings; additional investments in NMG One, its new merchandise system; and other technology initiatives.

Besides a new store planned in Fort Worth, TX, for 2017 — which is a replacement unit — Neiman plans to open its first Neiman Marcus store in Manhattan during calendar 2018, located in Hudson Yards, a new development on the west side of New York City. This announcement comes as part of its plan to expand its market share in New York by embarking on a five-year plan to modernize the Bergdorf Goodman stores and open its full-line Roosevelt Field store on Long Island in February 2016. The company opened its first Last Call Studio store (off-price) in Brooklyn in November 2014.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

Gross Capex Capex as % of Sales

Capital Spending

E – Estimate.Source: Company filings, Fitch Ratings.

($ Mil.) (%)

Leveraged Finance


Neiman has invested $838 million in gross capex between fiscals 2011 and 2015, primarily related to: • The construction of a new store in Walnut Creek, CA (opened in fiscal year 2012) and a

distribution facility in Pittston, PA. • Investments in online platforms, and technology and information systems. • Enhancements to merchandising and store systems. • The remodel of the Bergdorf Goodman men’s store on Fifth Avenue in New York City and

Neiman Marcus stores in Bal Harbour, FL; Chicago; Oak Brook, IL; and Beverly Hills, CA.

Fitch views Neiman as having the flexibility to pull back on capex, particularly remodeling spend, should sales remain materially weak beyond 2016.


Higher Leverage Under New Owners

Ares Management LLC and the Canada Pension Plan Investment Board acquired Neiman for $6.0 billion in October 2013, or 9.1x Neiman’s fiscal 2013 EBITDA of $658 million. Pro forma adjusted leverage was 7.1x, reflecting approximately $2 billion of incremental debt used to finance the company’s acquisition. This compares with 4.6x for fiscal 2013 under the prior capital structure (pre-IPO). The previous sponsors, Texas Pacific Group and Warburg Pincus, acquired Neiman in October 2005 for $5.1 billion, at a slightly higher EBITDA multiple of 9.7x fiscal 2005 EBITDA of $528 million, with pro forma leverage of 6.4x.

Snapshot of Luxury Department Stores Sales and Operating Profit Performance 2006 2007 2008 2009 2010 2011 2012 2013 2014

LTM 10/31/15

Revenues ($ Mil.) Nordstrom 8,561 8,828 8,272 8,258 9,310 10,497 11,762 12,166 13,110 13,889 YoY Growth (%) 10.9 3.1 (6.3) (0.2) 12.7 12.7 12.1 3.4 7.6 8.6 Neiman Marcusa 4,243 4,561 4,160 3,549 3,820 4,186 4,494 4,779 4,986 5,073 YoY Growth (%) 9.4 7.5 (8.8) (14.7) 7.6 9.6 7.4 6.3 2.9 3.6 Saks 2,940 3,283 3,030 2,632 2,786 3.014 3,148 N.A. N.A. N.A. YoY Growth (%) 5.8 11.7 (7.7) (13.1) 5.9 8.2 4.4 N.A. N.A. N.A. Department stores (Incl. L.D.) 218,132 213,941 202,915 190,788 189,265 188,478 182,879 175,145 171,665 170,231 YoY Growth (%) (1.0) (1.9) (5.2) (6.0) (0.8) (0.4) (3.0) (4.2) (2.0) (2.3) Comps Sales by Year (%) Nordstrom 7.5 3.9 (9.0) (4.2) 8.1 7.2 7.3 2.5 4.0 3.8 Neiman Marcusa 6.8 5.7 (11.4) (15.8) 6.9 9.4 6.2 5.1 5.5 1.2 Saks 4.9 11.7 (6.1) (14.7) 6.4 9.5 3.2 N.A. N.A. N.A. Sales per Sq Ft ($) Nordstrom 423 435 388 368 397 431 470 474 493 507 Neiman Marcusa 624 650 553 453 482 525 542 567 580 569 Saksb 395 444 417 356 379 419 437 N.A. N.A. N.A. EBITDA Margins (%) Nordstrom 16.3 16.2 12.6 12.9 15.3 15.4 15.0 14.8 14.5 13.4 Neiman Marcusa 15.4 15.5 11.0 10.3 12.8 13.5 13.8 14.4 13.6 13.0 Saks 5.9 7.5 0.9 4.8 8.6 9.7 9.1 N.A. N.A N.A. aNeiman Marcus’ figures have been adjusted to reflect fiscal years ending January. bSaks’ data is based on Fitch’s estimates and includes the New York flagship store. YoY – Year over year. L.D. − Leased department store space. Comps – Comparable store sales. N.A. − Not available. Source: Company filings, Fitch Ratings.

Leveraged Finance


Both the 2005 and 2013 LBOs consisted of PIK debt, and both PIK issues were relatively junior in the capital structures. The 2005 PIK issue terms provided greater flexibility for making payments in kind over the first five years, while the payment terms in the 2013 PIK issue have more stringent cash-pay requirements, consistent with the prevailing market overall. Neiman elected to pay in kind for three successive quarters beginning in January 2009 on the 2005 PIK notes in light of the dislocation in credit markets, although its liquidity position was fairly strong.

The company announced in August 2015 that it had filed a registration statement with the SEC for a proposed IPO. The downturn in the business is likely to stall prospects of an IPO over the next 12–18 months.

LBO Debt Structure Comparison — Neiman Marcus Group LTD LLC 2013 LBO

Amount ($ Mil.) (%)

2005 LBO

Amount ($ Mil.) (%)

$800 Mil. Senior Secured Revolving Credit Facility due 10/25/18 75 2

$600 Mil. Senior Secured Revolving Credit Facility due 2013 150 4 Senior Secured Term Loan Facility due 10/25/20 2,950 63

Senior Secured Term Loan Facility due 2013 1,975 57

7.125% Senior Debentures due 6/1/28 125 3

7.125% Senior Debentures due 6/1/28 125 4 8.000% Senior Unsecured Notes due 2021 960 20

9.000%/9.750% Senior PIK Toggle Notes due 2015 700 20

8.750%/9.500% Senior PIK Toggle Notes due 2021 600 13

10.375% Senior Subordinated Notes due 2015 500 14 Total Debt 4,710 100

Total Debt 3,450 100

EBITDAa 671.5

EBITDA 528.0 Rent Expenseb 104.6

Rent Expense 66.1

Total Leverage (x) 7.1

Total Leverage (x) 6.4 Interest Coverage (All Cash Interest, x) 2.5

Interest Coverage (All Cash Interest, x) 2.4

aEBITDA reflects the reversal of the reduction in rent expense related to the amortization of historical allowances received from developers in connection with the construction of Neiman stores and the reversal of the amortization of previously unrecognized actuarial losses related to certain long-term benefit plans. It also excludes advisory and management fees paid to the prior sponsors. bRent expense excludes the amortization of historical deferred real estate credits that will be eliminated in connection with purchase accounting. PIK – Payment-in-kind. Source: Company filings, Fitch Ratings.

Capital Structure ($ Mil., At Oct. 31, 2015) Description Amount (%) Secured Debt $900 Mil. Asset-Based Revolver due 10/25/18 340.0 6.9 $2,950 Mil. Secured Term Loan Facility due 10/25/20 2,891.1 58.8 7.125% Senior Debentures due 6/1/28 125.0 2.5 Total Secured Debt 3,356.1 68.3 Unsecured Debt 8.000% Senior Unsecured Notes due 2021 960.0 19.5 8.750%/9.500% Senior PIK Toggle Notes due 2021 600.0 12.2 Total Unsecured Debt 1,560.0 31.7 Total Debt 4,916.1 100.0 Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015) 2016 29.5 2017 29.5 2018 29.5 2019 29.5 2020 2,765.7 Thereafter 1,685.0

Note: Exclude borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

Liquidity ($ Mil., At Oct. 31, 2015) Cash 58.6 Revolver Availability 470.0 Total 528.6 Source: Company filings, Fitch Ratings.

Leveraged Finance


Recovery Analysis Fitch’s recovery analysis assumes an enterprise value (EV) of $2.4 billion for Neiman in a distressed scenario. This is based on a going concern EBITDA of approximately $400 million, which assumes a 20% decline in revenue from the current level of $5.1 billion and a 10% EBITDA margin, and market valuation of 6.0x EV/EBITDA. The EV multiple applied is below the current trading market multiples of comparable luxury retail peers, but slightly above the 5.6x that Fitch assumes for recovery analysis in the retail sector.

Applying this EV across the capital structure results in outstanding recovery prospects (91%–100%) for the revolving credit facility, which is assigned a ‘bb*/rr1*’. The credit facility is secured by a first lien on inventory and cash of Neiman and the subsidiary guarantors, and a second lien on real estate, capital stock, and all other tangible and intangible assets, including a significant portion of Neiman’s owned and leased real property — which currently consists of approximately half of Neiman’s full-line retail stores — and equipment.

The $2.9 billion term loan and the $125 million of 7.125% secured debentures are secured by a first lien on the company’s fixed and intangible assets, and a second lien on inventory and cash. They are expected to have good recovery prospects (51%–70%) and are assigned a ‘b+*/rr3*’. The $960 million 8% senior unsecured notes and $600 million 8.750%/9.500% senior PIK toggle notes, both due October 2021, have poor recovery prospects (less than 10%) are assigned a ‘ccc+*/rr6*’.

Recovery Analysis Neiman Marcus Group LTD LLC ($ Mil., Except Where Noted; Credit Opinion: b*)

Distressed Enterprise Value (EV) as a Going Concern (GC) Liquidation Value (LV) Book Value

Advance Rate (%)


Going Concern EBITDA 400.0 Cash 81.6 0 — GC EV Multiple (x) 6.0 A/R 0 80 — EV on GC Basis 2,400.0 Inventory 1,273.6 70 891.5 Net PPE 1,409.1 50 704.6 Total LV 1,596.1 Value Available for Claims Distribution Greater of GC or LV 2,400.4 Less Administrative Claims (10%) 240.0 Adjusted LV Available for Claims 2,160.4



Recovered Recovery


Credit Opinion

Sr. Secured Facilitya 567.0 567.0 100 rr1* +3 bb* Sr. Secured (Second Lien) 3,016.1 1,593.4 53 rr3* +1 b+* Sr. Secured (Other) 0.0 0 Concession Payment Availability Adjusted EV Available for Claims 2,160.4 Less Secured Debt Recovery 2,160.4 Remaining Recovery for Unsecured Claims


Recovered Recovery


Credit Opinion

Sr. Unsecuredb 1,639.4 0 rr6* –2 ccc+* Unsecured 0.0 0 — — — Sr. Subordinated 0.0 0 — — — aFitch assumes the $810 Mil. credit facility is 70% drawn in a distressed scenario. bIncludes senior unsecured notes and estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Fitch Ratings.

Leveraged Finance



Leveraged Finance


Appendix A

Organizational Structure — Neiman Marcus Group LTD LLC($ Mil., As of Oct. 31, 2015)

aSponsor Funds consist of Ares Management LLC and Canada Pension Plan Investment Board. bGuarantor subsidiaries will guarantee all of NMG and its subsidiaries’ current and future debt obligations. Neiman Marcus Group LTD LLC has pledged assets that secure the senior secured facilities, to secure the obligations under the existing 7.125% senior debentures due 2028. Bergdorf Goodman, Inc.; NM Nevada Trust; and NMG Germany GmbH are nonguarantors of the 2028 notes.The guarantor subsidiaries account for substantially all of the company’s revenues and EBITDA and hold substantially all the net assets and liabilities. CO – Credit Opinion. PIK – Payment-in-kind. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions.Source: Company filings, Fitch Ratings.

Mariposa Borrower, Inc.(Co-Issuer of Unsecured Notes)

Sponsor Fundsa

Mariposa Intermediate Holdings LLC(Guarantor of NMG’s Senior Secured Credit Facilities)

Neiman Marcus Group LTD LLCCO — b*/Stable

Debt Issue $900 Mil. Asset-Based Revolver due 10/25/18$2,950 Mil. Secured Term Loan Facility due 10/25/208.000% Senior Unsecured Notes due 10/15/21 (Co-Issuer)8.750%/9.500% Senior PIK Toggle Notes due 10/15/21 (Co-Issuer)Total

Amount 340

2,891960600

4,791

Guarantor Subsidiariesb Nonguarantor Subsidiaries

The Neiman Marcus Group, LLCCO — b*/Stable

Debt Issue 7.125% Senior Debentures due 6/1/28

Amount125

CO

bb*/rr1*b+*/rr3*ccc+*/rr6*ccc+*/rr6*

COb+*/rr3*

Neiman Marcus Group, Inc. (Parent Company)

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — Neiman Marcus Group LTD LLC Overview Borrower Neiman Marcus Group LTD LLC Document Date and Location

Revolving Credit Agreement dated 10/25/13 (Exhibit 10.2 to 8-K filed 10/29/13). First Amendment to Revolving Credit Agreement 10/10/14 (Exhibit 10.1 to 8-K filed 10/16/14).

Description of Debt Senior secured revolving credit facility subject to a borrowing base equal to the sum of (a) 90% of the net orderly liquidation value of eligible inventory, (b) 90% of eligible credit card accounts, and (c) 100% of all eligible cash held, less certain reserves.

Maturity Date Oct. 25, 2018 Amount $900 Mil. Ranking Senior secured Security First lien on inventory and A/R; second lien on all other tangible and intangible assets (including owned and leased real property);

second-priority pledge of 100% of stock of U.S. subs and 65% of foreign subs. Note: the applicable value of stock pledge is limited to 20% of the aggregate principal amount of the 2028 Debentures or other secured public debt obligations of Neiman.

Guarantee Guaranteed by the Parent Co., the borrower, and certain of its existing and future domestic subsidiaries (including Bergdorf Goodman, Inc., through which Neiman conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust, which holds legal title to certain real property and intangible assets used by the company in conducting its operations).

Financial Covenants Fixed-Charge Coverage A minimum fixed-charge coverage ratio (FCCR) of 1.0x, tested only if excess availability is less than the greater of (i) 10.0% of the lesser of

(a) the aggregate revolving commitments and (ii) the borrowing base, and (ii) $50 Mil. Debt Restrictions Debt Incurrence Ratio Debt: Debt permitted provided interest coverage ratio is 2.0x or greater on a pro forma basis, provided that the aggregate principal amount of

ratio debt incurred by restricted subsidiaries that are not guarantors may not exceed $100 Mil. at any time outstanding. Carveouts: Up to $300 Mil. of additional revolving facility commitments and/or incremental term loans; secured debt up to $3.6 Bil. plus incremental term loans or incremental equivalent term debt provided that pro forma senior secured first lien net leverage ratio ≤ 4.25x or total net leverage ratio ≤ 7.00x if incremental term loans are secured on a junior basis to the existing term loans; capital lease obligations or purchase money debt to finance purchase, lease or improvement of fixed or capital assets not to exceed the greater of $200 Mil. and 2.25% of consolidated total assets; $75 Mil. for debt incurred or refinanced for a permitted acquisition or an entity to become restricted subsidiary provided no event of default immediately before or would result therefrom and pro forma interest coverage ratio would increase; debt or guarantees of indebtedness of joint ventures not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; foreign subsidiary debt not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; unsecured debt permitted provided the Payment Conditions are satisfied (please refer to definition at the bottom of this page) and for which the maturity date is six months after the revolver’s latest maturity date; debt incurred by a receivables subsidiary in a qualified receivables financing; hedge agreements; other junior debt subject to a junior lien intercreditor agreement; general carveout up to the greater of $250 Mil. and 2.75% of consolidated total assets.

Limitation on Liens Liens securing new indebtedness permitted under debt incurrence covenant; general carveout up to the greater of $250 Mil. and 2.75% of consolidated total assets.

Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of over 50% voting stock prior to an IPO or 35% of voting interest after IPO and constitutes an event of default. M&A, Investments Restriction

Intercompany investments among the borrower and the restricted subsidiaries not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; investments in foreign subsidiaries not to exceed the greater of $100 Mil. and 1.15% of consolidated total assets; additional investments permitted provided the payment conditions are satisfied; general carveout of $75 Mil. (including general carveout for restricted payments and prepayment of junior debt). Permitted acquisitions provided the payment conditions are satisfied.

Sale of Assets Restriction Standard restrictions on asset sales above $10 Mil. threshold provided any noncash consideration outstanding at any time not to exceed the greater of $125 Mil. or 1.50% of consolidated total assets; general carveout of $10 Mil.


RP means dividends and share repurchase and is permitted provided payment conditions are satisfied. Carveouts: $30 Mil. per year for equity purchases from employees; dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; general carveout of $75 Mil. (including general carveout for investments and prepayment of junior debt).

Prepayment of Debt Prepayment of junior debt limited to $75 Mil. when taken together with the general basket for investments and RPs; additional payments permitted if immediately before and after such payment, the payment conditions are satisfied.

Other Cross-Default Yes, exceeding $50 Mil. Cross-Acceleration N.A. MAC Clause As a representation and warranty, and under affirmative covenants. Equity Cure Yes, permitted provided (a) there shall be at least two fiscal quarters in any period of four consecutive quarters that a cure right has not been

exercised and in aggregate no more than five “cure rights” shall be exercised, (b) the cure amount shall be no greater than the amount required for purposes of complying with the financial performance covenant (i.e. FCCR shall be at least 1.0x if excess availability is less than the greater of $50 Mil. and 10.0% of the line cap then in effect for 20 consecutive days).

Cash Dominion Event The company’s funds will be swept daily to reduce the borrowings outstanding under the ABL revolver if borrowings availability falls below designated thresholds. This means either (a) the occurrence and continuance of any specified default, or (b) the borrower’s failure to maintain availability of at least the greater of $50 Mil. or 10% of the line cap for five consecutive days.

Key Definitions Payment Conditions: With respect to a specified transaction or payment (a) no event of default has occurred and is continuing; (b) pro forma excess availability in the 30-day period preceding and on the date of the transaction or payment would exceed the greater of 15% of the line cap (lesser of the total revolver commitments and borrowing base then in effect) and $90 Mil.; and (c) pro forma consolidated FCCR is not less than 1.0x, provided that the FCCR test will not be required if pro forma excess availability in the 30-day period preceding and on the date of the transaction or payment would exceed the greater of 25% of the line cap (lesser of the total commitments or borrowing base) and $200 Mil.

Pricing LIBOR + 125 bps–175 bps or Base Rate + 25 bps–75 bps subject to levels of average historical excess availability; commitment fee of 0.25% per annum.

A/R – Accounts receivable. N.A. – Not applicable. MAC – Material adverse change. ABL – Asset-based revolver. Source: Company filings, Fitch Ratings.



Leveraged Finance


Term Loan Agreement Covenant Summary — Neiman Marcus Group LTD LLC Overview Borrower Neiman Marcus Group LTD LLC Document Date and Location Term Loan Credit Agreement dated as of Oct. 25, 2013 (Exhibit 10.1 to 8-K filed 10/29/13).

Term Loan Refinancing Amendment dated March 13, 2014 (Exhibit 10.1 to 8-K filed 3/13/14). Description of Debt Senior secured term loan facility Maturity Date Oct. 25, 2020 Amount $2,950 Mil. Ranking Senior secured Security Second lien on inventory and A/R; first lien on all other tangible and intangible assets (including owned and leased real property); first

priority pledge of 100% of stock of U.S. subs and 65% of foreign subs. Guarantee Guaranteed by the Parent Co, the borrower and certain of its existing and future domestic subsidiaries (including Bergdorf Goodman,

Inc. through which Neiman conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust, which holds legal title to certain real property and intangible assets used by the company in conducting its operations).

Debt Restrictions Debt Incurrence Ratio Debt: Debt permitted provided interest coverage ratio is 2.0x or greater on a pro forma basis, provided that the aggregate principal

amount of ratio debt incurred by restricted subsidiaries that are not guarantors may not exceed $100 Mil. at any time outstanding. Carveouts: ABL revolver debt including incremental facility not to exceed the greater of $1.1 Bil. and borrowing base; capital lease obligations or purchase money debt to finance purchase, lease, or improvement of fixed or capital assets not to exceed the greater of $200 Mil. and 2.25% of consolidated total assets; $75 Mil. for debt incurred or refinanced for a permitted acquisition or an entity to become restricted subsidiary provided no event of default immediately before or would result therefrom and pro forma interest coverage ratio would increase; debt or guarantees of indebtedness of joint ventures not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; foreign subsidiary debt not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; debt incurred by a receivables subsidiary in a qualified receivables financing; hedge agreements; other junior debt subject to a junior lien intercreditor agreement; general carveout up to the greater of $250 Mil. and 2.75% of consolidated total assets.


Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of over 50% voting stock prior to an IPO or 35% of voting interest after IPO and constitutes an

event of default. M&A, Investments Restriction Intercompany investments among the borrower and the restricted subsidiaries not to exceed the greater of $50 Mil. and 0.5% of

consolidated total assets; investments in foreign subsidiaries not to exceed the greater of $100 Mil. and 1.15% of consolidated total assets; general carveout up to the greater of $150 Mil. and 1.75% of consolidated total assets (including general carveouts for restricted payments and prepayment of junior debt).

Sale of Assets Restriction Standard restrictions on asset sales above $10 Mil. threshold provided any noncash consideration outstanding at any time not to exceed the greater of $125 Mil. or 1.50% of consolidated total assets; general carveout of $10 Mil.

Restricted Payments Restricted Payments (RP) RP means dividends and share repurchase.

Carveouts: Any RP up to the available amount (defined at the bottom of this page) provided no event of default is continuing immediately prior to such RP or would result therefrom and pro forma interest coverage ratio would be at least 2.0x; $30 Mil. per year for equity purchases from employees; dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; additional RP up to the greater of $100 Mil. or 1.15% of consolidated total assets (including general carveouts for investment and prepayment of junior debt).

Prepayment of Debt Payments of junior debt limited to the available amount on the date of payments provided no event of default is continuing or result therefrom and pro forma total net leverage ratio is equal to or less than 4.5x; additional payments of junior debt limited to the greater of $100 Mil. or 1.15% of consolidated total assets when taken together with the general basket for investments and RPs; additional payments permitted if immediately before and after such payment, the payment conditions are satisfied.

Other Cross-Default Yes, exceeding $50 Mil. Cross-Acceleration N.A. MAC Clause As a representation and warranty, and under affirmative covenants. Key Definitions Available Amount: Sum of (a) $200 Mil., (b) cumulative retained excess cash flow amount (measured annually), (c) cumulative amount

of cash proceeds from equity issuance, capital contribution and debt issuance to the holding company, (d) cash received from the sale of equity interest of any unrestricted subsidiary or dividend and other distribution by such unrestricted subsidiary, and (e) any mandatory prepayment declined by lender, less than the use of available amount since closing date.

A/R – Accounts receivable. ABL – Asset-based lending. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.



Leveraged Finance


Term Loan Agreement Covenant Summary — Neiman Marcus Group LTD LLC (Continued) Financial Covenants Leverage (Maximum) None. Coverage (Minimum) None. Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment Excess Cash Flow (ECF): 50% of ECF if senior secured first lien net leverage ratio > 4.0x, or 25% if leverage ratio ≤ 4.0x but

> 3.5x, or 0% if leverage ratio is ≤ 3.5x. 100% of net proceeds from asset sales and debt issuances shall be used to prepay term loan.

Amortization Schedule Term loan amortizes at a 0.25% quarterly installment (1.0% annually) with the balance due upon maturities. Callability/Optional Prepayment Permitted at any time without premium or penalty. Pricing Coupon Type/Index Floating based on LIBOR (L) or Base Rate (BR) Applicable Rate LIBOR + 300 bps–325 bps (1.0% LIBOR floor) or Base Rate + 200 bps–225 bps, subject to senior secured first lien net

leverage ratio.

ABL – Asset-based lending. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix C

Bond Covenant Summary — The Neiman Marcus Group LLC Overview Issuer The Neiman Marcus Group LLC Document Date and Location Indenture dated 5/27/98 (Exhibit 4.1 to 10-K filed 10/29/98)

First Supplemental Indenture dated 7/11/06 (Exhibit 4.1 to 8-K filed 7/11/06) Second Supplemental Indenture dated 8/14/06 (Exhibit 4.1 to 8-K filed 8/15/06)

Description of Debt 7.125% senior secured debentures Maturity Date June 1, 2028 Original Issue/Outstanding $125 Mil./$125 Mil. Ranking Senior secured Security Secured equally and ratably by a first lien security interest on certain collateral subject to liens granted under Neiman’s senior secured

credit facilities constituting (a) first priority pledge of 100% of stock of U.S. subs and 65% of foreign subs and (b) certain of Neiman’s principal properties that include approximately half of Neiman’s full-line stores, in each case, to the extent required by the terms of the indenture (pari passu with senior secured term loan facility). The collateral securing the 2028 debentures will be released upon the release of liens on such collateral under Neiman’s senior secured credit facilities and any other debt secured by such collateral.

Guarantee Guaranteed on a senior unsecured basis by the Parent Co., but not Bergdorf Goodman, Inc. and NM Nevada Trust that provide guarantees to the credit facilities and senior notes.

Debt Restrictions Debt Incurrence Senior debt incurrence subject to lien restriction. Limitation on Liens Limited to 15% of consolidated total assets. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) None M&A, Investments Restriction None Sale of Assets Restriction Sale and leasebacks of principal properties not permitted unless proceeds shall be used within 180 days to repay debt and transaction

subject to lien restriction. Restricted Payments Restricted Payments (RP) None Other Cross-Default No Cross-Acceleration Yes, exceeding $15 Mil. MAC Clause None Equity Clawback None Callability Callable at the greater of par and make-whole + 20 bps at any time


http://phx.corporate-ir.net/phoenix.zhtml?c=118113&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTUzNjQ5OCZEU0VRPTImU0VRPSZTUURFU0M9U0VDVElPTl9FWEhJQklUJmV4cD0mc3Vic2lkPTU3

http://www.sec.gov/Archives/edgar/data/1358651/000135865106000002/denb2028.htm

http://www.sec.gov/Archives/edgar/data/1358651/000135865106000005/secinden.htm

Leveraged Finance


Bond Covenant Summary — Neiman Marcus Group LTD LLC Overview

Issuer Neiman Marcus Group LTD LLC and Mariposa Borrower, Inc. (as co-issuers) Document Date and Location Senior Cash Pay Notes Indenture dated 10/21/13

(Exhibit 4.1 to 8-K filed 10/29/13) First Supplemental Indenture dated 10/25/13 (Exhibit 4.3 to 8-K filed 10/29/13)

Senior PIK Toggle Notes Indenture dated 10/21/13 (Exhibit 4.2 to 8-K filed 10/29/13) First Supplemental Indenture dated 10/25/13 (Exhibit 4.4 to 8-K filed 10/29/13)

Description of Debt 8.000% senior cash pay notes 8.750%/9.500% senior PIK toggle notes Maturity Date Oct. 15, 2021 Oct. 15, 2021 Original Issue/Outstanding $960 Mil./$960 Mil. $600 Mil./$600 Mil. Ranking Senior unsecured obligations of the issuer pari passu in right of payments to its senior indebtedness. Security Unsecured. Guarantee Guaranteed on a senior unsecured basis by the Parent Co., the issuer and certain of its existing and future domestic subsidiaries

(including Bergdorf Goodman, Inc., through which Neiman conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust, which holds legal title to certain real property and intangible assets used by the company in conducting its operations).

Debt Restrictions Debt Incurrence Ratio Debt: Debt permitted provided interest coverage ratio is 2.0x or greater on a pro forma basis, provided that the aggregate

principal amount of ratio debt incurred by restricted subsidiaries that are not guarantors may not exceed the greater of $100 Mil. and 1.15% of consolidated total assets at any time outstanding. Carveouts: ABL revolver debt including incremental facility not to exceed the greater of $1.1 Bil. and borrowing base; senior secured debt not to exceed the sum of $2.95 Bil. plus the greater of $650 Mil. and such amount that would not result in the senior secured net leverage ratio to be equal or greater than the ratio calculated at the closing date of the notes; capital lease obligations or purchase money debt to finance purchase, lease or improvement of fixed or capital assets not to exceed the greater of $200 Mil. and 2.25% of consolidated total assets; $125 Mil. for debt incurred to acquire any assets or for an entity to become restricted subsidiary provided pro forma interest coverage ratio would increase; debt or guarantees of indebtedness of joint ventures not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; foreign subsidiary debt not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; debt incurred by a receivables subsidiary in a qualified receivables financing; hedge agreements; general carveout up to the greater of $250 Mil. and 2.75% of consolidated total assets.


Limitation on Guarantees Guarantees are included under the definition of indebtedness hence are governed by related debt covenant. Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as sale of substantially all assets of the company and its restricted subsidiaries, or acquisition of more than 50% voting

stock of the company. There is a CoC put at 101. M&A, Investments Restriction Investments in a similar business not to exceed the greater of $100 Mil. and 1.15% of consolidated total assets; general carveout up to

the greater of $150 Mil. and 1.75% of consolidated total assets. Sale of Assets Restriction Standard restrictions on asset sales above $25 Mil. threshold provided any noncash consideration outstanding at any time not to exceed

the greater of $125 Mil. or 1.50% of consolidated total assets; in the event that sales proceeds exceed collateral value by more than $50 Mil. and are not applied to repay loans or reinvest in additional assets within 365 days, they shall be applied to repay the notes subject to an offer.

Restricted Payments Restricted Payments (RP) RP means (i) any dividend (ii) stock repurchase (iii) prepayment of subordinated debt and (iv) restricted investments.

Ratio Test: RP are permitted provided (i) no event of default (ii) borrower can incur $1 of debt under the 2.0x interest coverage ratio debt test. RP Basket: Determined as cumulative sum of $200 Mil. plus 50% consolidated net income commencing 8/4/13 plus 100% of the net proceeds from an equity issuance and other adjustments. Carveouts: $30 Mil. per year for equity purchases from employees; dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; any additional RP permitted provided pro forma total net leverage ratio not to exceed 3.5x and no event of default is continuing or would result therefrom; additional RP up to the greater of $100 Mil. or 1.15% of consolidated total assets provided no event of default is continuing or would result therefrom.

Other Cross-Default No. Cross-Acceleration Yes, exceeding $15 Mil. Callability Redeemable, at the company’s option, in whole or in part, on and

after Oct. 15, 2016, at the applicable redemption price below. 2016: 106.000% 2017: 104.000% 2018: 102.000% 2019+: 100.000%

Redeemable, at the company’s option, in whole or in part, on and after Oct. 15, 2016, at the applicable redemption price below. 2016: 106.563% 2017: 104.375% 2018: 102.188% 2019+: 100.000%

Equity Clawback Max. 40% of the issue can be redeemed @ 108.000% with proceeds from an IPO on or before 10/15/16.

Max. 40% of the issue can be redeemed @ 108.750% with proceeds from an IPO on or before 10/15/16.

Covenant Suspension Covenants related to debt incurrence, restricted payments, asset sales, limitation on transactions with affiliates, future guarantors and incurrence interest coverage ratio test pro forma for an acquisition, and offer to repurchase upon a change of control will be suspended if (a) the notes have investment grade ratings by two rating agencies and (b) there is no event of default. If any of these conditions fails to be met at a subsequent date, the covenants shall be reinstated on that later date.

PIK – Payment-in-kind. ABL – Asset-based lending. Source: Company filings, Fitch Ratings.









Leveraged Finance


Appendix D

Financial Summary — Neiman Marcus Group LTD LLC



12 Months

Three Months

LTM Ended


Operating EBITDAa 592.2 658.2 194.4 190.5 188.2 104.4 677.4 185.9 200.3 199.6 102.0 687.8 158.8 660.7 Operating EBITDA Margin (%) 13.6 14.2 17.2 13.3 16.2 9.4 14.0 15.7 13.2 16.4 8.7 13.5 13.6 13.0 FFO Return on Adjusted Capital (%)b 13.7 15.1 7.9 8.4 8.6 9.8 9.8 10.4 10.6 11.3 10.4 10.4 10.1 10.1 FCF Margin (%) (7.9) 4.4 (2.1) 6.0 (6.3) 11.9 2.5 (13.1) 10.4 (5.1) 1.6 (0.8) (18.6) (2.0)

Coverages (x) FFO Interest Coverage 2.7 3.3 2.3 2.2 1.9 2.2 2.1 2.1 2.4 2.7 1.2 2.1 2.0 2.1

Operating EBITDA/ Gross Interest Expense 3.4 3.9 5.2 2.4 2.3 1.4 2.5 2.5 2.7 2.7 1.4 2.4 2.2 2.3 FFO Fixed-Charge Coverage 2.1 2.5 1.8 1.9 1.7 1.9 1.8 1.8 2.0 2.2 1.2 1.8 1.7 1.8 FCF Debt Service Coverageb (0.9) 2.2 2.1 1.6 1.1 1.3 1.3 0.9 1.1 1.1 0.8 0.8 0.6 0.6 Cash Flow from Operations/Capex 1.7 2.4 0.3 3.6 (0.7) 3.1 1.7 (1.8) 3.5 0.0 1.2 0.8 (1.9) 0.6


Operating EBITDA 3.9 4.1 4.7 4.4 4.5 4.5 4.5 4.8 4.6 4.6 4.5 4.5 5.0 5.0 Long-Term Secured Debt/FFO 7.7 7.0 10.4 10.1 11.6 10.1 10.1 9.7 9.1 7.9 9.6 9.6 10.4 10.4 Total Debt with Equity Credit/ Operating EBITDA 4.7 4.1 7.0 6.7 6.9 6.8 6.8 7.2 7.0 6.9 6.8 6.8 7.4 7.4 FFO-Adjusted Leverage 6.2 5.3 9.9 9.3 9.2 8.1 8.1 7.7 7.5 7.0 7.7 7.7 8.0 8.0 Total Adjusted Debt/ Operating EBITDAR 5.1 4.6 7.2 6.9 7.1 7.0 7.0 7.4 7.2 7.1 7.0 7.0 7.5 7.5 FCF/Total Adjusted Debt (%) (9.7) 5.8 4.2 2.9 1.1 2.2 2.2 (0.2) 1.1 1.3 (0.7) (0.7) (1.8) (1.8)

Balance Sheet Short-Term Debt — — 29.5 29.5 29.4 29.4 29.4 29.4 29.4 29.4 29.4 29.4 29.4 29.4

Long-Term Senior Secured Debt 2,281.9 2,697.1 3,167.4 3,035.1 3,072.8 3,020.5 3,020.5 3,243.2 3,130.9 3,148.6 3,121.3 3,121.3 3,324.0 3,324.0 Long-Term Senior Unsecured Debt — — 1,560.0 1,560.0 1,560.0 1,560.0 1,560.0 1,560.0 1,560.0 1,560.0 1,560.0 1,560.0 1,560.0 1,560.0 Long-Term Subordinated Debt 500.0 — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 2,781.9 2,697.1 4,756.9 4,624.6 4,662.3 4,609.9 4,609.9 4,832.6 4,720.3 4,738.0 4,710.7 4,710.7 4,913.4 4,913.4 Off-Balance Sheet Debtc 735.2 773.6 829.6 829.6 829.6 829.6 829.6 936.8 936.8 936.8 936.8 936.8 936.8 936.8 Total Adjusted Debt with Equity Credit 3,517.1 3,470.7 5,586.5 5,454.2 5,491.9 5,439.5 5,439.5 5,769.4 5,657.1 5,674.8 5,647.5 5,647.5 5,850.2 5,850.2

Cash Flow Funds From Operations 297.7 385.8 47.6 90.5 72.2 89.5 299.8 80.7 101.6 127.9 16.5 326.8 75.0 321.0

Change in Working Capital (37.9) (36.4) (35.3) 29.0 (102.9) 105.0 (4.1) (180.0) 119.4 (126.9) 89.1 (98.4) (217.1) (135.5) Cash Flow from Operations 259.8 349.4 12.3 119.6 (30.7) 194.5 295.7 (99.2) 221.0 1.1 105.6 228.4 (142.1) 185.5 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (152.8) (146.5) (36.0) (33.5) (42.1) (62.4) (174.0) (56.4) (63.1) (63.6) (87.5) (270.5) (75.0) (289.1) Common Dividends (449.3) — — — — — — — — — — — — — FCF (342.3) 202.9 (23.6) 86.0 (72.8) 132.2 121.7 (155.6) 157.9 (62.5) 18.1 (42.1) (217.0) (103.5) Net Acquisitions and Divestitures — — (3,388.3) (3,388.6) — 3,388.3 (3,388.6) (181.7) — — — (181.7) — — Net Debt Proceeds 100.0 (95.7) 2,060.0 1,924.5 37.6 (2,109.3) 1,912.9 222.6 (112.4) 17.6 (27.4) 100.6 202.6 80.6 Net Equity Proceeds — — — — — — — — — — — — — — Other (Investing and Financing) (30.0) (19.8) 1,409.1 1,409.1 3.8 (1,408.3) 1,413.7 (0.2) (0.0) — — (0.3) — (0.0) Total Change in Cash (272.3) 87.4 57.2 31.1 (31.4) 2.9 59.8 (114.9) 45.5 (44.9) (9.2) (123.5) (14.4) (23.0) Ending Cash and Securities Balance 49.3 136.7 79.0 147.2 115.8 196.5 196.5 81.6 127.1 82.2 73.0 73.0 58.6 58.6 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — Neiman Marcus Group LTD LLC (Continued)



12 Months

Three Months

LTM Ended


Revenue 4,345.4 4,648.2 1,129.1 1,432.8 1,164.7 1,112.7 4,839.3 1,186.5 1,521.8 1,220.1 1,166.7 5,095.1 1,164.9 5,073.5 Revenue Growth (%) 8.6 7.0 5.7 5.2 6.1 (0.6) 4.1 5.1 6.2 4.8 4.9 5.3 (1.8) 3.6 Operating EBIT 462.1 516.7 160.1 150.0 142.0 77.7 529.8 142.3 155.3 151.5 53.0 502.2 102.8 462.7 Gross Interest Expense 176.3 169.2 37.5 78.1 82.5 72.7 270.8 73.0 73.2 73.3 72.7 292.3 71.7 290.9

Sector-Specific Data Comparable Store Sales (%)d 7.9 4.9 5.7 5.5 5.9 4.9 5.5 5.5 5.6 4.5 1.9 3.9 (5.6) (5.6)

No. of Stores 77 79 79 80 79 81 81 84 85 85 84 84 86 86 Gross Margin (%) 35.6 35.6 39.3 33.4 38.3 31.6 35.5 38.6 33.3 38.6 31.2 35.3 36.8 34.9 SG&A/Revenues (%) 26.2 25.6 26.4 24.0 27.3 25.7 25.7 27.8 24.0 27.2 27.7 26.5 29.1 26.8 Operating EBIT Margin (%) 10.6 11.1 14.2 10.5 12.2 7.0 10.9 12.0 10.2 12.4 4.5 9.9 8.8 9.1 Operating EBITDAR 684.1 754.9 220.3 216.4 214.1 130.3 781.1 215.1 229.6 228.9 131.3 804.9 188.1 777.8 Operating EBITDAR Margin (%) 15.7 16.2 19.5 15.1 18.4 11.7 16.1 18.1 15.1 18.8 11.3 15.8 16.1 15.3 Operating EBITDAR/ (Interest + Rent) (x)b 2.6 2.8 3.5 2.1 2.0 1.3 2.1 2.1 2.2 2.2 1.3 2.0 1.9 1.9 Inventory Turnover (x)b 3.1 3.1 2.5 3.1 3.0 3.0 3.0 2.5 3.0 2.9 3.0 3.0 2.5 2.5 Accounts Payable Turnover (x)b 9.0 8.3 9.1 11.1 12.2 8.2 8.2 8.7 10.8 12.0 9.2 9.2 9.5 9.5 Return on Invested Capital (%)b 13.4 14.3 8.8 9.2 8.8 9.2 9.2 8.6 8.8 9.0 8.8 8.8 8.0 8.0 Return on Assets (%)b 2.7 3.1 1.1 (0.1) (0.9) (1.3) (1.7) (1.1) (0.0) 0.2 0.2 0.2 0.0 0.0 Capex/Depreciation (%)b 117.5 103.5 105.0 82.9 91.2 233.7 117.9 129.5 140.1 132.3 178.4 145.7 133.8 145.9 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

PVH Corp. Credit Profile

Credit Profile Summary Strong Portfolio of Brands: With annual revenues of $8 billion, PVH Corp. (PVH) is a leading international apparel company with a strong portfolio of brands, including Tommy Hilfiger and Calvin Klein, and strengthened by its 2013 acquisition of The Warnaco Group, Inc. (Warnaco). PVH has a strong international presence that contributes 45% of the company’s total revenues and provides diversification benefits in an industry characterized by high cyclicality, and variations in fashion and consumer preferences.

Organic Growth Solid: Constant currency revenues were up 3% in the nine months ended Nov. 1, 2015 (reported at negative 4% due to FX), with a 5% increase (negative 2% reported) at Calvin Klein, a 3% increase (negative 7% reported) at Tommy Hilfiger and a 2% decline at Heritage Brands. Growth at Tommy Hilfiger and the repositioning of Calvin Klein’s underwear and jeanswear businesses have driven top line, though high retail inventory levels may pressure growth in the near term. Fitch expects constant currency growth to remain in the low single digits for the next 2–3 years.

Business Transformation a Long-Term Positive: In recent years, the company purchased Tommy Hilfiger (2010), sold G.H. Bass (2013), bought Calvin Klein licensee Warnaco (2013), and exited the IZOD retail business (2015). This transformation has allowed PVH to build scale and focus selling efforts on key brands. The Warnaco acquisition in particular has united licensor with licensee, allowing PVH to consolidate brand strategy and target $100 million in expense synergies.

Near-Term Headwinds: A challenged apparel sector has led to high inventory levels, exacerbated by an unseasonably warm fall in 2015, which has reduced demand for cold weather products. Excess inventory will continue to drive promotional activity and limit product reorders, pressuring gross margin and sales trends. PVH’s reported sales and EBITDA are further limited by the strong U.S. dollar, as half of company revenues are outside the U.S. Fitch Ratings expects PVH’s 2016 EBITDA to decline approximately 5% from the 2013 peak.

Improving Financial Leverage: PVH is projected to generate FCF of $450 million in 2015 and at least $600 million annually thereafter. FCF is expected to be used for debt repayment over the near term ($350 million in 2015) and for smaller licensee acquisitions. Fitch expects debt paydown to moderate following 2015 as improving EBITDA allows adjusted debt/EBITDAR to approach its pre-acquisition level in the low-4x range. Management targets debt/EBITDA of 2.0x–2.5x, which equates to adjusted debt/EBITDAR of around 4.0x–4.5x.

Credit Profile Drivers Positive Drivers: Positive credit drivers include improvements in top-line growth and margins, and the execution of planned debt reduction, leading to a sustainable improvement in adjusted leverage to below 4.0x. However, this is not expected due to management’s leverage targets.

Negative Drivers: Negative credit drivers include a reversal in the company’s operating performance due to potential missteps or unrealized synergies from the acquisition, or a more aggressive financial policy that causes adjusted debt/EBITDAR to remain above 4.5x.



Credit Opinion PVH Corp. carries a ‘bb*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data PVH Corp.

($ Mil.) FYE

2/1/15 LTM

11/1/15 Total Revenues 8,241.2 7,976.6 EBITDA 1,201.1 1,057.3 EBITDA Margin (%) 14.6 13.3 FCF 520.8 592.5 Total Adjusted Debt 8,311.0 8,113.6 Adj. Debt/EBITDAR (x) 4.6 4.9 EBITDAR/Int. + Rents (x) 2.4 2.3





Leveraged Finance



Strong Brand Portfolio PVH is a major global apparel company, operating three businesses: Tommy Hilfiger, Calvin Klein and Heritage Brands. The company produces dress shirts, neckwear, sportswear and footwear through its owned and licensed brands, and licenses its owned brands for a variety of products. The company’s revenues for the 12 months ended Nov. 1, 2015, were divided 43% Tommy Hilfiger, 35% Calvin Klein and 22% Heritage Brands. Calvin Klein is the company’s most profitable brand, with LTM EBIT margin of 14.8% as of Nov. 1, 2015, versus Tommy Hilfiger at 12.9% and Heritage Brands at 6.8%.

PVH’s 2014 revenue mix, following the full-year inclusion of Warnaco, was 53% domestic and 47% international, with the international proportion having increased from 11% in 2009 due to the Tommy Hilfiger and Warnaco acquisitions. PVH’s largest customer is Macy’s, Inc. (Macy’s), which accounts for less than 10% of its sales.

The company’s growth strategy centers on the Tommy Hilfiger and Calvin Klein businesses, especially in international markets. PVH’s Warnaco acquisition in 2013 provided the company with a stronger platform internationally, especially in key markets within Asia and Latin America. The company has focused much of its growth strategy on innerwear (basic undergarments) and denim within both the Calvin Klein and Tommy Hilfiger brands. Management’s strategy for Heritage Brands, which includes Van Heusen, IZOD and Speedo, among others, has been to improve profitability through actions such as reducing retail footprint.

Fitch Base Case Assumptions — PVH Corp. ($ Mil.) 2014A 2015F 2016F 2017F Comments Revenue 8,241 7,976 8,056 8,298 2015/2016 affected by FX.

Revenue Growth (%) 0.7 (3.2) 1.0 3.0 Organic growth rate of 3% in 2015–2016.

EBITDA 1,200 1,111 1,142 1,213 — EBITDA Margin (%) 14.6 13.9 14.2 14.6 2015 decline due to FX. Working Capital Change (131) (141) (10) (22) — Cash Flow from Operations 789 762 901 978 2016 improvement based

on stable inventory and payables, which have been cash flow headwinds.

Capex (256) (263) (266) (274) — Dividends (13) (13) (13) (14) — FCF 521 487 622 669 — Share Repurchases (11) (100) (200) (200) — Total Debt 3,565 3,215 3,011 2,797 — Total Adjusted Debta 8,311 8,103 8,046 7,984 — Adjusted Debt/EBITDAR (x) 4.6 4.7 4.5 4.3 — aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


Segment Data

2010 2011 2012 2013 2014

LTM 11/1/15

Revenue ($ Mil.)

Calvin Klein North America — 832.4 907.1 1,472.6 1,550.8 1,563.4 Calvin Klein International — 232.9 243.2 1,324.0 1,308.0 1,255.9 Total Calvin Klein 933.5 1,065.3 1,150.4 2,797.0 2,858.8 2,819.3 Tommy Hilfiger North America 904.4 1,297.7 1,429.8 1,542.2 1,635.8 1,628.3 Tommy Hilfiger International 1,040.8 1,753.1 1,787.2 1,891.1 1,946.0 1,756.5 Total Tommy Hilfiger 1,945.2 3,050.8 3,217.0 3,433.3 3,581.8 3,384.8 Heritage Brand Wholesale 1,113.3 1,122.2 1,012.1 1,440.0 1,445.0 1,426.6 Heritage Brand Retail 644.7 652.4 663.5 547.1 355.6 345.9 Total Heritage Brands 1,758.0 1,774.6 1,675.6 1,986.6 1,800.6 1,772.5 Total 4,636.7 5,890.7 6,043.0 8,216.4 8,241.2 7,976.6 Revenue Growth (%) Calvin Klein North America — — 9.0 62.3 5.3 — Calvin Klein International — — 4.4 432.0 1.1 — Total Calvin Klein 16.6 14.1 8.0 140.5 3.3 — Tommy Hilfiger North America — 43.5 10.2 7.9 6.1 — Tommy Hilfiger International — 68.4 1.9 5.8 2.9 — Total Tommy Hilfiger — 56.8 5.4 6.7 4.3 — Heritage Brand Wholesale 13.3 0.8 (9.8) 42.2 0.4 — Heritage Brand Retail 4.7 1.2 1.7 (17.6) (35) — Total Heritage Brands 10.0 0.9 (5.6) 18.6 (9.4) — Total 93.3 27.0 2.6 35.5 0.7 — Revenue Contribution (%) Calvin Klein North America 0.0 14.1 15.0 18.0 18.8 19.6 Calvin Klein International 0.0 4.0 4.0 15.8 15.9 15.7 Total Calvin Klein 20.1 18.1 19.0 33.8 34.7 35.3 Tommy Hilfiger North America 19.5 22.0 23.7 18.8 19.8 20.4 Tommy Hilfiger International 22.4 29.8 29.6 23.1 23.6 22.0 Total Tommy Hilfiger 42.0 51.8 53.2 41.9 43.5 42.4 Heritage Brand Wholesale 24.0 19.1 16.7 17.6 17.5 17.9 Heritage Brand Retail 13.9 11.1 11. 6.7 4.3 4.3 Total Heritage Brands 37.9 30.1 27.7 24.3 21.8 22.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 EBIT Margin (%)

Calvin Klein North America — 21.5 20.1 17.3 15.5 14.6 Calvin Klein International — 42.5 42.2 13.7 12.4 15.0 Total Calvin Klein 26.4 26.1 24.7 15.6 14.0 14.8 Tommy Hilfiger North America 9.9 9.7 14.0 14.9 15.0 12.8 Tommy Hilfiger International 11.0 12.9 13.2 13.1 13.6 13.0 Total Tommy Hilfiger 10.5 11.6 13.6 13.9 14.2 12.9 Heritage Brand Wholesale 11.6 8.7 10.0 11.0 7.9 7.9 Heritage Brand Retail 7.0 4.4 2.0 (0.8) (0.8) 2.0 Total Heritage Brands 9.9 7.2 6.8 7.8 6.2 6.8 Total Pre-Corporate 13.5 12.9 13.8 13.0 12.4 12.2 Corporate (1.6) (1.4) (1.4) (1.2) (1.2) (1.4) Total 11.8 11.4 12.4 11.8 11.2 10.8

Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Calvin Klein

PVH’s Calvin Klein business accounted for 35% of consolidated sales and 43% of EBIT in the LTM period ending Nov. 1, 2015. This segment includes the jeans and underwear business acquired from Warnaco; a wholesale dress furnishings and men’s better sportswear business; the Calvin Klein outlet retail business; and the Calvin Klein Collection high-end apparel and accessories business, which is sold at wholesale and the flagship store in New York City. Calvin Klein continues to license women’s dresses and suits, men’s tailored clothing and other categories.

The Warnaco acquisition gave PVH greater control over Calvin Klein, allowing it to execute a broad, global strategy of repositioning and growth. Marketing efforts target an elevated brand position through consistent messaging across platforms, including digital, traditional media and celebrity associations. The elevated positioning has helped PVH turn around the brand’s stagnant denim sales in the U.S. and Europe. The company is also increasing its penetration of apparel, including innerwear, across these relatively mature markets. Asia, Latin America and Mexico are considered growth markets, with the company expanding across categories and exploring both wholesale and retail opportunities. The company is leveraging Tommy Hilfiger’s strong international platform to help grow the Calvin Klein brand globally.

PVH’s Calvin Klein efforts have been successful in 2015, with constant currency sales up 5% through the first three quarters of the year. YTD growth has been pronounced in Europe and Asia, with relative softness in the U.S. in concert with broader domestic apparel trends. Fitch expects U.S. softness to continue, with flattish to slightly positive sales growth expected domestically for Calvin Klein. PVH’s ability to in-fill its international business by growing new markets and expanding category presence in existing markets should drive midsingle-digit growth over the next 24–36 months, on a constant currency basis, yielding low single-digit growth globally for the Calvin Klein brand.

Tommy Hilfiger

Tommy Hilfiger, which PVH acquired in 2010 and essentially doubled PVH’s size, accounted for 43% of revenues and 45% of EBIT in the LTM period ending Nov. 1, 2015. Tommy Hilfiger has a strong international presence, particularly in Europe, where it makes up approximately 50% of brand sales. The brand is distributed in more than 90 countries and through more than 1,200 Tommy Hilfiger retail stores worldwide, in addition to an exclusive relationship with Macy’s for sportswear in the U.S.

Segment Data (Continued)

2010 2011 2012 2013 2014

LTM 11/1/15

EBIT Contribution (%)

Calvin Klein North America — 23.6 21.8 23.9 23.4 23.4 Calvin Klein International — 13.1 12.3 16.6 15.8 19.4 Total Calvin Klein 39.4 36.7 34.1 40.5 39.3 42.8 Tommy Hilfiger North America 14.3 16.6 24.0 21.7 24.0 21.4 Tommy Hilfiger International 18.3 29.9 28.3 23.3 25.8 23.4 Total Tommy Hilfiger 32.7 46.6 52.2 45.0 49.8 44.8 Heritage Brand Wholesale 20.7 12.9 12.1 14.9 11.2 11.6 Heritage Brand Retail 7.3 3.8 1.6 (0.4) (0.3) (0.7) Total Heritage Brands 27.9 16.8 13.7 14.5 10.9 12.3 Total Pre-Corporate 100.0 100.0 100.0 100.0 100.0 100.0


Leveraged Finance


While Tommy Hilfiger continues to grow market share in most international markets, the company is executing a brand positioning in its relatively mature U.S. business. To revitalize sales, PVH is elevating the brand through product quality, in-store presentations and marketing. Through the first three quarters of 2015, global brand revenue is up 3% on a constant currency basis, with a 2% decline in North America mitigating 5% growth (constant currency) across international markets. Fitch expects these sales trends to continue into 2016 and through the next several years, with midsingle-digit international growth (constant currency) mitigated by slight declines in the U.S., yielding low single-digit growth globally for the brand.

Heritage Brands

The Heritage Brands business accounted for 22% of revenues and 12% of EBIT in the LTM period ended Nov. 1, 2015. This business owns the IZOD, Van Heusen and Arrow apparel brands, as well as the Speedo (swimwear), Warner’s and Olga (women’s intimates) brands. The company also manufactures apparel for licensed brands including CHAPS, Geoffrey Beene, several Kenneth Cole Brands, MICHAEL Michael Kors, Nautica, Ryan Seacrest and Ted Baker. Eighty percent of revenue in the LTM period ending Nov. 1, 2015 was wholesale, with the remainder generated at PVH-operated Van Heusen and IZOD retail outlet stores.

The company has underscored its focus on the Calvin Klein and Tommy Hilfiger brands in recent years by selling the G.H. Bass & Co. business in November 2013 and announcing the closure of the 120-store IZOD retail division in January 2015. The company continues to invest in the wholesale business within Heritage Brands. Current strategies include product innovations within dress furnishings, such as the Van Heusen Flex Collar introduced this year, and expansion of the Speedo brand beyond its core competitive swim market.

Heritage Brands’ sales declined 2% for the first nine months of 2015 due to the closure of the IZOD retail stores. Fitch projects flattish growth in 2016 and over the next several years as the company cycles through these store closures but competes in a still-challenging apparel market.

2016 Outlook International expansion at both Calvin Klein and Tommy Hilfiger should enable low single-digit constant currency growth for PVH in 2016 and the next several years. U.S. sales in 2016 will be constrained by a still-difficult apparel market, exacerbated by reduced replenishment orders of basics-oriented merchandise due to excess inventory at retail following a warm autumn. PVH’s internal initiatives and less mature position in many international markets should support growth despite potential economic slowdowns in various markets.

Organic growth, tapering of Calvin Klein repositioning investments and business mix shifts should yield a modest operating margin recovery in the medium term. However, the strong dollar will pressure both sales and margins, with reported sales likely down 3% in 2015 and projected up only 1% in 2016.

Reported EBITDA is projected to reach $1.2 billion in 2017, an improvement from $1.1 billion projected in 2015 and 2016, but flattish to 2013–2014 results, mostly due to currency pressure. PVH is projected to generate FCF of $490 million in 2015 and at least $600 million annually thereafter. Fitch expects $350 million of debt paydown in 2015 and another $200 million each in 2016 and 2017, based on the term loan amortization schedule. Following these required payments, Fitch projects minimal debt paydown as the company reaches its targeted debt/EBITDA ratio of 2.0x–2.5x, or adjusted debt/EBITDAR in the 4.0–4.5x

Leveraged Finance


range. PVH may use excess FCF for share repurchase or small acquisitions to bring Tommy Hilfiger and Calvin Klein licensees in house.

Liquidity and Debt Structure PVH has strong liquidity, supported by cash of $370 million and revolver availability of $719 million as of Nov. 1, 2015. The maturity schedule is manageable, with term loan amortization over the next three years, and the maturity of the revolver and Term Loan A in February 2019.

PVH upsized and extended its bank facilities during March 2014, providing an additional $350 million of loans under the Term Loan A and $250 million of loans under the Term Loan B. The maturity of the $750 million revolver and the Term Loan A were extended one year to February 2019, while the maturity of the Term Loan B remained at February 2020. The refinancing reduced borrowing spreads by 25 bps and provided some covenant flexibility. The proceeds from the loans were used to redeem the $600 million of 7.375% senior notes due 2020.

Capital Structure Following the refinancing and subsequent debt repayment, PVH’s capital structure, as seen in the Capital Structure table on the next page, includes senior secured credit facilities composed of a $750 million revolver, $1.8 billion outstanding on Term Loan A and $713 million outstanding on Term Loan B. The company repaid $201 million of the term loans in the nine months ended Nov. 1, 2015, most of which was voluntary.

Capital Structure ($ Mil., At Nov. 1, 2015) Description Amount (%) Secured $750 Mil. Secured Revolver due 2/13/19 0.0 0.0 Senior Secured Term Loan A due 2/13/19 1,840.2 54.2 Senior Secured Term Loan B due 2/13/20 713.7 21.0 7.750% Debentures due 11/15/23 100.0 2.9 Total Secured 2,653.9 78.1

Unsecured Debt 4.500% Sr. Unsecured Notes due 12/15/22 700.0 20.6 Capital Leases 17.0 0.5 Total Unsecured 717.0 21.1 Foreign Bank Facilities 28.0 0.8 Total Debt 3,398.9 100.0 Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Nov. 1, 2015) 2016 136.6 2017 186.2 2018 198.6 2019 1,291.1 2020 711.6 Thereafter 857.8 Source: Company filings, Fitch Ratings.

Liquidity ($ Mil., At Nov. 1, 2015) Cash 369.9 Revolver Availability 718.9 Total Liquidity 1,088.8 Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Leveraged Finance


PVH and Tommy Hilfiger B.V. are the two borrowers under the credit facility. The term loans are U.S. dollar-denominated, and the revolver includes a $475 million U.S. dollar facility, a $25 million facility available in U.S. or Canadian dollars, and a EUR186 million facility available in multiple currencies.

PVH also has $100 million of 7.750% secured debentures due 2023 and $700 million of 4.500% senior unsecured notes due 2022. The senior secured credit facilities and the 7.750% debentures due 2023 are equally and ratably secured by a first-priority lien on substantially all of the borrower’s assets and a pledge of the stock of the borrower’s subsidiaries, except with respect to the stock and assets of the Calvin Klein subsidiaries, as discussed below.

The obligations under the credit facility of both PVH (the domestic borrower) and Tommy Hilfiger B.V. (the foreign borrower) are jointly and severally, irrevocably and unconditionally guaranteed by substantially all U.S. subsidiaries. The borrowings of Tommy Hilfiger B.V. are also guaranteed by PVH and Tommy Hilfiger Europe B.V.

The U.S. guarantors have granted a first-priority lien on substantially all of their respective assets, including a pledge of stock of their U.S. subsidiaries and up to 66% of certain first-tier foreign subsidiaries.

Contingent Liabilities PVH is obligated to make contingent purchase price payments to Mr. Calvin Klein with respect to sales through Feb. 12, 2018. These payments are calculated at 1.15% of total worldwide sales of Calvin Klein branded products (as defined), and totaled $51 million in 2014. The company expects payments in 2015 to be approximately $52 million. The payments are guaranteed by the Calvin Klein subsidiaries and secured by a pledge of the equity interests in the Calvin Klein subsidiaries and a first-priority lien on substantially all of the domestic Calvin Klein subsidiaries’ assets. These liens, which are also the liens granted to the 7.750% debentures, are senior to the liens granted to the credit facility on these assets.


Fitch has assigned a ‘bbb–*/rr1*’ to the senior secured revolver, Term Loan A, Term Loan B, and the senior secured debentures, indicating outstanding recovery prospects (91%–100%) in the event of default. The unsecured notes are expected to have average recovery prospects (31%–50%) and are assigned ‘bb*/rr4*’.


Leveraged Finance


Appendix A

Organizational Structure — PVH Corp.($ Mil., As of Nov. 1, 2015)

aBorrowings under the credit facility are guaranteed by substantially all U.S. subsidiaries. In addition to the debt presented, the company has $28 Mil. outstanding under various foreign bank facilities. bU.S. subsidiary guarantors have granted a first-priority lien on substantially all subsidiary assets. cObligations to make contingent purchase price payments to Mr. Calvin Klein (through Feb. 12, 2018) are guaranteed by Calvin Klein, Inc. and its subsidiaries, and are secured by a first-priority lien on all of Calvin Klein’s domestic assets and the stock of its subsidiaries. These liens are senior to the lien granted to the credit facility. dBorrowings under the credit facility by Tommy Hilfiger B.V. are guaranteed by PVH Corp., the U.S. guarantor subsidiaries and Tommy Hilfiger Europe B.V. CO – Credit Opinion. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions. Source: Company reports, Fitch Ratings.

Public

PVH Corp.a(U.S. Borrowing Entity)

CO — bb*/Stable

Tommy Hilfiger Europe B.V.

Other U.S. Guarantorsb Tommy Hilfiger, B.V.d(Co-Borrower on Credit Facility)Calvin Klein, Inc.b,c The Warnaco Group, Inc.b

Debt Issue Amount CO$750 Mil. Secured Revolver due 2/13/19 — bbb–*/rr1*Senior Secured Term Loan A due 2/13/19 1,840 bbb–*/rr1*Senior Secured Term Loan B due 2/13/20 714 bbb–*/rr1*7.750% Debentures due 11/15/23 100 bbb–*/rr1*Total Secured 2,654 —

4.500% Senior Unsecured Notes due 12/15/22 700 bb*/rr4*Capital Leases 17 —Total Unsecured 717 —

Total 3,371 —

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — PVH Corp. Overview Borrower PVH Corp. (U.S. borrower) and Tommy Hilfiger B.V. (European borrower) Document Date and Location Amended and Restated Credit Agreement dated March 21, 2014 (Exhibit 10.1 to 10-Q dated June 12, 2014) Maturity Date Facility Type: Maturity Date

Revolver 2/13/19 Term A 2/13/19 Term B 2/13/20

Description of Debt Senior secured credit facilities with $750 Mil. revolver and $3.2 Bil. in U.S. dollar term loans. The revolver includes a $475 Mil. U.S. dollar facility, a $25 Mil. U.S. or Canadian facility, and a EUR186 Mil. euro facility available in multiple currencies.

Amount Facility Type: Commitment: Outstanding Revolver $750 Mil. $25 Mil. Term A $1,986 Mil. $1,930 Mil. Term B $1,189 Mil. $988 Mil.

Ranking The facility ranks at least equally in right of payment with all unsecured and unsubordinated obligations other than with respect to the contingent purchase price payments owed Mr. Calvin Klein and the 2023 debentures.

Security The senior secured credit facilities and the 7 3/4% debentures due 2023 are equally and ratably secured by a first-priority lien on substantially all of the borrower’s assets and a pledge of the stock of the borrower’s subsidiaries, except that liens on the stock and assets of the Calvin Klein subsidiaries granted to the debentures and to Mr. Calvin Klein (with respect to the contingent purchase price payments owed to him) are senior to such liens granted to the credit facilities (see Guarantee section below).

Guarantee The obligations of PVH Corp. are jointly and severally, irrevocably and unconditionally guaranteed by substantially all U.S. subsidiaries. The borrowings of Tommy Hilfiger B.V. are guaranteed by PVH Corp. and Tommy Hilfiger Europe B.V. PVH and the U.S. subsidiary guarantors granted a security interest in certain of their assets as collateral for their obligations. PVH’s obligation to make contingent purchase price payments to Mr. Calvin Klein is guaranteed by the Calvin Klein subsidiaries and is secured by a pledge of all of the equity interests in the Calvin Klein subsidiaries and a first-priority lien on substantially all of the domestic Calvin Klein subsidiaries’ assets. These liens, and the liens granted to the 7 3/4% debentures, are senior to the liens granted to the credit facility.


PVH may incur unsecured debt provided the debt matures three months after the term loans. Capital leases or secured purchase money indebtedness limited to $150 Mil. (or 1.5% of Consolidated Total Assets, if greater). Sale-leasebacks limited to $75 Mil. (or 0.75% of Consolidated Total Assets, if greater). Other indebtedness of subsidiaries up to $125 Mil. (or 1.25% of Consolidated Total Assets, if greater), is permitted. Other indebtedness of any group member up to $375 Mil. (or 3.50% of Consolidated Total Assets, if greater) is permitted.

Limitation on Liens Liens are limited to $200,000,000 (or 1.75% of Consolidated Total Assets, if greater). Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures Change of Control (CoC) A CoC, defined as a person or group acquiring a 35% or more voting interest, or gaining power to appoint a majority of the board of

directors, or PVH ceases to own 100% of Tommy Hilfiger B.V., constitutes an event of default. M&A, Investments Restriction PVH may make loans to employees/directors of up to $15 Mil. In the case of an acquisition in excess of $40 Mil., PVH must

demonstrate compliance with the interest coverage and leverage covenants. PVH may make other investments up to $275 Mil. (or 2.50% of Consolidated Total Assets, if greater). Investments in JVs are limited to $100 Mil. (or 1.0% of Consolidated Total Assets, if greater) plus dividends received from the JV.

Sale of Assets Restriction Asset sales are limited to 2.0% of Consolidated Total Assets, and the total of all asset sales in a calendar year are limited to 5.0% of Consolidated Total Assets. The proceeds must be applied to repayment of the term loan within 10 days, or invested in other assets within 365 days. Sale-leasebacks limited to $75 Mil. (or 0.75% of Consolidated Total Assets, if greater).

Restricted Payments Restricted Payments (RP) PVH may purchase stock or stock options from employees of up to $15 Mil. per year. Dividends are limited to $0.20/share of

common stock, and the equivalent amount for the convertible preferred. Other restricted payments are limited to $200 Mil. (or 1.75% of Consolidated Total Assets, if greater) plus, if the incurrence test is satisfied (defined as Consolidated Total Net Debt to Consolidated Adjusted EBITDA for the most recent four quarters of 3.00:1.00 or less), the Available Amount as defined.

Other Cross-Default Yes, with threshold amount of $75 Mil. Cross Acceleration N.A. MAC Clause The borrower must represent and warranty prior to each credit extension that there has been no Material Adverse Effect. Equity Cure None. Covenant Suspension None. Required Lenders/Voting Rights > 50% of term loan and revolving commitment.

JV – Joint venture. MAC – Material adverse change. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/78239/000007823914000027/ex10120141q10q.htm

Leveraged Finance


Bank Agreement Financial Covenant Summary — PVH Corp. (Continued) Financial Covenants Leverage (Maximum) Consolidated Net Debt/Consolidated Adjusted EBITDA FY 1Q15 through FY 4Q15 3.75x FY 1Q16 through FY 4Q16 3.50x FY 1Q17 through FY 4Q17 3.25x FY 1Q18 and thereafter 3.00x Coverage (Minimum) Consolidated Adjusted EBITDA/Consolidated Cash Interest Expense FY 1Q15 through FY 4Q15 5.50x FY 1Q16 through FY 4Q16 5.75x FY 1Q17 and thereafter 6.00x Current Ratio (Minimum) — Net Worth (Minimum) — Principal Repayments Mandatory/Tax Prepayment

Mandatory Prepayment with x% of proceeds from: — Excess cash: x = 50% (unless meet a leverage test). — Asset sale: x = 100% of net proceeds. — New debt: x = 100% of net proceeds.

Amortization Schedule Date Term A (%) Term B (%) 3/31/16 7.5 1 3/31/17 10.0 1 3/31/18 72.5 1 3/31/19 — 1 3/31/20 — 94 Callability/Optional Prepayment Optional prepayment without prepayment penalty. Pricing Coupon Type/Index Tranche A Term Loans and Revolving Loans that are eurocurrency rate loans float based off adjusted eurocurrency rate. Pricing Grid Leverage Ratio Applicable Rate > 4.0:1 Adjusted Eurocurrency Rate + 200 bps > 3.0:1 but <4.0:1 Adjusted Eurocurrency Rate + 175 bps > 2.0:1 but < 3.0:1 Adjusted Eurocurrency Rate + 150 bps < 2.0:1 Adjusted Eurocurrency Rate + 125 bps


Leveraged Finance


Appendix C

Senior Secured Debentures Covenant Summary — PVH Corp. Overview Issuer PVH Corp. Document Date and Location Base indenture dated Nov. 4, 1993.

First Supplemental dated Oct. 17, 2002, located in exhibit 4.15 to 10-Q dated Dec. 13, 2002. Second Supplemental dated Feb. 12, 2003, located in exhibit 4.2 to 10-Q dated Feb. 26, 2003. Third Supplemental dated May 6, 2010, located in exhibit 4.16 to 10-Q dated Sept. 10, 2010. Fourth Supplemental dated Feb. 2, 2013, located in exhibit 4.11 to 10-Q dated June 13, 2013.

Maturity Date Nov. 15, 2023 Description of Debt 7.750% Debentures Amount $100 Mil. Ranking Senior secured Security The debentures and the senior secured credit facilities are equally and ratably secured by a first-priority lien on substantially all of

the borrower’s assets and a pledge of the stock of the borrower’s subsidiaries, with the exception that the liens granted to the debentures on the stock and assets of the Calvin Klein subsidiaries are senior to the liens on such assets granted to the credit facility and equal to the liens granted to Mr. Calvin Klein.

Guarantee None. Debt Restrictions Debt Incurrence Debt of domestic subsidiaries is limited to 5% of consolidated net tangible assets. Limitation on Liens Liens on property of the company or any subsidiary or stock of subsidiaries, together with the attributable value of sale-leaseback

transactions, are limited to 10% of consolidated net tangible assets. Limitation on Guarantees None. Acquisitions/Divestitures Change of Control (CoC) None. M&A, Investments Restriction Standard restrictions on consolidations, mergers, and sales of assets. Sale of Assets Restriction Sale-leasebacks are limited by the limitation on liens provision, and proceeds must be applied within 180 days to the purchase of

fixed assets or the retirement of the debentures. Restricted Payments Restricted Payments (RP) In the event of a Designated Restricted Payment Event, defined as a restricted payment causing consolidated net worth to drop to

less than $175 Mil. plus 50% of cumulative consolidated net income or less 100% of consolidated net loss, this gives the holder the option to put the bonds back to the company at 100%.

Other Cross-Default No. Cross-Acceleration Yes, with a threshold of $25 Mil. MAC Clause None. Equity Clawback None. Covenant Suspension None.

MAC — Material adverse change. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/78239/000007823902000023/firstsupp415.txt

http://www.sec.gov/Archives/edgar/data/78239/000007823902000023/firstsupp415.txt

http://www.sec.gov/Archives/edgar/data/78239/000095013603000445/file004.txt

http://www.sec.gov/Archives/edgar/data/78239/000095013603000445/file004.txt

http://www.sec.gov/Archives/edgar/data/78239/000007823910000057/exh4162023notesthirdsuppleme.htm

http://www.sec.gov/Archives/edgar/data/78239/000007823913000028/ex41120131q10q.htm

Leveraged Finance


Senior Unsecured Notes Covenant Summary — PVH Corp. Overview Issuer PVH Corp. Document Date and Location Indenture dated Dec. 20, 2012, located in exhibit 4.1 of 8-K dated Dec. 20, 2012. Maturity Date 12/15/22 Description of Debt 4.500% Senior Notes Amount $700 Mil. Ranking Senior unsecured Security None. Guarantee None. Debt Restrictions Debt Incurrence PVH may incur debt if the pro forma Consolidated Coverage Ratio (EBITDA/interest) is greater than 2.0x. In addition, permitted debt

includes Purchase Money Indebtedness and Capital Lease Obligations to acquire or construct property up to the greater of $175.0 Mil. and 1.5% of Total Assets; indebtedness of a Foreign Restricted Subsidiary or Calvin Klein company up to the greater of $225.0 Mil. and 2.0% of Total Assets; and other indebtedness which does not exceed the greater of $440.0 Mil. or 4.0% of Total Assets.

Limitation on Liens Liens securing debt under any credit facility are permitted so long as the Senior Secured Leverage Ratio is not greater than 3.5x. In addition, during a period when the covenants are suspended, PVH may incur secured debt in an amount up to 3.5% of Total Assets.

Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures Change of Control (CoC) If someone acquires more than 50% of the voting stock or the Continuing Directors cease to constitute a majority of the board of

directors, the notes may be put at 101. M&A, Investments Restriction Permitted Investments include the greater of $375.0 Mil. and 3.5% of Total Assets. Sale of Assets Restriction Proceeds from asset sales must be used to repay senior indebtedness or invest in additional assets within one year. Proceeds not

applied as such, in excess of $75 Mil., must be used to offer to repurchase the notes at par. Sale-leasebacks limited to the greater of $90 Mil. and 1.0% of total assets, plus an amount that would be permitted per the limitation on debt and liens covenants.

Restricted Payments Restricted Payments (RP) Restricted payments limited to the sum of 50% of cumulative net income (subtracting 100% of net losses), plus $75 Mil., plus other

amounts that, as of Oct. 28, 2012, totaled $500 Mil. In addition, PVH may pay dividends of up to $0.20/share on each of its common and preferred shares, and may repurchase shares in an amount up to $15 Mil. annually.

Other Cross Default No. Cross Acceleration Yes, with a threshold of $75 Mil. MAC Clause None. Equity Clawback None. Covenant Suspension Provided notes have investment-grade ratings from S&P and Moody’s and no event of default exists, certain covenants (debt

incurrence, restricted payments, asset sales, limitation on liens) cease to apply.


http://www.sec.gov/Archives/edgar/data/78239/000007823912000078/ex41indenture.htm

Leveraged Finance


Appendix D

Financial Summary — PVH Corporation 12 Months Three Months



LTM Ended

($ Mil.) 1/29/12 2/3/13 11/3/13 2/2/14 2/2/14 5/4/14 8/3/14 11/2/14 2/1/15 2/1/15 5/3/15 8/2/15 11/1/15 11/1/15 Profitability Operating EBITDAa 847.3 920.1 365.6 261.2 1,223.2 273.1 276.9 375.6 193.1 1,201.1 259.5 248.7 356.0 1,057.3 Operating EBITDA Margin (%) 14.4 15.2 16.2 12.7 14.9 13.9 14.0 16.8 9.3 14.6 13.8 13.3 16.4 13.3 FFO Return on Adjusted Capital (%)b 14.3 11.4 8.5 9.2 9.2 9.2 9.7 10.7 13.0 13.0 13.4 13.6 13.2 13.2 FCF Margin (%) 5.3 5.8 (3.6) 9.2 0.7 (5.4) 8.2 3.6 18.7 6.3 0.3 11.1 (0.3) 7.4 Coverages (x) FFO Interest Coverage 5.6 5.1 4.5 0.9 3.2 4.4 6.9 10.2 8.8 7.4 7.5 8.7 10.8 8.9 Operating EBITDA/ Gross Interest Expense 6.6 7.8 7.6 5.6 6.4 6.5 7.9 11.2 5.9 8.4 8.4 8.5 12.5 8.7 FFO Fixed-Charge Coverage 2.2 1.9 1.9 1.0 1.5 1.8 2.1 2.7 2.4 2.2 2.1 2.3 2.6 2.3 FCF Debt Service Coverageb 2.1 2.2 0.9 0.9 0.9 0.7 0.8 1.6 2.6 2.6 3.2 3.3 2.6 2.6 Cash Flow from Operations/Capex 2.9 2.7 (0.3) 3.7 1.3 (1.1) 4.2 2.2 5.7 3.1 1.3 5.0 1.0 3.4 Leverage (x)b Long-Term Secured Debt/ Operating EBITDA 1.4 1.0 2.4 2.1 2.0 2.7 2.5 2.5 2.4 2.2 2.3 2.3 2.4 2.4 Long-Term Secured Debt/FFO 2.0 1.9 6.7 6.1 5.9 6.9 5.7 4.4 2.9 2.9 2.7 2.5 2.6 2.6 Total Debt with Equity Credit/ Operating EBITDA 2.3 2.6 3.7 3.3 3.3 3.5 3.3 3.2 3.2 3.0 3.2 3.1 3.2 3.2 FFO Adjusted Leverage 4.5 5.6 8.0 7.3 7.3 7.2 6.8 6.1 5.0 5.0 4.9 4.8 4.9 4.9 Total Adjusted Debt/ Operating EBITDAR 4.1 4.3 5.3 4.8 4.8 5.0 4.9 4.8 4.9 4.6 4.9 4.9 4.9 4.9 FCF/Total Adjusted Debt (%) 6.2 5.9 0.8 0.6 0.6 1.3 1.9 3.8 6.3 6.3 7.7 8.3 7.3 7.3 Balance Sheet Short-Term Debt 83.0 98.8 97.4 91.8 91.8 244.1 264.5 139.2 107.8 107.8 109.9 119.8 151.7 151.7 Long-Term Senior Secured Debt 1,203.3 900.0 2,774.9 2,563.6 2,478.6 3,161.6 2,942.5 2,918.3 2,639.0 2,639.0 2,590.0 2,462.5 2,539.9 2,539.9 Long-Term Senior Unsecured Debt 656.5 1,342.7 1,428.7 1,340.0 1,425.0 700.4 700.4 700.4 817.8 817.8 799.7 799.7 675.6 675.6 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 1,942.7 2,341.5 4,301.0 3,995.3 3,995.3 4,106.1 3,907.4 3,757.9 3,564.6 3,564.6 3,499.6 3,382.0 3,367.2 3,367.2 Off-Balance Sheet Debtc 3,090.3 3,569.9 4,798.8 4,798.8 4,798.8 4,746.4 4,746.4 4,746.4 4,746.4 4,746.4 4,746.4 4,746.4 4,746.4 4,746.4 Total Adjusted Debt with Equity Credit 5,033.0 5,911.5 9,099.8 8,794.1 8,794.2 8,852.5 8,653.8 8,504.3 8,311.0 8,311.0 8,246.0 8,128.4 8,113.6 8,113.6 Cash Flow Funds From Operations 594.6 484.8 169.2 (3.6) 421.8 146.2 207.5 309.1 257.1 919.9 200.6 226.0 278.8 962.5 Change in Working Capital (103.9) 84.8 (186.6) 263.6 (117.2) (199.2) 12.7 (155.4) 211.1 (130.8) (140.2) 36.6 (213.7) (106.2) Cash Flow from Operations 490.7 569.5 (17.4) 260.0 304.6 (53.0) 220.2 153.7 468.2 789.1 60.4 262.6 65.1 856.3 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (169.8) (210.6) (60.6) (70.9) (237.1) (50.7) (52.0) (70.8) (82.3) (255.8) (48.5) (52.4) (68.1) (251.3) Dividends (10.9) (11.0) (3.1) — (12.3) (3.1) (6.3) (3.1) — (12.5) (6.2) (3.2) (3.1) (12.5) FCF 310.0 348.0 (81.1) 189.1 55.1 (106.8) 161.9 79.8 385.9 520.8 5.7 207.0 (6.1) 592.5 Net Acquisitions and Divestitures (85.3) (37.9) — 61.5 (1,753.8) (7.4) — (7.3) 1.2 (13.5) — — — 1.2 Net Debt Proceeds (452.9) 387.4 (14.6) (305.5) 1,355.7 56.8 (201.7) (155.7) (214.3) (514.9) (49.6) (120.3) (17.1) (401.3) Net Equity Proceeds 19.2 (0.7) (0.6) 23.6 (9.9) (4.0) 0.4 2.6 2.9 1.9 (5.7) (15.8) (60.1) (78.7) Other (Investing and Financing) (56.5) (37.8) 0.7 (16.0) (53.4) (20.4) (13.9) (15.4) (58.5) (108.2) (10.4) (23.5) (13.5) (105.9) Total Change in Cash (265.5) 659.0 (95.7) (47.3) (406.4) (81.8) (53.3) (96.0) 117.2 (113.9) (60.0) 47.4 (96.8) 7.8 Ending Cash and Securities Balance 233.2 892.2 542.5 593.2 593.2 513.0 461.1 365.1 479.3 479.3 419.3 466.7 369.9 369.9 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — PVH Corporation (Continued) 12 Months Three Months



LTM Ended

($ Mil.) 1/29/12 2/3/13 11/3/13 2/2/14 2/2/14 5/4/14 8/3/14 11/2/14 2/1/15 2/1/15 5/3/15 8/2/15 11/1/15 11/1/15 Income Statement Revenue 5,890.6 6,043.0 2,259.1 2,052.2 8,186.4 1,963.7 1,975.6 2,233.1 2,068.8 8,241.2 1,879.3 1,864.0 2,164.5 7,976.6 Revenue Growth (%) 27.0 2.6 37.5 25.4 35.5 2.8 0.5 (1.2) 0.8 0.7 (4.3) (5.6) (3.1) (3.0) Operating EBIT 715.3 779.7 313.2 217.6 1,016.9 214.0 217.9 316.6 126.8 962.0 198.5 185.7 293.0 804.0 Gross Interest Expense 129.4 118.7 47.9 46.9 192.2 42.1 35.0 33.6 32.8 143.5 30.9 29.2 28.4 121.3 Sector-Specific Data Same-Store Sales (%)d — — — — — — — — — — — — — — No. of Stores — — — — — — — — — — — — — — Gross Margin (%) 52.0 53.8 51.7 52.5 52.6 52.7 53.4 52.4 51.9 52.6 51.6 53.2 51.1 51.9 SG&A/Revenues (%) 39.9 40.9 37.8 41.9 40.2 41.8 42.4 38.2 45.8 40.9 41.1 43.2 37.6 41.9 Operating EBIT Margin (%) 12.1 12.9 13.9 10.6 12.4 10.9 11.0 14.2 6.1 11.7 10.6 10.0 13.5 10.1 Operating EBITDAR 1,233.6 1,366.3 515.6 411.2 1,823.0 421.4 425.2 523.9 341.4 1,794.4 407.8 397.0 504.3 1,650.5 Operating EBITDAR Margin (%) 20.9 22.6 22.8 20.0 22.3 21.5 21.5 23.5 16.5 21.8 21.7 21.3 23.3 20.7 Operating EBITDAR/ (Interest + Rent) (x)b 2.4 2.4 2.6 2.1 2.3 2.2 2.3 2.9 1.9 2.4 2.3 2.2 2.9 2.3 Inventory Turnover (x)b 3.8 3.3 3.6 3.6 3.6 3.4 2.9 3.2 3.1 3.1 3.3 2.8 3.0 3.0 Accounts Payable Turnover (x)b 8.3 7.5 9.9 8.1 8.1 9.3 6.9 8.5 6.8 6.8 9.3 6.8 7.9 7.9 Return on Invested Capital (%)b 14.2 13.4 11.4 12.3 12.3 11.8 11.8 11.9 11.6 12.3 11.5 11.3 11.0 11.0 Return on Assets (%)b 4.7 5.6 2.9 1.9 1.2 2.0 2.8 3.1 4.2 4.0 4.9 4.7 4.7 4.7 Capex/Depreciation (%)b 128.7 150.0 115.8 162.7 115.0 85.8 88.1 120.0 124.1 107.0 79.5 83.2 108.1 99.2 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for the LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

Sally Beauty Holdings, Inc. Credit Profile

Credit Profile Summary Strong Business Profile: Sally Beauty Holdings, Inc. (Sally) has proven to be among the most resilient businesses in the retail sector. Because products are consumable in nature, not available at mass retail and used as part of a daily regimen, many elements of the business are less subject to cyclical or seasonal swings. These elements differentiate the company from the majority of the retail sector. Exclusive-label products are also a key driver of the company’s strong mid-teens EBITDA margins.

Hybrid Model Adds Diversity: The company caters to both retail consumers and salon professionals. Approximately 64% of EBITDA is derived from the retail segment, while the remaining 36% is generated by the distribution segment, which includes professional-only merchandise not available at retail stores.

Credit Protection Measures Solid: Sally’s consolidated top line on a same-store sales basis is consistently positive and expected to remain so. Over the seven-year period since 2008, same-store sales have averaged 3.4% on a consolidated basis, total sales have increased 5.4% and EBITDA has increased 8.2% on a CAGR basis. Fitch Ratings expects Sally’s same-store sales to remain at approximately 3% and EBITDA margin to improve modestly from 16% in 2015 to 16.1% and 16.4% in 2016 and 2017, respectively, with pricing in 2016 and sales leverage in 2017. FCF should improve to $220 million–$240 million.

Supplier Concentration: Five suppliers provide 39% of the company’s products. Supplier relationships have changed with some frequency with just 90 days notice. Sally’s high supplier concentration leaves it exposed to meaningful and sudden reductions in revenues. The company’s largest supplier is Procter & Gamble Company (P&G). P&G is selling its salon brands to Coty, Inc. Fitch does not expect the relationship to change, but it could potentially pressure ratings if it did.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include further improvement in adjusted leverage to its targeted range of 2.0x–2.5x on a debt/EBITDA basis, or 3.5x–4.0x on an adjusted debt/EBITDAR basis, which could occur on the back of a stated intent to apply a sizable portion of FCF toward debt reduction.

Negative Drivers: Negative credit profile drivers would include deteriorating operating momentum, loss of a major supplier, aggressive shareholder-friendly activity or a sizable debt-financed acquisition that could result in weakening credit metrics, with adjusted debt/EBITDAR increasing to over 4.5x.



Credit Opinion Sally Beauty Holdings, Inc. carries a ‘bb*/Stable’ Credit Opinion (CO). COs are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context. For more information, please consult our list of published Credit Opinions.

Financial Data Sally Beauty Holdings, Inc.

($ Mil.) FYE

9/30/14 FYE

9/30/15 Total Revenue 3,753.5 3,834.3 EBITDA 611.3 612.4 EBITDA Margin (%) 16.3 16.0 FCF 239.2 194.3 Total Adjusted Debt 3,555.6 3,573.2 Total Adjusted Debt/EBITDAR (x) 4.3 4.3 EBITDAR/(Interest + Rent) (x) 2.5 2.5 Same-Store Sales (%) 2.0 2.9 Real Estate Owned (%) 0 0 No. of Stores 4,647 4,792

Analysts Grace Barnett +1 212 908-0718 [email protected]






Leveraged Finance



Competitively and Demographically Advantaged Sally is an international specialty retailer (64% of segment EBITDA) and distributor (36%) of professional beauty supplies. The company has a hybrid business model selling its own products and distributing branded products for major beauty suppliers. Roughly half of the company’s sales are of consumable, repeat purchases of hair care products to a growing ethnic and aging population. Per the Census Bureau, the population aged 65 and older is projected to grow to 84 million between 2012 and 2015, almost double the estimated 43 million in 2012. Hispanics, who are now 17% of the population, should grow to 29% by 2060. An aging population and ethnic minorities such as Hispanics outspend contemporaries on hair products, including colorants and hair loss products. These demographics provide a solid and advantageous floor to Sally’s business.

Per the research firm IBISWorld, the U.S hair and nail salon industry is highly fragmented, and no company has a dominant market share. It is a labor-intensive industry with low barriers to entry and very few capital requirements. The industry grew about 2.4% from 2010 to 2015, has 1.2 million businesses and about 1.7 million employees. IBISWorld expects demand for industry services to accelerate due to improving disposable income.

Hair and beauty manufacturers such as P&G, L’Oréal, S.A (L’Oréal), and Estée Lauder have consolidated over a number of decades and continue to develop products specifically for the salon channel. All have highly profitable brands designed specifically for the salon channel. The salon channel uses a large volume of products on a daily basis as they shampoo, condition and finish the hair of tens of millions of consumers a day. There is plenty of margin to share, with relatively low advertising, and with a 13-ounce bottle of shampoo selling for more than $15 in the salon channel, contrasted with between $2 and $5 for a 13-ounce mid-tier mass

Fitch Base Case Assumptions — Sally Beauty Holdings, Inc. ($ Mil., Year Ended Sept. 30) 2015A 2016F 2017F 2018F Comments Revenue 3,834 3,952 4,081 4,204 — Revenue Growth (%) 2.2 3.1 3.3 3.0 Negative FX reduced 2015’s revenues by

almost 4%. Modestly less FX expected and should be offset by higher same-stores sales given price increases instituted during September through December 2015.

Same-Store Sales (%) 2.9 3.9 3.0 3.0 Increase in 2016 benefiting from increased price initiatives.

EBITDA 612 637 670 684 Includes the add-back of stock-comps. EBITDA Margin (%) 16.0 16.1 16.4 16.3 — Working Capital Change (57) (19) (19) (17) — Cash Flow From Operations 301 358 370 354 — Capex (107) (130) (130) (100) Higher than $90 Mil. three-year average, with 500

store refreshes per year ($20,000/store) plus IT spends given two data breaches in two years.

Dividends — — — — No dividends expected for the foreseeable future. FCF 194 228 240 224 — Share Repurchases (228) (300) (250) (250) In line with company guidance. Total Debt 1,788 1,887 1,988 2,087 FCF should finance share repurchases and

moderate store acquisitions. Book debt increases with Sally issuing modest amounts to fund buybacks within the context of maintaining leverage under 4.5x.

Total Adjusted Debta 3,573 3,810 3,987 4,167 — Total Adjusted Debt/EBITDAR (x) 4.3 4.3 4.3 4.4 — aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. Source: Fitch Ratings.

Leveraged Finance


brand (per Nielsen). Fitch anticipates gross margins for the manufacturer and salon upon resale to consumers are high. Sally stands in the middle of the flow.

Given the large breadth and widely dispersed customers to be served, distributing directly to the salon channel is not efficient for suppliers. The company, with its Sally Beauty Supply and Beauty Systems Group (BSG) businesses, provides a nationwide network over 4,790 company-operated units, approximately 180 franchised units and more than 900,000 direct-selling beauty consultants to fulfill the high touch requirements. Salon operators are likely to continue to depend on channels such as Sally for a majority of their beauty supply purchases. Operators make frequent trips to buy supplies because their small salons make up the bulk of the market and have limited shelf space or storage. BSG is essentially their just-in-time inventory supplier. SalonCentric, the professional products distribution operation of L’Oréal, is the closest direct competitor, with more than 565 stores and a network of consultants.

Most beauty manufacturers are also multinationals. Sally derives just 18% of revenues from outside the U.S., but should be able to take advantage of its relationship with these global suppliers in markets with similar fragmentation characteristics in the U.S. International growth is a key focus for the company. Sally expects to open its first store in Brazil during 2016. The company appears to be approaching its expansion cautiously, which is appropriate given the economic challenges in emerging markets.

Segment Breakdown

Division

Percentage of Fiscal 2015 Revenue/ EBITDA Description Brands

Avg. Store Size Customers Competitors

Retail — Sally Beauty Supply

61/64 More than 3,650 retail stores (about 77% in the U.S.) selling hair, skin, nail and other beauty merchandise. Products are professional quality at moderate price points, and are not available at mass.

Clairol, Revlon, Conair, Ion (exclusive label).

1,700 sq ft, 90% selling space.

75% retail consumers/ 25% salon professionals.

Primarily small, regional retail participants in addition to drug stores, mass merchants, supermarkets and department stores.

Distribution — Beauty Systems Group (BSG)

39/36 A mix of stores and consultants that sell professional-only merchandise not available at retail stores. As a percentage of segment sales, stores (CosmoProf) are 66%, distributor sales consultants are 25% and franchise stores are 9%.

Different assortment versus Sally Beauty Stores. Matrix, Redken, Paul Mitchell, etc. Most merchandise is sold under exclusive distribution agreements, whereby BSG is designated as the sole distributor in a certain geographic area.

2,600 sq ft Salon professionals only, for use in salons or resale to consumers.

Only national distributor of professional brands. Next largest is SalonCentric, a division of L’Oréal.

Sq ft – Square feet. Source: Company filings, Fitch Ratings estimates.

Leveraged Finance


Supplier Concentration a Potential Issue The company’s five largest suppliers — P&G, the Professional Products Division of L’Oréal, John Paul Mitchell Systems, Conair Corporation and Shiseido Cosmetics (America) Limited — accounted for approximately 39% of consolidated merchandise purchases. L’Oréal represented 12% of BSG revenues in 2015 ($181 million), but less than 5% of consolidated revenues. P&G is the company’s largest supplier and confirmed Sally is the largest customer for its $20 billion beauty division. This is both a strength and a potential weakness to Sally’s business model.

Supplier relationships have changed with some frequency with just 90 days’ notice. Sally’s high supplier concentration leaves it exposed to meaningful and sudden reductions in revenues. L’Oréal became a competitor in late 2007. It pulled back from selling some of its products exclusively through Sally’s BSG, forward integrated into distribution itself in some geographies and placed products into competitive regional distribution networks. Sales of L’Oréal products represented 33% of BSG’s revenues in 2006. Although Sally was able to keep a meaningful portion of the business on a non-exclusive basis, BSG margins were pressured for two years as the exclusivity delivered higher than normal profits. Gross margins declined about 150 bps, with overhead increasing due to additional compensation to sales reps to make up for lost sales and corporate activities to right-size the organization.

P&G announced on July 9, 2015 that it agreed to sell 43 beauty brands, including its hair care salon brands to Coty. The acquisition is expected to close in the second half of 2016, and would be transformative for Coty, doubling its size to $10 billion on a pro forma basis in 2015. P&G’s professional product personnel and extensive experience will come with the acquisition.

Fitch believes it is unlikely Coty would switch its business elsewhere given its lack of experience with the professional beauty channel, the deep bench of experience being gained with P&G’s personnel and their ostensibly good relationship with Sally. However, in the event some portion moves away from Sally in 2017, it would be a credit negative. Assuming P&G’s business is 15% of Sally’s revenue and 10% is moved elsewhere, Fitch estimates revenue could decline by approximately 10%, including modestly negative FX, EBITDA margin could decline around 200 bps given a fixed infrastructure and leverage (total adjusted debt/operating EBITDAR) increase around 5.0x. These factors could pressure ratings. However, Fitch’s expectations that the company would remain FCF positive, which provides the flexibility to reduce debt and manage its credit protection measures, is a strong credit positive.

Financial Performance, a Model of Consistency Sally’s consolidated top line on a same-store sales basis is consistently positive and same-store sales are expected to remain at approximately 3%. As the company captures a meaningful portion of manufacturing margins on its own brands, EBITDA margins have generally improved with sales leverage.

Sally’s financial performance has been solid throughout the economic downturn. Over the seven-year period from fiscal year-end September 2008, same-store sales have averaged 3.4% on a consolidated basis, total sales have increased 5.4% and EBITDA has increased a strong 8.2% on a CAGR basis. Lease-adjusted leverage has come down by two turns since the 2006 separation transaction from former parent Alberto-Culver Company.

Strong, steady FCF generation is another key credit strength of Sally. FCF has grown from $65 million in fiscal 2008 to around $230 million each year in fiscal 2011–2014. FCF declined to $194 million in fiscal 2015, driven by an approximately $30 million increase in capex. Sally has been investing heavily in store refreshes to upgrade the “shopability” of its stores. The

Leveraged Finance


investments have included installation of nail studios and impulse kiosks, and sophisticated customer relationship management (CRM) systems to aid with effective email and digital campaigns. Approximately 1,000 U.S. Sally stores (27% of store base) have been refreshed at the end of November 2015, and the company expects to complete an additional 500 store refreshes each year.

The company expects capex to ramp up in 2016 to approximately $125 million–$130 million as the remaining store refreshes are completed and new concepts are installed. The hair care solution center will be launched in January 2016, followed by a hair color concept in late spring and a hair appliance/tools concept in mid to late fiscal 2016.

With an EBITDA base at over $600 million and fixed obligations (interest, capex, taxes) in the $325 million–$350 million range, Fitch expects the company to generate annual FCF in the mid-$200 million range, with working capital a modest use of funds. There is minimal seasonality in the business; FCF is comfortably positive in each quarter of the year.

Quarterly Revenue and Unit Growth Trend

12/31/13 3/31/14 6/30/14 9/30/14 FYE

9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 FYE

9/30/15 Revenue ($ Mil.) Sally Beauty Supply 573.4 569.6 584.5 581.3 2,308.7 586.5 572.1 588.6 582.3 2,329.5 Beauty Systems Group 367.1 349.9 364.8 363.0 1,444.8 377.9 365.6 379.3 381.9 1,504.8 Total Revenue 940.5 919.5 949.3 944.3 3,753.5 964.5 937.8 967.9 964.2 3,834.3

Revenue Growth (%) Sally Beauty Supply 2.6 2.5 4.5 4.5 3.5 2.3 0.4 0.7 0.2 0.9

Beauty Systems Group 5.9 2.2 3.4 3.6 3.8 3.0 4.5 4.0 5.2 4.2 Total Revenue Growth 3.9 2.4 4.1 4.2 3.6 2.6 2.0 2.0 2.1 2.2

Same-Store Sales (%) Sally Beauty Supply 0.9 0.5 1.8 2.1 1.3 1.6 1.4 2.0 1.8 1.7

Beauty Systems Group 5.2 2.2 2.7 3.8 3.5 3.9 5.9 5.6 7.4 5.7 Consolidated 2.2 1.0 2.1 2.6 2.0 2.3 2.8 3.1 3.2 2.9

Number of Stores Sally Beauty Supply 3,423 3,456 3,499 3,544 3,544 3,586 3,612 3,636 3,655 3,655

Beauty Systems Group 1,092 1,095 1,098 1,103 1,103 1,109 1,112 1,118 1,137 1,137 Total Units 4,515 4,551 4,597 4,647 4,647 4,695 4,724 4,754 4,792 4,792 Total Unit Growth (%) 4.0 4.1 4.0 3.6 3.6 4.0 3.8 3.4 3.1 3.1


Leveraged Finance


Key Operating Metrics by Segment — Sally Beauty ($ Mil., Fiscal Year Ended September) 2008 2009 2010 2011 2012 2013 2014 2015 Net Sales Sally Beauty Supply 1,672.9 1,695.7 1,834.6 2,012.4 2,198.5 2,230.0 2,308.7 2,329.5 Beauty Systems Group 975.3 940.9 1,081.5 1,256.7 1,325.2 1,392.2 1,444.8 1,504.8 Total 2,648.2 2,636.6 2,916.1 3,269.1 3,523.6 3,622.2 3,753.5 3,834.3 Net Sales as % of Total Sally Beauty Supply 63.2 64.3 62.9 61.6 62.4 61.6 61.5 60.8 Beauty Systems Group 36.8 35.7 37.1 38.4 37.6 38.4 38.5 39.2 Same-Store Sales (%) Sally Beauty Supply 1.2 2.1 4.1 6.3 6.5 (0.6) 1.3 1.7 Beauty Systems Group 6.9 1.0 6.2 5.5 6.1 4.2 3.5 5.7 Total 2.6 1.8 4.6 6.1 6.4 0.8 2.0 2.9 Gross Profit Sally Beauty Supply 858.4 878.7 976.4 1,087.7 1,199.3 1,223.4 1,265.8 1,276.5 Beauty Systems Group 376.2 364.6 428.0 506.9 543.9 571.9 594.4 621.3 Total 1,234.6 1,243.3 1,404.4 1,594.6 1,743.3 1,795.3 1,860.2 1,897.8 Gross Margin (%) Sally Beauty Supply 51.3 51.8 53.2 54.0 54.6 54.9 54.8 54.8 Beauty Systems Group 38.6 38.7 39.6 40.3 41.0 41.1 41.1 41.3 Total 46.6 47.2 48.2 48.8 49.5 49.6 49.6 49.5 EBIT Sally Beauty Supply 285.6 283.9 320.5 381.0 439.7 437.0 431.7 412.4 Beauty Systems Group 80.9 91.6 112.5 145.7 182.7 200.5 217.0 231.2 Segment Operating Profit 366.5 375.5 433.0 526.6 622.4 637.5 648.6 643.5 Unallocated Expenses (66.5) (70.0) (79.2) (83.8) (96.0) (97.9) (119.5) (119.5) Total Operating Earnings 300.0 305.5 353.7 442.8 526.4 539.6 529.1 524.0 EBITDA Sally Beauty Supply 308.7 308.0 346.9 409.7 471.1 474.1 472.7 458.0 Beauty Systems Group 101.6 110.3 132.6 170.8 208.7 225.5 243.8 259.8 Consolidated 348.6 352.5 404.9 502.5 591.1 611.8 608.8 613.4 EBITDA Margin (%) Sally Beauty Supply 18.5 18.2 18.9 20.4 21.4 21.3 20.5 19.7 Beauty Systems Group 10.4 11.7 12.3 13.6 15.7 16.2 16.9 17.3 Total 13.2 13.4 13.9 15.4 16.8 16.9 16.2 16.0 EBITDA (Before Corporate Expenses) as % of Total Sally Beauty Supply 75.2 73.6 72.3 70.6 69.3 67.8 66.0 63.8 Beauty Systems Group 24.8 26.4 27.7 29.4 30.7 32.2 34.0 36.2 Capex Sally Beauty Supply 22.1 23.2 30.4 34.9 42.2 60.6 43.1 66.0 Beauty Systems Group 18.7 8.5 11.3 14.1 12.0 15.7 19.2 16.8 Corporate 4.8 5.6 7.1 10.9 15.0 8.6 14.5 23.8 Total 45.6 37.3 48.7 60.0 69.1 84.9 76.8 106.5 Geographic Breakdown Net Sales U.S. 2,170.7 2,202.2 2,402.1 2,688.1 2,886.0 2,944.0 3,031.0 3,145.9 Foreign 477.5 434.4 514.0 581.1 637.7 678.3 722.5 688.4 As a % of Total Sales U.S. 82.0 83.5 82.4 82.2 81.9 81.3 80.8 82.0 Foreign 18.0 16.5 17.6 17.8 18.1 18.7 19.2 18.0 Number of Stores (Excluding Franchised Units) U.S. 2,348 2,391 2,468 2,550 2,638 2,710 2,793 2,868 International 472 507 538 583 646 693 751 787 Total Sally Beauty Supply Units 2,820 2,898 3,006 3,133 3,284 3,403 3,544 3,655 Beauty Systems Group 760 829 868 995 1,031 1,084 1,103 1,137 Total 3,580 3,727 3,874 4,128 4,315 4,487 4,647 4,792


Leveraged Finance


Liquidity and Debt Structure The company had $140 million of cash on the balance sheet and $477 million available under its $500 million asset-based lending (ABL) facility as of Sept. 30, 2015. Fitch expects annual FCF to be in the mid-$200 million range, and expects Sally will use this primarily toward share repurchases, with a portion allocated toward opportunistic bolt-on acquisitions and greenfield growth in international markets. Sally announced on Nov. 18, 2015 an offering of $750 million senior unsecured notes due December 2025 with the intention of using the net proceeds, together with cash on hand and/or additional borrowings, to redeem all $750 million of the 6.875% senior unsecured notes due November 2019. The company has no debt maturities until June 2022, when the $850 million 5.750% senior unsecured notes are due.


Fitch has assigned ‘bb+*/rr1*’ to the senior secured ABL revolver, indicating outstanding recovery prospects (91%–100%) in the event of default. The unsecured debt is expected to achieve average recovery (31%‒50%) and was assigned ‘bb*/rr4*’.

Capital Structure ($ Mil., At Sept. 30, 2015) Description 9/30/15

Pro Forma for 2025 Notes (%)

Secured Debt $500 Mil. ABL Revolver due July 2018 — — — Total Secured Debt — — — Unsecured Debt 6.875% Sr. Unsecured Notes due November 2019 750.0 — — 5.750% Sr. Unsecured Notes due June 2022 850.0 850.0 47.2 5.500% Sr. Unsecured Notes due November 2023 200.0 200.0 11.1 5.625% Sr. Unsecured Notes due December 2025 — 750.0 41.7 Total Unsecured Debt 1,800.0 1,800.0 100.0 Total Debt 1,800.0 1,800.0 100.0 ABL – Asset-based loans. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Sept. 30, 2015) 2016 — 2017 — 2018 — 2019 750 Thereafter 1,050

Note: Excludes borrowings under credit facility, mortgages and capital leases. Source: Company filings, Fitch Ratings.



Leveraged Finance



Leveraged Finance


Appendix A

Organizational Structure — Sally Holdings, LLC ($ Mil., As of Sept. 30, 2015, Pro Forma)

Sally Holdings LLC (Sally Holdings)

Debt Issue$500 Mil. Sr. Secured ABL Revolver 5.750% Senior Notes Due 20225.500% Senior Notes Due 20235.625% Senior Notes Due 2025Total Debt

Amount0.0

850.0200.0750.0

1,800.0

MaturityJuly 2018June 2022November 2023December 2025

Sally Investment Holdings LLC (Sally Investment)

Sally Beauty Holdings, Inc. (Sally Beauty)CO — bb*/Stable

Beauty Systems Group LLC(Co-Borrower under ABL)

Sally Beauty Supply LLC(Co-Borrower under ABL) Sally Beauty Distribution LLC Sally Capital Inc.

(Co-Issuer for Notes)

Sally Beauty Intl. Finance LLC

Beauty Holding LLC

Other Domestic Subsidiaries

Sally Beauty Int’l. Inc.

Sally Beauty Distribution of Ohio, Inc.

Sally Beauty Int’l. Holdings, C.V. (Netherlands)

Beauty Systems Group (Canada), Inc. (Delaware)

(Canadian Borrower under ABL)

SBH Netherlands Cooperatief UASally Beauty Worldwide Holdings, BV

SBH Finance B.V (Netherlands)(Foreign Borrower under ABL)

Legal Entities

Guarantors

Legend

CO – Credit Opinion. ABL – Asset-based loans. Note: Please refer to front page of this report for disclaimer regarding Credit Opinions. Source: Fitch Ratings, company reports.

CObb+*/rr1*bb*/rr4*bb*/rr4*bb*/rr4*

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — Sally Holdings LLC Overview Borrower(s) Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC (as Domestic Borrowers); Beauty Systems Group (Canada), Inc.

(as Canadian Borrower); SBH Finance B.V (as Foreign Borrower). Description of Debt Senior secured revolving asset-based lending facility of $500 Mil. subject to a borrowing base equal to (i) 90% of eligible credit card receivables and (ii) 90%

of cost of eligible inventory (net of inventory reserve) multiplied by the appraised value of eligible inventory plus (iii) face amount of eligible trade receivables multiplied by the receivables advance rate (of 80% or 85% based on reporting requirements then in effect), minus (iv) 100% of the then amount of availability reserves.

Document Date Second Amendment to Credit Agreement dated 7/26/13 (Exhibit 4.3 to 10-K filed 11/14/13) Credit Agreement dated 11/12/10 (Exhibit 4.13 to 10-Q filed 2/3/11) Amendment No. 1 to Credit Agreement dated 6/8/12 (Exhibit 4.1 to 8-K filed 6/14/12)

Amount $500 Mil. full commitment with a sublimit of $25 Mil. for Canadian facility. $200 Mil. accordion feature for domestic (and $25 Mil. for Canadian) facility subject to no default.

Maturity Date 7/26/18 Ranking Senior secured. Security Secured by a first lien on inventory, accounts receivable and credit card receivables of the related loan parties (domestic or Canadian). Loan parties

includes both borrowers as well as guarantors of the obligations. Guarantee Guaranteed by parents Sally Beauty Holdings, Inc., and Sally Investment Holdings LLC, as well as by material wholly owned domestic subsidiaries of the

domestic borrowers (see org chart); Canadian subsidiaries, organized under the laws of Canada, will guarantee the obligations under the Canadian credit facility (there are presently no Canadian guarantors).

Financial Covenants Fixed-Charge Coverage Consolidated fixed charge coverage ratio (FCCR), calculated on a TTM basis to be equal to or greater than 1.0x during the continuance of a covenant

compliance event (means either [a] that an event of default has occurred and is continuing, or [b] excess availability is less than the greater of 10% of the borrowing base, or $40 Mil.).

Debt Restrictions Debt Incurrence Ratio Debt: Secured debt permitted provided secured leverage ratio does not exceed 4.0x on a pro forma basis.

Carveouts: No restriction on unsecured and/or subordinated debt incurrence Limitation on Liens Loan parties not permitted for create liens except permitted encumbrances, which include: existing liens on debt and refinancings thereof; liens on

intellectual property; and liens securing new indebtedness permitted under debt incurrence covenant (purchase money debt, capital leases and ratio debt). Limitation on Guarantees Guarantees are defined as debt and hence governed by debt restriction. Also see investment section below. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as occupancy of majority of board seats or acquisition of more than 50% voting stock, and constitutes an event of default. Investments Restriction Unlimited amount permitted provided the acquisition/investment payment conditions are satisfied (i) no event of default (ii) excess availability for the 45-day

period preceding, and on the date of, such transaction or payment was equal to or greater than 15% of the loan cap. Note: If acquisition/investment payment conditions cannot be met but the excess availability condition is met, the amount in any fiscal year is capped at $30 Mil. Carveouts: Guarantees of secured debt permitted under debt covenant; general carveout of $2.5 Mil. in any fiscal year provided no event of default exists. Permitted Acquisitions: Total consideration paid for permitted acquisitions in any fiscal year is limited to $30 Mil. as long as pro forma excess availability is equal to or greater than 15% of the loan cap.

Sale of Assets Restriction Dispositions of assets and equity (including sale and leaseback) are permitted provided no event of default and the net proceeds are used to repay the loans.

Restricted Payments Restricted Payments (RP) RP: Means (i) any dividend (other than payable in capital stock of any loan party) with respect to capital stock and (ii) stock repurchase.

Ratio Test: Sally Holdings LLC (the Parent) may pay cash dividends and distributions to Sally Investment Holdings LLC (Intermediate Holdco) for distribution to Sally Beauty Holdings, Inc. (Holdings) to enable Holdings to pay cash dividends and repurchase its stock up to: (a) an amount such that consolidated FCCR is equal to or greater than 1.10x (on a pro forma basis) provided that no default or event of default exists or would arise therefrom, and pro forma excess availability for the 45 day period preceding, and on the date of, such payment must equal or be greater than 20% of the loan cap for 45 days prior to the RP; or (b) RP amount is not limited by the FCCR test if pro forma excess availability for the 45-day period preceding (and on the date of) is equal to or greater than the lesser of $150 Mil. or 30% of the borrowing base. For RP up to $30 Mil. in any fiscal year, excess availability must equal or exceed the lesser of $75 Mil. or 15% of borrowing base for 45 days preceding; or for RP in excess of $30 Mil. in any fiscal year, excess availability must equal or exceed the lesser of $100 Mil. or 20% of borrowing base for 45 days preceding and consolidated FCCR shall be at least 1.1x. Carveouts: Parent may make cash distributions to Holdings and Intermediate Holdco in amount sufficient to cover their expenses (other than taxes) incurred in ordinary course of business.

Prepayment of Debt Voluntary redemption, retirement, prepayment of debt is permitted provided no default or event of default exists or would arise therefrom, and pro forma excess availability for the 45 day period preceding, and on the date of, such payment was equal to or greater than 20% of the loan cap.

Other Cross-Default Yes for material debt (> $20 Mil.) of any loan party. Cross-Acceleration Same as above. MAC Clause As a representation and warranty Equity Cure Yes — Provided (a) the parent identifies such cash equity contribution as a specified equity contribution; (b) in each four fiscal quarter period, there shall

exist a period of at least two consecutive quarters in respect of which no specified equity contribution shall have been made, (c) the amount of any contribution included in the calculation of consolidated EBITDA shall be limited to the amount required to effect compliance with FCCR of 1.0x.

Trigger (or Cash Dominion) Event

The company’s funds will be swept daily via ACH/wire into concentration accounts (maintained by the administrative agent and under the sole dominion of the collateral agent) to reduce the borrowings outstanding under the credit facility upon occurrence of a trigger event. Means either (i) the occurrence and continuance of an event of default, or (ii) the borrowers’ failure to maintain excess availability of at least the greater of $40 Mil. or 15% of the loan cap for 45 consecutive days.

Key Definitions Loan Cap: Represents the lesser of (a) total commitments and (b) borrowing base. Excess Availability: Difference between (a) the loan cap and (b) the outstanding credit extensions to the borrowers.

MAC – Material adverse change. ACH – Automated clearing house transfers. Source: Company filings, Fitch Ratings.




Leveraged Finance


Appendix C

Bond Covenant Summary — Sally Holdings LLC Overview Issuer Sally Holdings LLC (issuer) and Sally Capital Inc. (as co-issuer) Description of Debt 5.750% Senior Notes, 5.500% Senior Notes and 5.625% Senior Notes Document Date and Location Indenture dated 5/18/12 filed as Exhibit 4.1 to 8-K dated 5/18/12

Supplemental Indenture dated 5/18/12 filed as Exhibit 4.2 to 8-K dated 5/18/12 Second Supplemental Indenture dated 10/29/13 filed as Exhibit 4.2 to 8-K dated 10/29/13 Third Supplemental Indenture dated 12/3/15 filed as Exhibit 4.2 to 8-K dated 12/31/15

Maturity Date 5.750% Senior Notes: 6/1/22 5.500% Senior Notes: 11/1/23 5.625% Senior Notes: 12/1/25

Original Issue/Outstanding 5.750% Senior Notes: $850 Mil./$850 Mil. 5.500% Senior Notes: $200 Mil./$200Mil. 5.625% Senior Notes: $750 Mil./$750 Mil.

Ranking Senior unsecured obligations of the issuer. Security None. Guarantee Guaranteed on a senior unsecured basis by parents Sally Beauty Holdings, Inc. and Sally Investment Holdings LLC, as well as by each subsidiary

guarantor of the issuer, jointly and severally, with all other subsidiary guarantors. Subsidiary guarantor is a domestic restricted subsidiary of Sally Holdings LLC (other than Sally Capital Inc.).

Debt Restrictions Debt Incurrence Ratio Debt: Sally Holdings LLC and restricted subsidiaries may incur debt if consolidated coverage ratio (pro forma) is greater

than 2.0x. Carveouts: Credit facility debt (Term, ABL, other) provided total aggregate amount outstanding does not exceed $1.2 Bil. plus the greater of $400 Mil. and borrowing base less debt incurred by special purpose domestic subsidiaries. Borrowing base is defined as 80% of the book value of inventory plus 85% of the book value of receivables of the issuer and 100% of cash and equivalents of the issuer and its domestic subsidiaries. • Capital leases and purchase money debt capped at the higher of $100 Mil. and 11.5% of consolidated tangible assets; • General carveout amount equal to the greater of $85 Mil. and 9.75% of consolidated tangible assets.

Limitation on Liens Liens (other than permitted liens) on debt issued by the issuer or any restricted subsidiary are not permitted without equally and ratable securing the notes contemporaneously. Carveouts: Standard carveouts for existing liens and refinancings thereof; general carveout of $25 Mil.

Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as less than 100% of equity interest in the borrower or acquisition of more than 50% voting stock of the borrower or HoldCo or

constitution of the Board of Directors changes so Permitted Holders lose control and may constitute an event of default (if section 7.1 requirements are not met). There is a CoC put at 101.

Investments Restriction See Restricted Payments section. Sale of Assets Restriction Standard restrictions on asset sales; in the event that sales proceeds exceed collateral value by more than $30 Mil. and are not applied to repay

loans or reinvest in additional assets within 365 days, they shall be applied to repay the notes subject to an offer. Restricted Payments Restricted Payments (RP) RP: Means (i) any dividend (ii) stock repurchase (iii) prepayment of subordinated debt and (iv) restricted investments.

Ratio Test: RP are permitted provided (i) no event of default (ii) borrower can incur $1 of debt under the 2.0x consolidated coverage ratio debt test. RP Basket: Determined as cumulative sum of 50% consolidated net income commencing 7/1/2006 plus 100% of the net proceeds from an equity issuance and other adjustments. Carveouts: • General carveout equal to the greater of $50 Mil. and 5.75% consolidated tangible assets; • Additional RP provided consolidated leverage ratio is less than 3.25x (after giving effect to such RP including any debt incurred to finance such

payment) and no event of default exists. Other Cross-Default Yes, upon a payment default on final maturity on any material debt (> $40 Mil) of issuer or restricted subsidiary. Cross-Acceleration Yes, if agreed to by holders of at least 30% of principal then outstanding. Callability 5.750% notes: noncallable until 6/1/17. Thereafter, redeemable, at the company’s option, in whole or in part, on and after 6/1/17 at the applicable

redemption price below: 2017: 102.875% 2018: 101.917% 2019: 100.958% 2020+: 100.000%

5.500% notes: noncallable until 11/1/18. Thereafter, redeemable, at the company’s option, in whole or in part, on and after11/1/18 at the applicable redemption price below: 2018: 102.750% 2019: 101.833% 2020: 100.917% 2021+: 100.000%

5.625% notes: noncallable until 12/1/20. Thereafter, redeemable, at the company’s option, in whole or in part, on and after 12/1/20 at the applicable redemption price below: 2020: 102.813% 2021: 101.875% 2022: 100.938% 2023+: 100.000%

Equity Clawback Max. 35% of the issue can be redeemed with proceeds from an IPO @ 105.750% on or before 6/1/15 for the 5.750% notes and @105.500% on or before 11/1/16 for the 5.500% notes.

Covenant Suspension Covenants related to debt incurrence, restricted payments and disposition of assets (but excluding lien restrictions) will be suspended if (a) the notes have investment grade ratings by two rating agencies and (b) there is no event of default. If any of these conditions fails to be met at a subsequent date, the covenants shall be reinstated on that later date.

ABL – Asset-based loans. Source: Company filings, Fitch Ratings.





Leveraged Finance


Appendix D

Financial Summary — Sally Beauty Holdings, Inc.

12 Months

Three Months



12 Months


Operating EBITDAa 502.5 591.1 151.1 611.8 149.6 148.0 162.4 151.4 611.3 144.8 154.4 160.6 152.6 612.4 Operating EBITDA Margin (%) 15.4 16.8 16.7 16.9 15.9 16.1 17.1 16.0 16.3 15.0 16.5 16.6 15.8 16.0 FFO Return on Adjusted Capital (%)b 22.0 20.9 22.9 22.9 22.3 21.3 22.0 21.2 21.2 19.7 20.5 19.9 21.3 21.3 FCF Margin (%) 7.1 6.5 10.3 6.2 5.0 8.9 1.6 10.1 6.4 4.0 10.5 (0.1) 6.0 5.1

Coverages (x)

FFO Interest Coverage 3.6 4.3 5.0 4.5 5.2 2.8 4.2 3.7 4.0 4.3 3.7 4.0 4.3 4.1 Operating EBITDA/Gross Interest Expense 4.5 5.7 5.6 5.7 5.3 5.1 5.5 5.2 5.3 5.0 5.3 5.5 5.2 5.2 FFO Fixed-Charge Coverage 2.0 2.1 2.4 2.2 2.4 1.6 2.1 1.9 2.0 2.1 1.9 2.0 2.1 2.1 FCF Debt Service Coverageb 3.0 3.1 1.8 1.8 3.2 3.3 2.8 3.0 3.0 2.9 3.1 3.0 2.6 2.6 Cash Flow from Operations/Capex 4.9 4.3 5.6 3.7 4.5 5.8 1.8 4.5 4.1 3.0 6.3 1.0 2.6 2.8

Leverage (x)b

Long-Term Secured Debt/ Operating EBITDA 1.4 — — — — — — — — — — — — — Long-Term Secured Debt/FFO 2.3 — — — — — — — — — — — — — Total Debt with Equity Credit/ Operating EBITDA 2.8 2.7 2.8 2.8 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 2.9 2.9 FFO-Adjusted Leverage 4.9 5.0 4.8 4.8 4.9 5.1 5.1 5.2 5.2 5.5 5.3 5.3 5.1 5.1 Total Adjusted Debt/Operating EBITDAR 4.3 4.0 4.1 4.1 4.3 4.3 4.3 4.3 4.3 4.4 4.3 4.3 4.3 4.3 FCF/Total Adjusted Debt (%) 7.9 7.2 6.8 6.8 7.1 7.3 6.6 6.7 6.7 6.4 6.9 6.4 5.4 5.4

Balance Sheet

Short-Term Debt 3.0 1.9 78.0 78.0 1.9 1.6 10.3 1.0 1.0 0.9 0.8 0.8 0.8 0.8 Long-Term Senior Secured Debt 693.9 — — — — — — — — — — — — — Long-Term Senior Unsecured Debt 436.5 1,612.9 1,611.4 1,611.4 1,811.4 1,811.2 1,811.0 1,810.6 1,810.6 1,810.1 1,809.4 1,809.0 1,786.8 1,786.8 Long-Term Subordinated Debt 275.0 — — — — — — — — — — — — — Other Debt 4.8 2.4 1.3 1.3 1.0 0.7 0.4 0.1 0.1 0.1 0.0 — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 1,413.1 1,617.2 1,690.7 1,690.7 1,814.3 1,813.5 1,821.7 1,811.6 1,811.6 1,811.0 1,810.2 1,809.8 1,787.6 1,787.6 Off-Balance Sheet Debtc 1,540.8 1,559.2 1,649.6 1,649.6 1,744.0 1,744.0 1,744.0 1,744.0 1,744.0 1,785.6 1,785.6 1,785.6 1,785.6 1,785.6 Total Adjusted Debt with Equity Credit 2,953.9 3,176.4 3,340.3 3,340.3 3,558.3 3,557.5 3,565.7 3,555.6 3,555.6 3,596.6 3,595.8 3,595.4 3,573.2 3,573.2

Cash Flow

Funds From Operations 296.6 340.4 109.1 381.4 118.6 52.4 95.0 78.5 344.5 95.5 77.5 87.0 97.4 357.5 Change in Working Capital (4.7) (42.8) 4.2 (71.0) (58.5) 46.4 (60.4) 44.0 (28.5) (38.5) 39.9 (54.5) (3.5) (56.7) Cash Flow from Operations 291.8 297.6 113.3 310.5 60.1 98.8 34.6 122.5 316.0 57.0 117.4 32.5 93.9 300.8 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (60.0) (69.1) (20.3) (84.9) (13.4) (17.0) (19.4) (27.0) (76.8) (18.8) (18.5) (33.3) (35.9) (106.5) Common Dividends — — — — — — — — — — — — — — FCF 231.9 228.5 93.0 225.6 46.7 81.8 15.1 95.5 239.2 38.2 98.9 (0.9) 58.0 194.3 Net Acquisitions and Divestitures (86.8) (43.4) (6.0) (22.1) — — (4.8) (0.2) (4.9) — (2.0) (0.7) (3.5) (6.3) Net Debt Proceeds (149.3) 180.2 (0.0) 74.0 123.7 (0.5) 8.5 (9.5) 122.1 (0.3) (0.2) (0.2) (0.2) (0.8) Net Equity Proceeds 10.9 (172.0) (95.7) (484.2) (58.9) (45.4) (175.6) (26.8) (306.6) 29.9 (45.7) (5.9) (151.6) (173.2) Other (Investing and Financing) (2.8) (16.6) 2.5 13.6 (0.8) 8.6 0.7 1.2 9.7 16.2 4.3 0.8 (1.8) 19.5 Total Change in Cash 4.0 176.7 (6.3) (193.1) 110.8 44.5 (156.1) 60.2 59.5 84.1 55.3 (6.9) (99.1) 33.5 Ending Cash and Securities Balance 63.5 240.2 47.1 47.1 157.9 202.5 46.3 106.6 106.6 190.7 246.0 239.1 140.0 140.0 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8xs gross rent expense. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — Sally Beauty Holdings, Inc. (Continued)

12 Months

Three Months



12 Months


Revenue 3,269.1 3,523.6 906.4 3,622.2 940.5 919.5 949.3 944.3 3,753.5 964.5 937.8 967.9 964.2 3,834.3 Revenue Growth (%) 12.1 7.8 2.7 2.8 3.9 2.4 4.1 4.2 3.6 2.6 2.0 2.0 2.1 2.2 Operating EBIT 442.7 526.4 131.8 539.6 130.3 128.5 142.4 130.5 531.6 124.2 133.4 138.0 127.3 523.0 Gross Interest Expense 112.5 103.9 27.2 107.7 28.5 29.3 29.3 29.3 116.3 29.2 29.2 29.2 29.2 116.8

Sector-Specific Data

Same-Store Sales (%) 6.1 6.4 0.4 0.8 2.2 1.0 1.8 2.1 2.0 2.3 2.8 3.1 3.5 2.9 No. of Stores 4,128 4,315 4,487 4,487 4,515 4,551 4,597 4,647 4,647 4,695 4,724 4,754 4,792 4,792 Gross Margin (%) 48.8 49.5 49.6 49.6 49.0 49.6 50.1 49.5 49.6 49.1 49.8 49.7 49.3 49.5 SG&A/Revenues (%) 35.2 34.5 35.0 34.7 35.1 35.7 35.1 35.7 35.4 36.2 35.6 35.5 36.1 33.5 Operating EBIT Margin (%) 13.5 14.9 14.5 14.9 13.9 14.0 15.0 13.8 14.2 12.9 14.2 14.3 13.2 13.6 Operating EBITDAR 695.1 786.0 202.7 818.0 204.1 202.5 216.9 205.9 829.3 200.6 210.2 216.4 208.4 835.6 Operating EBITDAR Margin (%) 21.3 22.3 22.4 22.6 21.7 22.0 22.8 21.8 22.1 20.8 22.4 22.4 21.6 21.8 Operating EBITDAR/(Interest + Rent) (x)b 2.3 2.6 2.6 2.6 2.5 2.4 2.6 2.5 2.5 2.4 2.5 2.5 2.5 2.5 Inventory Turnover (x)b 2.6 2.5 2.4 2.4 2.4 2.4 2.3 2.3 2.3 2.3 2.3 2.2 2.3 2.3 Accounts Payable Turnover (x)b 6.9 6.8 6.8 6.8 7.3 7.1 7.1 7.1 7.1 7.4 7.0 7.1 7.2 7.2 Return on Invested Capital (%)b 23.2 23.6 24.6 24.6 22.9 22.8 23.4 23.4 23.4 22.3 22.5 22.0 22.8 22.8 Return on Assets (%)b 12.4 11.3 13.4 13.4 12.6 12.1 12.6 12.1 12.1 11.6 11.5 11.0 11.2 11.2 Capex/Depreciation (%)b 100.4 106.8 105.1 117.6 69.5 87.0 97.2 129.2 96.4 91.4 88.3 147.4 142.3 119.2 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

Sears Holdings Corporation Full Rating Report

Key Rating Drivers EBITDA Remains Materially Negative: Fitch Ratings expects Sears Holdings Corporation’s (Sears or Holdings) EBITDA to be in the negative $600 million–negative $650 million range in 2015 and potentially worse in 2016. We expect a revenue decline of around 20% in 2015 due to estimated domestic comparable store sales (comps) of negative 10% and ongoing store closings. Comps are expected to be in the negative midsingle-digit range in 2016 and 2017, with top-line decline potentially in the high single-digit range as Sears continues to close stores.

Significant Cash Burn: Sears’ interest expense, capex and pension plan contributions are expected to total $750 million–$800 million annually between 2015 and 2017. Netting this amount from Fitch’s EBITDA expectation — and assuming $200 million–$300 million in net working capital benefit — leads to cash burn (CFO after capex and pension contributions) of $1.0 billion–$1.1 billion in 2015. Cash burn could potentially worsen in 2016, assuming EBITDA losses approach $800 million–$1 billion.

Shrinking Assets Fund Operations: Sears injected $3.1 billion in liquidity through October 2015, with $429 million from real estate joint ventures (JVs) related to 31 stores and $2.7 billion from the sale-leaseback transaction with Seritage Growth Properties (Seritage), in which it sold 235 owned properties and its 50% interest in the JV. This is on top of the $6.8 billion — including expense and working capital reductions and debt-financing activities — between 2012 and 2014 to fund ongoing operations given material declines in internally generated cash flow.

Further Liquidity Injections Required: Fitch expects Sears to end 2015 with about $1.8 billion–$2.0 billion in liquidity based on current EBITDA expectations. This assumes no additional asset sales above the $3.1 billion injected through October or debt issuance. Sears is consequently likely to require an additional $1.3 billion–$1.5 billion in annual liquidity in 2016 and 2017 via further real estate transactions and/or higher borrowings, plus another $500 million to fund annual seasonal working capital needs.

Rating Sensitivities Positive Rating Action: A positive rating action could result from a sustained improvement in comps and EBITDA to a level where the company is covering its fixed obligations. This is not anticipated at this time.

Negative Rating Action: A negative rating action could result if Sears is unable to inject the liquidity needed to fund ongoing operations.

Ratings Sears Holding Corporation Long-Term IDR CC Secured Second Lien Notes CCC+/RR1 Senior Unsecured Notes C/RR6

Sears, Roebuck and Co. Long-Term IDR CC

Sears Roebuck Acceptance Corp. (SRAC) Long-Term IDR CC Secured Bank Facilitya CCC+/RR1 Secured First Lien Term Loana CCC+/RR1 Senior Unsecured Notes CC/RR4 Short-Term IDR C Commercial Paper C Kmart Holding Corporation Long-Term IDR CC Kmart Corporation Long-Term IDR CC Secured Bank Facilitya CCC+/RR1 Secured First Lien Term Loana CCC+/RR1

aSRAC and Kmart are co-borrowers. IDR – Issuer Default Rating.

Rating Outlook —

Financial Data Sears Holdings Corporation

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 31,198.0 25,942.0 EBITDA (710.0) (575.0) EBITDA Margin (%) NM NM FCF (1,657.0) (1,719.0) Total Adjusted Debt 9,576.0 8,657.0 Total Adj. Debt/ EBITDAR (x) NM NM EBITDAR/(Interest +Rent) (x) NM NM Comparable Store Sales (%)a (1.8) (10.1) Real Estate Owned (%)b 45 30 No. of Stores 1,725 1,687 aComparable store sales for LTM data reflects the performance for the nine months ended Oct. 31, 2015. bReal estate owned reflects owned full-line Sears and Kmart stores (excludes U.S. specialty stores, a majority of which are leased). The figure for the LTM period reflects Fitch’s estimate after adjusting for the 266 properties sold through various real estate transactions during the year. N.M. – Not Meaningful.

Analysts Monica Aggarwal +1 212 908-0282 [email protected]


Leveraged Finance


Business Profile Assessment The magnitude of Sears’ decline in profitability and lack of visibility to turn operations around remains a significant concern. Fitch expects Sears’ EBITDA to be negative $600 million– negative $650 million and potentially worse in 2016.

Fitch expects top-line contraction of around 20% in 2015 due to estimated comps of negative 10% and ongoing store closings. Domestic comps are expected to be in the negative midsingle-digit range in 2016 and 2017.

Sears’ interest expense, capex and pension plan contributions are expected to total $750 million–$800 million annually between 2015 and 2017. Netting this amount from Fitch’s EBITDA expectation, and assuming $200 million–$300 million in net working capital benefit, leads to cash burn of $1.0 billion–$1.1 billion in 2015. Cash burn could potentially worsen in 2016, assuming EBITDA losses approach $800 million–$1 billion. Sears also needs an estimated $500 million in liquidity to fund seasonal holiday working capital needs.

Asset Divestitures and Other Liquidity Initiatives Sears has undertaken a number of real estate transactions, spun off various businesses, reduced inventory buys and further cut costs since 2012 to inject liquidity into the business.

During 2015, the company extended $1,971 million out of its $3,275 million credit facility until July 2020, with the rest expiring in April 2016.

The company entered into several real estate transactions in 2015, monetizing 48% of its unencumbered owned store base. The company entered into three real estate JVs with General Growth Properties, Inc.; Simon Property Group, Inc.; and The Macerich Company in April 2015. Under the terms of the transactions, Sears’ contributed a total of 31 properties into the JVs in exchange for a 50% interest in each of the JVs and $429 million in cash.

Sears raised $2.7 billion of gross cash proceeds from the rights offering and sale-leaseback transaction with Seritage in July 2015. Sears sold 235 properties to Seritage along with its 50% interest in the JVs mentioned above. Sears entered into agreements with Seritage and the JVs, under which it leases 255 of the properties, with the remaining 11 properties being leased by Seritage to third parties.

Fitch Base Case Assumptions — Sears Holdings Corporation ($ Mil.,) 2014A 2015F 2016F 2017F Revenue 31,198 24,980 23,333 21,795 Revenue Growth (%) (13.8) (19.9) (6.6) (6.6) Comparable Store Sales (%) (1.8) (9.6) (4.2) (4.2) EBITDA (710) (603) (746) (958) EBITDA Margin (%) (2.3) (2.4) (3.2) (4.4) Working Capital Change 563 322 222 220 Cash Flow From Operations (1,387) (870) (1,085) (1,308) Capex (270) (250) (250) (250) Dividends — — — — FCF (1,657) (1,120) (1,335) (1,558) Share Repurchases — — — — Total Debt 3,800 2,454 2,694 3,141 Total Adjusted Debta 9,576 7,630 7,790 8,157 Total Adjusted Debt/EBITDAR (x) NM NM NM NM aTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. NM – Not meaningful. Source: Fitch Ratings.

Leveraged Finance


2014 Recap — $2.3 Billion in Liquidity • $500 million exit dividend from the separation of Lands’ End; • $358 million from real estate transactions; • A $400 million secured short-term loan from entities affiliated with controlling shareholder

ESL Investments, Inc. (ESL), put in place in mid-September to fund holiday inventory buildup. The loan was guaranteed by Sears and secured by a first-priority lien on 25 real properties owned by Sears.

• $380 million from its rights offering for its shares in Sears Canada, in which Sears had a 51% stake, of which $168 million was received in the third quarter;

• $625 million of 8% senior unsecured notes with warrants offer announced on Oct. 20, 2014 and completed in mid-November.

Sears also benefited from an approximately $500 million reduction in net working capital as it cut back on inventory buys and closed unproductive stores.

2013 Recap — $2 Billion in Liquidity • $1 billion through real estate transactions: $300 million in real estate proceeds;

$400 million from the Sears Canada five-store lease transaction in November; and $300 million from the Sears Canada sale of JV interest in January 2014.

• $1 billion five-year secured term loan using the accordion feature of its domestic asset-based lending facility executed in October 2013.

• Reduction in peak working capital of $320 million during the peak working capital season, with domestic inventory down approximately $620 million.

• $200 million in fixed-cost reductions.

2012 Recap — $2.5 Billion in Liquidity • Sears announced in April 2012 the sale of 11 Sears stores to General Growth Properties

(GGP) for $270 million. The leased Ala Moana property in Hawaii accounted for the majority of the sale price — which was more than $200 million according to GGP, as disclosed in their first-quarter conference call — valuing the remaining 10 owned and leased properties at $6 million–$7 million each.

• Sears Canada received CAD170 million in cash proceeds for the surrender and early termination of the leases on three properties under an agreement with The Cadillac Fairview Corporation Limited in the first quarter.

• Sears separated its Sears Hometown and Outlet businesses and certain hardware stores by transferring direct ownership of these businesses together as a separate company to its shareholders. Sears received cash proceeds of approximately $447 million, or approximately 6.0x EBITDA, when the transaction closed in third-quarter 2012. These assets represented approximately $2.3 billion–$2.6 billion in revenue, $70 million– $80 million in EBITDA and $350 million–$400 million in assets, including $325 million–$375 million of net inventory in 2011.

• Sears reduced its peak working capital by $583 million in 2012 on both store closings ($200 million) and reduced buying ($383 million in the domestic segment). Total domestic inventory was down $972 million at the end of the third quarter.

• The company reduced expenses by approximately $570 million in 2012.

Further Asset Sales and/or Debt Funding Required Beyond 2015 Sears ended 2014 with total liquidity of $1.1 billion, made up of $250 million in cash and $808 million of availability under the revolver. In June 2015, the company repaid the remaining balance of the $400 million secured short-term loan it borrowed in 2014. In August 2015,

Leveraged Finance


Sears tendered $936 million 6.625% senior secured notes due 2018 for cash with proceeds from the Seritage transaction.

Fitch expects Sears to end 2016 (year ending January 2016) with total liquidity of about $1.8 billion–$2.0 billion. This assumes no additional asset sales or debt has been issued above the $3.1 billion injected through August.

Sears could consequently require an additional $1.3 billion–$1.5 billion in annual liquidity in 2016 and 2017 via further real estate transactions and/or higher borrowings, plus another $0.5 billion to fund seasonal working capital needs.

Potential Sources of Liquidity Sears still owns approximately 269 — excludes 125 Sears full-line mall stores in a bankruptcy-remote vehicle and 27 specialty stores — unencumbered Kmart discount and Sears full-line mall stores. If the unencumbered real estate was valued at a similar price per square foot as the 235 properties sold under the Seritage transaction, Fitch estimates Sears could get an additional $2.6 billion in proceeds. However, the remaining portfolio could be of lower value if the stores are in smaller markets or declining malls, and there could be restrictions on the sale of some of these properties based on mall operating covenants. There could also be value in below-market leases, but the potential proceeds are difficult to estimate. The company could also separate its Sears Auto Center business.

The company’s ability to issue incremental debt secured by receivables and inventory, which governs the borrowing base that determines the borrowing capacity on its existing credit facility, after netting out the first lien term loan and second lien secured notes, is limited given the significant reduction in working capital over the past few years.

Leveraged Finance


Liquidity and Debt Structure Sears had total cash of approximately $295 million and availability under its credit facility of $963 million as of Oct. 31, 2015, after the paydown of $936 million of second lien notes due October 2018. The borrowing availability of $963 million on the undrawn $3.275 billion domestic credit facility reflected $654 million of letters of credit outstanding, the effect of the springing fixed-charge coverage ratio covenant that caps borrowing to 90% of the line cap, and another $654 million that was not available due to the borrowing base limitation.

Sears addressed the maturity of its $3.275 billion secured credit facility, which was due to mature on April 8, 2016, by extending $1.971 billion out of the total $3.275 billion to July 2020. The remainder will expire in April 2016.

The company does not have any other near-term maturities.

See the Business Profile Assessment section for FCF projections and liquidity needs.

Liquidity ($ Mil., At Oct. 31, 2015) Cash 294 Availability Under U.S. Credit Facility 963 Total 1,257 Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015) 2016 10 2017 53 2018 1,248 2019 625 2020 — Thereafter 284

Note: Excludes any revolver, commercial paper borrowings and capitalized leases. Source: Company filings, Fitch Ratings.

Capital Structure At 1/31/15 At 10/31/15 Description Location ($ Mil.) (%) ($ Mil.) (%) Secured Debt $3,275 Mil. Secured Revolver ($1,304 Mil. Exp. 4/8/16 and $1,971 Mil. Exp. 7/20/20)a SRAC/Kmart 213.0 5.8 677.0 21.6 First Lien Term Loan Facility Due 6/30/18a,b SRAC 983.0 26.8 975.5 31.1 Second Lien Notes Due 10/15/18 Holdings 1,238.0 33.7 302.0 9.6 Total Secured Debt 2,434.0 66.3 1,954.5 62.4 Unsecured Debt Unsecured CP SRAC 2.0 0.1 9.0 0.3 8.000% Senior Subordinated Notes due 2019 Holdings 625.0 17.0 625.0 19.9 6.500%–7.500% SRAC Notes Due 2017–2043 SRAC 327.0 8.9 327.0 10.4 Other Notes/Mortgages SRAC 13.0 0.4 13.0 0.4 Total Unsecured Debt 974.0 26.3 974.0 31.1 Capital Leases 272.0 7.4 206.0 6.6 Total Debt 3,673.0 100.0 3,134.5 100.0 aSRAC and Kmart are co-borrowers. bThe Secured First Lien Term Loan was issued under the same credit agreement as the credit facility, but Sears reflects the debt under SRAC in its 10-K filing. CP – Commercial paper. Exp. – Expires. SRAC – Sears Roebuck Acceptance Corp. Source: Company filings, Fitch Ratings.

Leveraged Finance


Recovery Considerations for Issue-Specific Ratings In accordance with Fitch’s Recovery Rating (RR) methodology, Fitch has assigned RRs based on the company’s ‘CC’ Issuer Default Rating (IDR). Fitch’s recovery analysis assumes a liquidation value under a distressed scenario of approximately $6.5 billion (low seasonal inventory) to $7.0 billion (peak seasonal inventory) on domestic inventory, receivables, and property, plant and equipment.

The $3.275 billion domestic senior secured credit facility, under which Sears Roebuck Acceptance Corp. (SRAC) and Kmart Holding Corporation (Kmart) are the borrowers, is rated ‘CCC+/RR1’, indicating outstanding (90%–100%) recovery prospects in a distressed scenario. Holdings provides a downstream guarantee to both SRAC and Kmart borrowings, and there are cross-guarantees between SRAC and Kmart. The facility is also guaranteed by direct and indirect wholly owned domestic subsidiaries of Holdings, which own assets that collateralize the facility.

The facility is secured primarily by domestic inventory, which is expected to range from an estimated $4.5 billion in January 2016 to about $5.5 billion–$5.8 billion around peak levels in the next 12 months, and pharmacy and credit card receivables, which are estimated to be $0.3 billion– $0.4 billion. The credit agreement imposes various requirements, including but not limited to the following provisions: if availability under the credit facility is beneath a certain threshold, the fixed-charge ratio as of the last day of any fiscal quarter should not be less than 1.0x; a cash dominion requirement if excess availability on the revolver falls below designated levels; and limitations on its ability to make restricted payments, including dividends and share repurchases.

The $976 million first lien senior secured term loan due June 2018 is also rated ‘CCC+/RR1’, as it is secured by a first lien on the same collateral and guaranteed by the same subsidiaries of the company that guarantee the revolving facility. Under the guarantee and collateral agreement, the revolving lenders will have priority of payment from the collateral over the $1 billion first lien term loan lenders.

The remaining $302 million second lien notes due October 2018 at Holdings, which have a second lien on the same collateral package as the credit facility and $1 billion term loan, are rated ‘CCC+/RR1’ due to the significant paydown of these notes and Fitch’s expectation that Sears will not be able to issue incremental debt secured by receivables and inventory given the significant decline in the borrowing base.

The notes contain provisions that require Holdings to maintain minimum collateral coverage for total debt secured by the collateral securing the notes — failing which, Holdings has to offer to buy notes sufficient to cure the deficiency at 101% — that provide downside protection. Fitch also notes the second lien notes have an unsecured claim on the company’s unencumbered real estate assets, given the notes are guaranteed by substantially all the domestic subsidiaries that guarantee the credit facility.

The senior unsecured notes at SRAC are rated ‘CC/RR4’, indicating average recovery prospects (31%–50%). The recovery on these notes is derived from the valuation on the company’s unencumbered real estate assets held at Sears, Roebuck and Co., which provides a downstream guarantee of SRAC’s senior notes and also agrees to maintain SRAC’s fixed-charge coverage at a minimum of 1.1x. However, should a material portion of the owned real estate be used to raise additional liquidity, it could adversely affect the ratings on the unsecured notes. Recovery to the senior unsecured notes also takes into account potential sizable claims under operating lease obligations and the company’s underfunded pension plan.

The 8% $625 million unsecured notes due 2019 at Holdings are rated ‘C/RR6’, given poor recovery prospects (0%–10%).

Leveraged Finance


Recovery Analysis Sears Holdings Corporation ($ Mil., Except Where Noted; IDR: CC)

Distressed Enterprise Value (EV) as a Going Concern (GC) Liquidation Value (LV) of Assetsa

Book Value

Advance Rate (%)


Going Concern EBITDA — Cash 294.0 0 GC EV Multiple (x) — A/R 475.0 80 380.0 EV on GC Basis — Inventory 5,897.6 70 4,128.3 Net PPE 2,668.0 94 2,500.0 Total LV 7,008.3 Value Available for Claims Distribution Greater of GC or LV 7.008.3 Less Administrative Claims (10%) 700.8 Adjusted LV Available for Claims 6,307.5



Recovered Recovery


Sr. Secured (First Lien)b 1,835.4 1,835.4 100 RR1 +3 CCC+ Sr. Secured FILO Term Loan 975.5 975.5 100 RR1 +3 CCC+ Sr. Secured (Second Lien) 301.8 301.8 100 RR1 +3 CCC+

Concession Payment Availability Table Adjusted LV Available for Claims 6,307.5 Less Secured Debt Recovery 3,112.7 Remaining Recovery for Unsecured Claims 3,194.8

Unsecured Priority Amount Concession

Allocation (%) Value

Recovered Recovery


Implied Rating

Actual Rating

Sr. Unsecuredc 3,262.0 100 3,194.8 98 RR2 +2 CCC CC/RR4 Unsecured 625.0 0 0 RR6 –1 C — Sr. Subordinated 0.0 0 0 — Subordinated 0.0 0 0 — Sr. Equity 0.0 0 0 — aLiquidation value reflects domestic assets held at guarantor subsidiaries. The book value of inventory reflects Fitch’s expectations for peak inventory levels in the next 12, assuming further store closings and asset sales. Separately, $2.5 Bil. PPE value reflect Fitch’s estimate of proceeds resulting from sale of remaining properties. bAssumes the revolver is drawn up to 70% of the line cap. cThe senior unsecured claims include SRAC unsecured debt, the amount of Sears' pension underfunding levels as of Jan. 31 2015, and estimated operating lease claims. The recovery on these claims is derived from the valuation on the company's unencumbered real estate assets. However, should a material portion of the owned real estate be used to raise additional liquidity, it could adversely affect the ratings on the unsecured notes. As a result, Fitch has assigned average recovery prospects to these notes. IDR – Issuer Default Rating. A/R – Accounts receivable. PPE – Property, plant and equipment. FILO – First in last out. Source: Fitch Ratings.

Leveraged Finance


Market Share Losses Continue Since Kmart and Sears, Roebuck and Co. merged under the newly created entity Sears Holdings Corporation in March 2005, the company has been underperforming its largest retail peers within the department store, discount and big-box specialty retail segments. The combined domestic entity lost $18.7 billion, or close to 39% of its 2006 domestic revenue base of $47 billion, excluding Orchard Hardware, through 2014. The top-line weakness reflects years of underinvestment in stores, competitive pressures, inconsistent merchandising execution and the lack of a long-term retail strategy.

Using an industry composite based on Sears’ domestic sales mix, industry sales were down an estimated 6% over 2008–2014, or a CAGR decline of 1.0%. During this five-year period, Sears’ sales were down 33%, or a CAGR decline of approximately 6.4%. As seen in the segment data below, hardlines, which currently accounts for around 53% of the sales mix, accounted for most of the sales decline in 2012 and 2013, while apparel and soft home, which accounts for 18% of the sales mix, drove the sales decline in 2014.

The decline in Kmart’s sales has been even more pronounced relative to its industry peers, with every single category under pressure. Using a composite of general merchandise, food and drugstore sales for Kmart, industry sales were up 22% between 2008 and 2014, or 3.4% CAGR. In contrast, Kmart’s sales were down 26%, or a CAGR decline of approximately 5%. The hardlines category, which accounts for 29% of sales, is also a weakness for Kmart. Kmart also continues to lose share in the food and drug space, which accounts for 38% of its annual sales mix. This has typically been an area of strength for its peers in the discount category, Wal-Mart Stores, Inc. and Target Corp.

Fitch does not expect Kmart and Sears to reverse the negative sales trends, and expects both segments will continue to be share donors.

Sears Domestic and Kmart Category Breakdown Sears Domestic Kmart

2011 2012 2013 2014

YTD 11/1/14

YTD 10/31/15 2011 2012 2013 2014

YTD 11/1/14

YTD 10/31/15

Mix of Business ($ Mil.)

Hardlines 13,022 11,870 9,355 8,903 6,542 5,704 4,765 4,486 4,037 3,605 2,502 1,986 Apparel and Soft Home 5,471 5,434 5,197 3,673 2,562 1,917 4,723 4,588 4,298 4,049 2,728 2,274 Food and Drug 41 38 16 12 6 5 5,705 5,398 4,772 4,326 3234 2749 Service and Other 3,115 3,635 4,630 4,448 3,374 3,155 92 95 87 94 63 53 Total 21,649 20,977 19,198 17,036 12,484 10,781 15,285 14,567 13,194 12,074 8,527 7,062 Mix of Business (%) Hardlines 60.2 56.6 48.7 52.3 52.4 52.9 31.2 30.8 30.6 29.9 29.3 28.1 Apparel and Soft Home 25.3 25.9 27.1 21.6 20.5 17.8 30.9 31.5 32.6 33.5 32.0 32.2 Food and Drug 0.2 0.2 0.1 0.1 0.0 0.0 37.3 37.1 36.2 35.8 37.9 38.9 Service and Other 14.4 17.3 24.1 26.1 27.0 29.3 0.6 0.7 0.7 0.8 0.7 0.8 YoY Growth (%) Hardlines (4.9) (8.8) (21.2) (4.8) (2.7) (12.8) (2.3) (5.9) (10.0) (10.7) (7.2) (20.6) Apparel and Soft Home 0.3 (0.7) (4.4) (29.3) (25.9) (25.2) (1.8) (2.9) (6.3) (5.8) (6.2) (16.6) Food and Drug 7.9 (7.3) (57.9) (25.0) (25.0) (16.7) (1.8) (5.4) (11.6) (9.3) (8.2) (15.0) Service and Other 0.8 16.7 27.4 (3.9) (4.1) (6.5) (3.2) 3.3 (8.4) 8.0 5.0 (15.9) Total (2.8) (3.1) (8.5) (11.3) (8.9) (13.6) (2.0) (4.7) (9.4) (8.5) (7.2) (17.2)

YoY – Year-over-year. Note: Hardlines consist of appliances, consumer electronics, lawn and garden, tools and hardware, automotive parts, household goods, toys, housewares and sporting goods. Apparel and Soft Home includes women’s, men’s, kids, footwear, jewelry, accessories and soft home. Food and Drug consists of grocery and household, pharmacy and drugstore. Service and Other includes repair, installation and automotive service, and extended contract revenue. Source: Company filings, Fitch Ratings.

Leveraged Finance


4.7 4.1 4.0 3.8 3.5 3.2 2.8 2.5

(12)

(8)

(4)

0

4

8

2007 2008 2009 2010 2011 2012 2013 2014

Composite Industry Growth Rate Kmart Growth Rate Kmart Share of Composite Industry

Kmart Sales Trend Versus Industry Composite(2007–2014)

Source: The composite index is based on Fitch's estimates of Kmart's sales mix over the five-year period and created using the U.S. Census Bureau categorization of retail sales by industry segment.

(%)

22.3 20.8 21.0 19.7 19.0 18.4 17.114.9

(10)

0

10

20

30

2007 2008 2009 2010 2011 2012 2013 2014

Composite Industry Growth Rate Sears Domestic Growth Rate Sears Share of Composite Industry

Sears Domestic Sales Trend Versus Industry Composite (2007–2014)

Source: The composite index is based on Fitch's estimates of Sears' domestic sales mix over the five-year period and was created using the U.S. Census Bureau categorization of retail sales by industry segment.

(%)

Leveraged Finance


Sears Segment Dataa ($ Mil., Unless Otherwise Indicated) 2008 2009 2010 2011 2012 2013 2014 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Revenues Sears Domestic 25,315 23,672 22,937 21,649 20,977 19,198 17,036 4,419 5,489 4,285 4,310 3,889 4,552 3,526 3,752 3,503 Kmart 16,219 15,743 15,595 15,285 14,567 13,194 12,074 2,916 4,007 2,897 2,923 2707 3,547 2,356 2,459 2,247 Sears Canada 5,236 4,628 4,796 4,633 4,310 3,796 2,088 937 1,097 697 780 611 — — — — Total 46,770 44,043 43,328 41,567 39,854 36,188 31,198 8,272 10,593 7,879 8,013 7,207 8,099 5,882 6,211 5,750 Revenue Growth (%) Sears Domestic (9.1) (6.5) (3.1) (2.8) (5.4) (8.5) (11.3) (6.5) (12.2) (4.9) (9.9) (12.0) (0.2) (17.7) (12.9) (9.9) Kmart (6.0) (2.9) (0.9) (2.0) (4.7) (9.4) (8.5) (5.4) (14.7) (6.6) (7.7) (7.2) (0.1) (18.7) (15.9) (17.0) Sears Canada (6.5) (11.6) 3.6 (3.4) (7.0) (11.9) (45.0) (10.9) (16.3) (17.2) (15.2) (34.8) — — — — Total (7.8) (5.8) (1.6) (1.6) (5.3) (9.2) (13.8) (6.6) (13.6) (6.8) (9.7) (12.9) (23.5) (25.3) (22.5) (20.2) Comparable Store Sales (%) Sears Domestic (9.5) (8.7) (3.6) (3.0) (1.4) (4.1) (2.1) (4.0) (7.8) 0.2 0.1 (0.7) (7.0) (14.5) (14.0) (9.6) Kmart (6.1) (0.8) 0.7 (1.4) (3.7) (3.6) (1.4) (2.1) (5.1) (2.2) (1.7) 0.5 (2.0) (7.0) (7.3) (7.5) Total (Domestic) (8.0) (5.1) (1.6) (2.2) (2.5) (3.8) (1.8) (3.1) (6.4) (1.0) (0.8) (0.1) (4.4) (10.9) (10.8) (8.6) Sears Canada (CAD) (1.6) (6.9) (4.0) (7.7) (5.6) (2.7) (5.7) (1.2) (6.4) (7.6) (6.8) (9.5) — — — — Gross Profit Sears Domestic 7,235 7,025 6,579 5,800 5,870 4,874 4,086 1,093 1,328 1,069 976 887 1,154 1,000 926 789 Kmart 3,783 3,721 3,838 3,467 3,409 2,865 2,561 589 862 595 582 560 824 518 509 473 Sears Canada 1,644 1,495 1,463 1,334 1,235 1,016 502 249 292 164 184 154 — — — — Total 12,662 12,241 11,880 10,601 10,514 8,755 7,149 1,931 2,482 1,828 1,742 1,601 1,978 1,518 1,435 1,262 Gross Margin (%) Sears Domestic 28.6 29.7 28.7 26.8 28.0 25.4 24.0 24.7 24.2 24.9 22.6 22.8 25.4 28.4 24.7 22.5 Kmart 23.3 23.6 24.6 22.7 23.4 21.4 21.2 20.2 21.5 20.5 19.9 20.7 23.2 22.0 20.7 21.1 Sears Canada 31.4 32.3 30.5 28.8 28.7 26.8 24.0 26.6 26.6 23.5 23.6 25.2 — — — — Total 27.1 27.8 27.4 25.5 26.4 24.2 22.9 23.3 23.4 23.2 21.7 22.2 24.4 25.8 23.1 21.9 Gross Profit YoY Change (bps) Sears Domestic (107) 110 (99) (178) 104 (259) (142) (228) (287) (7) (287) (193) 115.1 346.1 208.0 (27.6) Kmart (17) 31 98 (192) 71 (169) (19) (161) (189) (107) (189) 49 173.1 148.6 79.9 35.0 Sears Canada 7 91 (180) (171) (14) (189) (276) (242) (178) 219 (178) (137) — — — — Total (67) 72 (37) (184) 78 (219) (129) (209) (237) (15) (237) (113) 102.3 260.8 140.4 (25.2) SG&A (Excluding Noncash or One-Time Items) Sears Domestic 7,179 6,694 6,621 6,397 6,095 5,596 4,944 1,363 1,501 1,264 1,264 1,196 1,220 1,182 1,166 1,083 Kmart 3,572 3,509 3,471 3,444 3,355 3,123 2,872 759 854 705 726 682 759 599 609 605 Sears Canada 1,308 1,142 1,244 1,366 1,265 1,105 622 276 288 225 217 180 — — — — Total 12,059 11,345 11,336 11,177 10,715 9,824 8,438 2,398 2,643 2,194 2,207 2,058 1,979 1,781 1,775 1,688 Operating Income Sears Domestic 56 331 (42) (597) (225) (722) (858) (270) (173) (195) (288) (309) (66) (182) (240) (294) Kmart 211 212 367 23 54 (258) (311) (170) 8 (110) (144) (122) 65 (81) (100) (132) Sears Canada 336 353 219 (2) (30) (89) (120) (27) 4 (61) (33) (26) — — — — Total Excluding One-Time Items 603 896 544 (576) (201) (1,069) (1,289) (467) (161) (366) (465) (457) (1) (263) (340) (426) Adjusted EBITDA Sears Domestic 780 1,003 614 4 356 (211) (431) (142) (52) (91) (178) (199) 37 (80) (145) (217) Kmart 349 364 519 172 201 (129 (216) (139) 40 (87) (120) (97) 88 (61) (81) (115) Sears Canada 455 455 320 101 69 3 (71) (5) 24 (43) (15) (13) — — — — Total EBITDA 1,584 1,822 1,453 277 626 (337) (718) (286) 12 (221) (313) (309) 125 (141) (226) (332) Store Info. (Units) Sears Domestic Sears Full-Line Stores 856 848 842 832 788 768 717 775 768 765 757 751 717 715 711 708 Sears Essentials/Grands 73 60 52 35 10 10 8 10 10 10 10 10 8 8 8 8 Total Full-Line 929 908 894 867 798 778 717 785 778 765 757 751 717 715 711 708 Specialty Stores 1,233 1,284 1,354 1,338 54 50 29 50 50 36 36 30 29 28 28 27 Total Sears Domestic 2,162 2,192 2,248 2,205 852 828 746 835 828 801 793 781 746 743 739 735 Kmart Stores 1,368 1,327 1,307 1,305 1,221 1,152 979 1,183 1,152 1,123 1,077 1,050 979 973 963 952 Sears Canada Full-Line Stores 122 122 122 122 118 118 — 118 118 113 113 113 — — — — Specialty Stores 266 280 361 378 357 331 — 338 331 326 319 305 — — — — Total Sears Canada 388 402 483 500 475 449 — 456 449 439 432 418 — — — — a2011 full-year figures exclude Orchard Hardware, including any year-over-year calculations. YoY – Year-over-year. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Accelerated Store Closings/Divestitures The company closed or divested a net 601 big box locations between 2008 and 2014, resulting in a square footage decline of 18.5%. A majority (321 units) of the closed or divested stores were leased stores. Sears owned 662 of its big boxes — 175 Kmart discount stores, eight Kmart supercenters, 472 domestic Sears full-line stores and seven Sears Essentials/Grand stores — or approximately 47% of its 2014 domestic square footage. The company has closed nine Sears locations and 27 Kmart locations YTD Oct. 31, 2015, translating to a square footage decline of approximately 2% in the time period.


Domestic Big-Box Square Footage Reduction: 2008–2014a 2008 2014

Average

Sq. Ft. Total

Sq. Ft. Average

Sq. Ft. Total

Sq. Ft. Total Unit Closings

Format Units (000) (000) Units (000) (000) 2008–2014 Sears Full-Line Stores 856 133 113,848 709 155 109,895 (147) Grand Essentials 73 115 8,395 8 170 1,360 (65)

Kmart Discount Stores 1,321 92 121,532 968 95 91,960 (353) Kmart Supercenters 47 166 7,802 11 170 1,870 (36) Total 2,297 — 251,577 1,696 — 205,085 (601) Net Reduction in Sq.Ft. (%) — — — — — — (18.5) aExcludes stores related to 2012 spinoff of Sears Hometown and Outlet Stores businesses and certain hardware stores. Sq. Ft. – Square feet. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix A

Ownership Structurea

ESL Investments, Inc.Other Board MembersFairholme Capital ManagementForce Capital ManagementOther Public Shareholders

Sears Roebuck Acceptance Corp. (SRAC)IDR — CC

Debt IssueSecured First Lien Term Loan due 6/30/18c

Unsecured Commercial Paper6.500%–7.500% Notes due 2017–2043Total

Guarantor Subsidiariese,f

Nonguarantor Subsidiariesf

Organizational Structure — Sears Holdings Corporation($ Mil., As of Oct. 31, 2015)

aOwnership figures as of May 6, 2015. bAdjusted EBITDA adds back noncash pension expense and closed store reserve and severance. cThe Secured First Lien Term Loan was issued under the same credit agreement as the credit facility, but Sears reflects the debt under SRAC in its 10-K filing. d$1,304 million expires on 4/8/16 and $1,971 expires on 7/20/20. eIncludes Sears, Roebuck & Co.; Kmart Holding Corp.; SRAC; and Kmart Corporation, but excludes Sears Canada and affiliates that do not own collateral. fData is presented pre-intercompany eliminations between parent, guarantor subsidiaries and nonguarantor subsidiaries. IDR – Issuer Default Rating. NM – Not meaningful. ABL – Asset-based loan. NR – Not rated. A/R – Accounts receivable. A/P – Accounts payable. Source: Company filings, Fitch Ratings.

(%)53.23.6

24.76.4

12.1

Kmart Holding Corp.IDR — CC

Downstream guarantee

of ABL

100%

Cross-stream guarantee under ABL

Amount975.5

9.0327.0

1,311.5

RatingCCC+/RR1C CC/RR4—

Sears, Roebuck & Co.IDR — CC

Sears Canada Co.IDR — NR

Debt Issue

$300 Mil. ABL Facility due 2019Total

Kmart CorporationIDR — CC/Negative

RevenueEBITDAA/RInventoryA/PTotal AssetsTotal Debt

3,10992825——

32,547 41

100% 100%

12%

100%

Downstream guarantee of all SRAC’s senior notes Subsidiary guarantee (secured) of

a) ABL on first-priority basis andb) SHLD notes on second-priority basis.

Coborrowers under $3.275 Bil. ABL revolver due 2016/2020

Legend

$3.275 Bil. ABLd

(CCC+/RR1)

Consolidated Revenue Consolidated Adjusted EBITDAb

Consolidated Debt/EBITDAR

25,942(574.0)

NM

RevenueEBITDAA/RInventoryA/PTotal AssetsTotal Debt

26,077 (1,739

4416,2082,295

36,039 3,813

Amount

0.00.0

Rating

NR—

Sears DC Corp.IDR — NR

Sears Holding Corporation (SHLD)IDR — CC

Amount302.0625.0 927.0

RatingCCC+/RR1C/RR6—

Debt Issue6.625% Second Lien Secured Notes due 10/15/188.000% Senior Unsecured Notes due 2019TotalOther Claims: Underfunded Pension Plans

Entity-level financial data

Legal entity (issuer, borrower or guarantor)

Owns 360 FL Sears Domestic, seven Sears Essentials and 22 specialty stores

Claims: Operating leases/underfunded pension plans

Owns 175 discount stores and eight supercentersClaims: Operating leases/underfunded pension plan

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary SRAC and Kmart Corp. Overview Borrower Sears Roebuck Acceptance Corp. (SRAC) and Kmart Corp. Document Date and Location Second Amended and Restated Credit Agreement dated April 8, 2011 (exhibit 10.3 to 10-Q filed May 19, 2011).

Second Amended and Restated Guarantee and Collateral Agreement dated April 8, 2011 (exhibit 10.4 to 10-Q filed May 19, 2011). First Amendment to the Second Amended and Restated Credit Agreement dated Oct. 2, 2013 (exhibit 10.1 to 8-K filed Oct. 2, 2013). Third Amended and Restated Credit Agreement dated July 21, 2015 (exhibit 10.2 to 10-Q filed Aug. 20, 2015)

Description of Debt $1.304 Bil. and $1.971 Bil. asset-based revolving credit facility (ABL revolver) subject to a borrowing base equal to 85% of eligible credit card receivables and 85% of eligible pharmacy receivables at such time plus the lesser of (i) 70% of the net eligible inventory and (ii) 80% of the net orderly liquidation value, minus 100% of the availability reserves at such time. $1.0 Bil. senior secured term loan.

Amount ($ Mil.) Commitment Outstanding

(As of Oct. 31, 2015)

ABL Revolver 1,304 677 ABL Revolver 1,971 Term loan 1,000 976 Maturity Date $1.304 Bil. ABL revolver: April 8, 2016

$1.971 Bil. ABL revolver: July 20, 2020 Term loan: June 30, 2018

Ranking Senior secured. Security Secured by a first lien on the domestic inventory, credit card accounts receivable and pharmacy receivables owned by the borrowers

and subsidiary guarantors. Guarantee Borrowers under the facility are SRAC and Kmart. The holding company (Sears Holding Corp. [SHLD]) provides a downstream

guarantee of both SRAC and Kmart’s borrowings, and there are cross-guarantees between SRAC and Kmart. The facility is also guaranteed by each of the subsidiary guarantors (direct/indirect wholly owned domestic subsidiaries of SHLD that owns inventory, credit card accounts, receivables, pharmacy receivables and other collateral).

Financial Covenants Fixed-Charge Coverage > 1.0x springing when excess availability is less than the greater of 10% of the line cap and $175 Mil. Debt Restrictions Debt Incurrence

Coverage Ratio Debt: None. Notable Permitted Debt: 1) $1 Bil. incremental revolver or term loan (currently exhausted with a new $1 Bil. term loan); 2) $100 Mil. for debt of SHLD or of any nonborrowing subsidiary, provided pro forma capped excess availability is more than or equal to 15% of line cap and the pro forma fixed-charge ratio is more than or equal to 1.0x; sale-leaseback of assets not constituting collateral; 3) junior secured notes up to $2 Bil.; 4) unlimited debt with maturity after July 20, 2020, and with repayment not exceeding 1% of original amount per annum; and 5) additional all-purpose debt up to $750 Mil.

Limitation on Liens Notable Permitted Liens: Second-priority lien up to $2 Bil. provided no event of default and pro forma excess availability (line cap less outstanding) is more than or equal to 15% of the line cap.

Limitation on Guarantees Guarantees of operating leases and other nondebt obligations are included under the definition of investments and, hence, are governed by the related covenants.

Acquisitions/Divestitures Change of Control (CoC) A CoC constitutes an event of default and is defined as acquisition of more than 35% voting stock of SHLD by nonpermitted holders,

or SHLD ceasing to own 100% of voting stock of Sears, Roebuck & Co and Kmart Holding Corp. M&A Restriction Acquisition is permitted provided i) no event of default exists, ii) pro forma capped excess availability is more than or equal to 15% of

line cap, and iii) the pro forma fixed-charge ratio is more than or equal to 1.0x. Investment Restriction Notable Carveouts: $100 Mil. investment in nonborrowing subsidiaries, provided pro forma capped excess availability is more than

or equal to 15% of line cap and the pro forma fixed-charge ratio is more than or equal to 1.0x. There is a general investment carveout of $250 Mil.

Sale of Assets Restriction Restrictions on store closings: No more than 250 full-line Sears or Kmart stores per quarter or 500 full-line Sears or Kmart stores every four consecutive quarters without the consent of the co-collateral agents.

Restricted Payments Restricted Payments (RPs) RP Basket: $1.5 Bil., conditioned on 1) excess availability is over 50% of the line cap and 2) no more than $1 Bil. in the LTM.

Notable Permitted Payments: 1) Additional all-purpose payments, provided the sum of pro forma capped excess availability and pro forma suppressed availability (limited to 5% of line cap) is more than or equal to 15% of line cap and the pro forma fixed-charge ratio is more than or equal to 1.05x; and 2) payments are also permitted from the net proceeds of any common stock issuances and any permitted dispositions as long as a) pro-forma capped excess availability is at least 15% of the line cap and b) shall not exceed in any 12 consecutive months 75% of the net proceeds; provided that RPs made pursuant to this clause in cash during any 12 consecutive month period shall not exceed $125 Bil.

N.A. – Not applicable. MAC − Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.




http://www.sec.gov/Archives/edgar/data/1310067/000131006715000038/shldex102q22015.htm

Leveraged Finance


Bank Agreement Covenant Summary SRAC and Kmart Corp. (Continued) Other Cross-Default Yes, exceeding $50 Mil. Cross-Acceleration N.A. MAC Clause None. Covenant Suspension None. Applicability of Covenants Covenants apply to SHLD, the borrowers and any subsidiaries thereof (except Sears Canada Co. or any of its subsidiaries). Cash Dominion Event The company’s funds will be swept daily to reduce the borrowings outstanding under the credit facility if borrowing availability falls

below designated thresholds. This means either a) the occurrence and continuance of an event of default, or b) the sum of capped excess availability and suppressed availability (limited to 2.5% of line cap) at any time is less than the greater of 12.5% of the line cap and $175 Mil. for three days (whether or not consecutive) during any 30-day period.

Important Definitions Line Cap Lesser of (i) aggregate commitments plus the principal amount of incremental term loans and (ii) borrowing base. Capped Excess Availability Lesser of (i) line cap less outstanding, and (ii) borrowing base less outstanding less principal of pari passu notes. Suppressed Availability Borrowing base less sum of (i) aggregate commitments, (ii) principal of incremental term loans and (iii) principal of pari passu notes.

N.A. – Not applicable. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

Bank Agreement Financial Covenant Summary SRAC and Kmart Corp. Financial Covenants (Maintenance) Leverage (Maximum) None. Coverage (Minimum) Fixed-Charge Coverage: More than or equal to 1.0x as of the last day of any fiscal quarter, if capped excess availability (the

lesser of line cap and borrowing base less outstanding) is less than the greater of 10% of line cap or $200 Mil. Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment None. Amortization Schedule None. Callability/Optional Prepayment Optional prepayment with or without prepayment penalty. Pricing Coupon Type/Index LIBOR or BR based floating rate. ABL Revolver Consolidated Leverage Ratio Applicable Margin More than or equal to 3.0x LIBOR + 250 bps or BR + 150 bps More than or equal to 2.0x but less than 3.0x LIBOR + 225 bps or BR + 125 bps Less than 2.0x LIBOR + 200 bps or BR + 100 bps L Commitment Fee: 0.375%−0.625% per annum based on average daily available commitments. Term Loan LIBOR + 450 bps (with 1% LIBOR floor) or BR + 350 bps.

ABL – Asset-based loan. BR − Base rate. Source: Company filings, Fitch Ratings.

Leveraged Finance


Appendix C

Bond Covenant Summary Sears Holdings Corporation (SHLD) Overview Issuer Sears Holding Corporation (SHLD) Document Date and Location Indenture dated Oct. 12, 2010 (exhibit 4.1 to 8-K filed Oct. 15, 2010). Description of Debt 6.625% senior secured notes (second lien). Maturity Date Oct. 15, 2018 Original Issue/Outstanding ($ Mil.) 1,250/302 Ranking Senior. Security Second lien security interest in domestic inventory and credit card accounts receivables, and the obligations under certain banking

and cash-management arrangements. The security interest will be automatically released if the corporate family rating is upgraded to low ‘BBB’ and there is no event of default (satisfaction of the prior two conditions being defined as a fall-away event).

Guarantee Upstream guarantee by SHLD’s guarantor subsidiaries but junior to the guarantee obligations under the revolving credit facility. The guarantees will be automatically released if the corporate family rating is upgraded to low ‘BBB’ and there is no event of default.

Debt Restrictions Debt Incurrence None except noted under lien restrictions. Limitation on Liens Prior to a fall-away event, secured debt up to borrowing base (defined as 90% of accounts receivable of the issuer and guarantors

plus 65% of inventory) less the amount of notes outstanding is permitted. This can be incurred by SHLD or any restricted subsidiary, under (a) the 2009 credit agreement (subject to a $2.45 Bil. cap) and (b) any additional first lien obligations, provided that the aggregate amount of commitments under (a) and (b) does not exceed the borrowing base requirement. Following a fall-away event, secured debt up to 15% of SHLD’s consolidated net tangible assets will be permitted.

Limitation on Guarantees None. Collateral Coverage Event/Offer If the borrowing base is less than the principal amount of SHLD’s consolidated debt that is secured by liens on the collateral

that also secures the notes as of the last day of any two consecutive quarters (collateral coverage event), SHLD must offer to purchase an amount of notes sufficient to cure the collateral coverage shortfall at 101% of their principal amount, plus accrued and unpaid interest.

Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as acquisition of more than 50% voting stock but does not constitute an event of default. There is a CoC put at

101 only upon a CoC triggering event, which is defined as occurrence of both a) a CoC and b) a downgrade to below investment grade by two of the three rating agencies.

M&A, Investments Restriction None. Sale of Assets Restriction Standard restrictions on asset sales. Restricted Payments Restricted Payments None. Other Cross-Default No. Cross-Acceleration No. Callability Callable at Treasury rate + 50 bps. MAC Clause None. Equity Clawback None. Covenant Suspension None.



Leveraged Finance


Bond Covenant Summary Sears Roebuck Acceptance Corp. (SRAC) Overview Issuer Sears Roebuck Acceptance Corp. (SRAC) Document Date Base indenture dated May 15, 1995 (exhibit 4[a] to S-3/A filed Feb. 27, 1996).

Base indenture dated Oct. 1, 2002 (exhibit 4[e] to S-3 filed Oct. 2, 2002). First supplemental indenture dated Nov. 3, 2003 (exhibit 4[e] to S-3 filed Nov. 3, 2003). Guarantee agreement of SRAC debt by Sears, Roebuck and Co., dated March 11, 2004 (S-3 filed March 12, 2004).

Maturity Date Various notes due 2014−2043. Description of Debt Senior unsecured notes. Original Issue/Outstanding ($ Mil.) 4,000/327 Ranking Senior Security Unsecured Guarantee Sears, Roebuck and Co. (Sears) as intermediary holding company provides a downstream guarantee on the notes, and Sears

must retain 100% ownership of SRAC. Financial Covenants Fixed-Charge Coverage The 1995 and 2002 indentures provide for SRAC to maintain a fixed-charge coverage ratio of more than or equal to 1.1x for

any fiscal quarter. Debt Restrictions Debt Incurrence None. Limitation on Liens None. Limitation on Guarantees None. Acquisitions/Divestitures Change of Control None. M&A, Investments Restriction None. Sale of Assets Restriction None. Restricted Payments Restricted Payments None. Other Cross-Default No. Cross-Acceleration Yes, exceeding $100 Mil. MAC Clause None. Equity Clawback None. Covenant Suspension None.


http://www.sec.gov/Archives/edgar/data/88255/0000319256-96-000011.txt

http://www.sec.gov/Archives/edgar/data/88255/000095013702005083/c70545a2exv4wxey.txt

http://www.sec.gov/Archives/edgar/data/88255/000008825503000142/rexhibit4e.txt

http://www.sec.gov/Archives/edgar/data/319256/000031925604000065/s3march112004.htm

Leveraged Finance


Appendix D

Financial Summary — Sears Holdings Corporation




LTM Ended


Operating EBITDAa 291.0 641.0 (282.3) 12.8 (325.0) (218.0) (310.0) (306.0) 124.0 (710.0) (141.0) (226.0) (332.0) (575.0) Operating EBITDA Margin (%) 0.7 1.6 (3.4) 0.1 (0.9) (2.8) (3.9) (4.2) 1.5 (2.3) (2.4) (3.6) (5.8) (2.2) FFO Return on Adjusted Capital (%)b 2.6 3.1 (0.4) (4.0) (4.0) (6.2) (8.5) (12.4) (12.1) (12.1) (9.6) (8.3) (7.2) (7.2) FCF Margin (%) (1.7) (1.8) (12.6) 1.9 (4.6) (8.0) (3.0) (17.6) 6.0 (5.3) (9.8) (5.5) (22.4) (6.6)

Coverages (x) FFO Interest Coverage (1.6) (1.6) (5.1) (5.2) (5.0) (8.6) (5.3) (9.1) (0.7) (5.7) (4.2) (2.1) (7.8) (3.4)

Operating EBITDA/ Gross Interest Expense 1.0 2.4 (4.6) 0.2 (1.3) (3.1) (4.3) (3.9) 1.3 (2.3) (1.6) (2.0) (4.5) (1.6) FFO Fixed-Charge Coverage 0.3 0.4 (0.5) (0.7) (0.5) (1.7) (0.8) (2.1) 0.4 (1.0) (0.7) (0.2) (1.6) (0.5) FCF Debt-Service Coverageb (0.2) (0.3) (0.4) (0.8) (0.8) (0.8) (0.8) (0.7) (1.3) (1.3) (1.1) (3.0) (1.2) (1.2) Cash Flow from Operations/ Capex (0.7) (0.8) (11.3) 4.4 (3.4) (7.8) (3.5) (15.7) 8.2 (5.1) (12.2) (7.1) (18.5) (6.8)

Leverage (x)b Long-Term Secured

Debt/Operating EBITDA 4.3 1.9 22.7 (6.9) (6.9) (2.3) (2.8) (2.4) (3.1) (3.1) (2.9) (2.3) (3.3) (3.3) Long-Term Secured Debt/FFO (1.7) (2.0) (2.2) (1.7) (1.7) (0.8) (1.3) (1.0) (1.1) (1.1) (1.0) (0.7) (1.2) (1.2) Total Debt with Equity Credit/ Operating EBITDA 12.0 4.9 47.9 (13.1) (13.1) (7.7) (5.4) (6.0) (5.4) (5.4) (6.1) (5.7) (5.0) (5.0) FFO-Adjusted Leverage 26.8 24.6 (227.3) (20.9) (20.9) (14.0) (10.8) (8.0) (9.1) (9.1) (11.8) (13.4) (16.4) (16.4) Total Adjusted Debt/ Operating EBITDAR 9.0 6.6 12.2 23.2 23.2 44.1 (210.0) (125.3) 798.0 798.0 108.6 51.6 58.9 58.9 FCF/Total Adjusted Debt (%) (6.8) (7.4) (9.8) (16.0) (16.0) (15.4) (17.0) (18.1) (17.3) (17.3) (16.6) (19.1) (19.9) (19.9)

Balance Sheet Short-Term Debt 1,506.0 1,177.0 1,833.0 1,415.0 1,415.0 1,308.0 1,489.0 2,171.0 690.0 690.0 787.0 76.0 757.0 757.0

Long-Term Senior Secured Debt 1,237.0 1,237.0 2,227.0 2,229.0 2,229.0 1,238.0 2,225.0 2,005.0 2,221.0 2,221.0 1,848.0 1,238.0 1,915.0 1,915.0 Long-Term Senior Unsecured Debt 750.0 706.0 635.0 605.0 605.0 1,583.0 590.0 764.0 889.0 889.0 1,253.0 1,830.0 209.0 209.0 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 3,493.0 3,120.0 4,695.0 4,249.0 4,249.0 4,129.0 4,304.0 4,940.0 3,800.0 3,800.0 3,888.0 3,144.0 2,881.0 2,881.0 Off-Balance Sheet Debtc 6,848.0 6,728.0 6,216.0 6,216.0 6,216.0 5,776.0 5,776.0 5,776.0 5,776.0 5,776.0 5,776.0 5,776.0 5,776.0 5,776.0 Total Adjusted Debt with Equity Credit 10,341.0 9,848.0 10,911.0 10,465.0 10,465.0 9,905.0 10,080.0 10,716.0 9,576.0 9,576.0 9,664.0 8,920.0 8,657.0 8,657.0

Cash Flow Funds From Operations (718.0) (613.0) (365.0) (271.0) (1,325.0) (676.0) (425.0) (693.0) (156.0) (1,950.0) (488.0) (342.0) (633.0) (1,619.0)

Change in Working Capital 411.0 310.0 (592.0) 834.0 216.0 116.0 238.0 (502.0) 711.0 563.0 (47.0) 45.0 (589.0) 120.0 Cash Flow from Operations (307.0) (303.0) (957.0) 563.0 (1,109.0) (560.0) (187.0) (1,195.0) 555.0 (1,387.0) (535.0) (297.0) (1,222.0) (1,499.0) Total Non-Operating/ Nonrecurring Cash Flow 32.0 — — — — — — — — — — — — — Capex (432.0) (378.0) (85.0) (128.0) (329.0) (72.0) (54.0) (76.0) (68.0) (270.0) (44.0) (42.0) (66.0) (220.0) Common Dividends — (50.0) — (233.0) (233.0) — — — — — — — — — FCF (707.0) (731.0) (1,042.0) 202.0 (1,671.0) (632.0) (241.0) (1,271.0) 487.0 (1,657.0) (579.0) (339.0) (1,288.0) (1,719.0) Net Acquisitions and Divestitures 72.0 532.0 13.0 695.0 995.0 79.0 85.0 152.0 108.0 424.0 108.0 2,570.0 30.0 2,816.0 Net Debt Proceeds 308.0 (411.0) 968.0 (437.0) 1,149.0 (122.0) 152.0 673.0 (875.0) (172.0) 81.0 (733.0) (264.0) (1,791.0) Net Equity Proceeds (183.0) — — — — — — — — — — — — — Other (Investing and Financing) (102.0) 472.0 (11.0) (31.0) (54.0) 478.0 2.0 (57.0) 204.0 627.0 426.0 35.0 (3.0) 662.0 Total Change in Cash (612.0) (138.0) (72.0) 429.0 419.0 (197.0) (2.0) (503.0) (76.0) (778.0) 36.0 1,533.0 (1,525.0) (32.0) Ending Cash and Securities Balance 747.0 609.0 599.0 1,028.0 — 831.0 829.0 326.0 250.0 250.0 286.0 1,819.0 294.0 294.0 Short-Term Marketable Securities — — — — — — — — — — — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — Sears Holdings Corporation (Continued)




LTM Ended

($ Mil.) 1/28/12 2/2/13 11/2/13 2/1/14 2/1/14 5/3/14 8/2/14 11/1/14 1/31/15 1/31/15 5/2/15 8/1/15 10/31/15 10/31/15 Income Statement Revenue 41,567.0 39,854.0 8,272.0 10,593.0 36,188.0 7,879.0 8,013.0 7,207.0 8,099.0 31,198.0 5,882.0 6,211.0 5,750.0 25,942.0 Revenue Growth (%) (4.1) (4.1) (6.6) (13.6) (9.2) (6.8) (9.7) (12.9) (23.5) (13.8) (25.3) (22.5) (20.2) (23.0) Operating EBIT (562.0) (189.0) (463.3) (160.3) (1,057.0) (373.0) (462.0) (454.0) (2.0) (1,291.0) (263.0) (340.0) (426.0) (1,031.0) Gross Interest Expense 289.0 267.0 61.0 73.0 254.0 71.0 72.0 78.0 92.0 313.0 90.0 111.0 74.0 367.0 Sector-Specific Data

Comparable Store Sales (%)d (2.2) (2.5) (3.1) (6.4) (3.8) 0.2 (0.8) (0.1) (4.4) (1.8) (10.9) (10.8) (8.6) (10.1) No. of Stores 4,010 2,548 2,474 2,429 2,429 2,363 2,302 1,831 1,725 1,725 1,716 1,702 1,687 1,687 Gross Margin (%) 25.5 26.4 23.3 23.4 24.2 23.2 21.7 22.2 24.4 22.9 25.8 23.1 21.9 23.9 SG&A/Revenues (%) 26.9 26.9 28.9 24.9 27.1 27.9 27.5 28.5 24.4 27.1 30.3 28.6 29.4 27.8 Operating EBIT Margin (%) (1.4) (0.5) (5.6) (1.5) (2.9) (4.7) (5.8) (6.3) (0.0) (4.1) (4.5) (5.5) (7.4) (4.0) Operating EBITDAR 1,147.0 1,482.0 (88.0) 207.0 452.0 (37.5) (129.5) (125.5) 304.5 12.0 39.5 (45.5) (151.5) 147.0 Operating EBITDAR Margin (%) 2.8 3.7 (1.1) 2.0 1.2 (0.5) (1.6) (1.7) 3.8 — 0.7 (0.7) (2.6) 0.6 Operating EBITDAR/ (Interest + Rent) (x)b 1.0 1.3 (0.3) 0.8 0.4 (0.1) (0.5) (0.5) 1.1 0.0 0.1 (0.2) (0.6) 0.1 Inventory Turnover (x)b 3.5 3.7 3.1 3.8 3.8 3.7 3.8 3.4 4.0 4.0 3.8 3.7 3.1 3.1 Accounts Payable Turnover (x)b 10.3 10.3 7.7 10.4 10.4 9.9 9.9 8.8 11.7 11.7 10.4 9.9 8.4 8.4 Return on Invested Capital (%)b 2.0 4.9 0.9 (2.1) (2.1) (4.0) (6.2) (6.6) (6.6) (6.6) (5.4) (4.2) (4.2) (4.2) Return on Assets (%)b (14.7) (4.8) (7.4) (7.5) (7.5) (8.8) (11.4) (12.4) (12.7) (12.7) (11.9) (6.1) (5.5) (5.5) Capex/Depreciation (%)b 50.6 45.5 47.0 74.0 44.9 46.5 35.5 51.4 54.0 46.5 36.1 36.8 70.2 48.2 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dComparable store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


Retailing / U.S.A.

SUPERVALU Inc. Full Rating Report

Key Rating Drivers Potential Save-A-Lot Spinoff: SUPERVALU Inc. (SVU) announced in July 2015 it was exploring a potential spinoff of its Save-A-Lot segment as a publicly traded company. A Form 10 was filed for Save-A-Lot in early January 2016 and management views the first half of fiscal 2017 as a possible completion time frame. Fitch anticipates market conditions could also influence the timing of the potential spinoff. Save-A-Lot represented 27% of SVU’s total EBITDA in fiscal 2015 and had pro forma sales of $4.6 billion and EBITDA of $221 million.

Spinoff Neutral to Rating: Based on Fitch’s scenario analysis, SVU’s adjusted debt/EBITDAR would be around 5.0x pro forma for the Save-A-Lot spinoff, assuming no changes in debt levels, versus 4.0x at Dec. 5, 2015. Save-A-Lot’s capital structure has not been determined. However, if Save-A-Lot incurs some debt in conjunction with a spinoff and dividends $100 million–$750 million of proceeds to SVU, which uses the cash to pay down debt, SVU’s adjusted leverage could range from 4.0x to 5.0x post spin.

Spinoff Removes Growth Vehicle: Save-A-Lot has significant long-term growth upside, given its position in the growing hard discount sector. A spinoff of Save-A-Lot would therefore negatively affect SVU’s business profile by removing a primary growth vehicle. However, SVU intends to retain up to 19.9% of Save-A-Lot to be monetized within five years of the separation. Fitch estimates the stake could be worth up to $400 million, assuming the market values Save-A-Lot at 8.0x–10.0x EBITDA, or $1.8 billion–$2.0 billion.

Retail, Independent Business EBITDA: SVU’s remaining businesses would consist of its mature Retail Food (supermarket) and Independent Business (wholesale grocery) segments. For the first three quarters of fiscal 2016, sales and operating margins for these segments were flat to down due to lost customers at the wholesale business and negative identical store sales at the retail operations. Fitch projects slightly lower EBITDA of $550 million–$560 million for these operations, down from approximately $590 million in fiscal 2015, over the next two years due to soft sales and gradual margin compression.

Covenants, Debt Paydown: Fitch expects SVU to refinance or seek amendments to its credit facilities to permit a spinoff, given Save-A-Lot’s inclusion in the facilities’ collateral package. Fitch anticipates some debt repayment would occur in the event of a spinoff, and debt paydown would be required if SVU chooses to sell Save-A-Lot.

Rating Sensitivities Positive Rating Action: Future developments that may, individually or collectively, lead to a positive rating action include meaningfully higher than expected sales growth and steady to improving EBITDA, particularly in the Independent Business and Retail Food segments. Effective management of the transition services agreement (TSA) wind down, and adjusted debt/EBITDAR at or below 4.0x would also be factors.

Negative Rating Action: Future developments that may, individually or collectively, lead to a negative rating action include consistently negative operating trends across the business, with top-line declining in the 2%–3% range, FCF turning negative and adjusted debt/EBITDAR meaningfully above 5.0x.

Ratings Long-Term IDR B ABL Facility BB/RR1 Term Loan BB/RR1 Senior Unsecured B/RR4

IDR – Issuer Default Rating. ABL – Asset-based lending.


Financial Data SUPERVALU Inc.

($ Mil.) FYE

2/28/15 LTM

12/5/15 Total Revenue 17,820 17,947 EBITDA 807 829 EBITDA Margin (%) 4.5 4.6 FCF 169 308 Total Adjusted Debt 3,960 3,946 Total Adjusted Debt/EBITDAR (x) 4.1 4.0 EBITDAR/ (Interest + Rent) (x) 2.7 2.8 Identical Store Sales (%) — Retail Fooda 1.0 (2.0) Identical Stores Sales (%) — Save-A-Lot Networka 5.8 (0.3) Real Estate Owned (%)b 16 NA Number of Stores 1,528 1,536 aIdentical Store Sales for the LTM period reflects the nine-month period ended Dec. 5, 2015. bAs of fiscal year end.


Monica Aggarwal, CFA +1 212 908-0282 [email protected]

Leveraged Finance


Key Assumptions — Excluding Save-A-Lot Fitch’s key assumptions, assuming SVU separates the Save-A-Lot business, are as follows: annual revenues grow at 0%–1%; EBITDA trends toward $550 million–$560 million over the next 24 months, due to margin pressure in the Retail Food segment, versus roughly pro forma $590 million in fiscal 2015; the company remains FCF positive; and adjusted leverage is in the low 4.0x–5.0x range. Fitch estimates SVU’s capex would be reduced by approximately $80 million–$100 million, given Save-A-Lot’s fiscal 2015 and projected fiscal 2016 capex reported in its Form 10 filing. The leverage range reflects uncertainty related to debt at the legacy business.

Business Profile Assessment SVU currently operates through three segments: Independent Business (wholesale distribution), Save-A-Lot (hard discount) and Retail Food (traditional supermarket). The SUPERVALU Segments table that follows presents SVU’s three segments on a pro forma basis for the March 2013 sale of the New Albertsons Inc. (NAI) assets, including the TSA payments that would have been received from NAI prior to the sale, except in fiscal 2011.

Spinoff of Save-A-Lot SVU intends to separate Save-A-Lot from the rest of its operations via a tax-free spinoff. The rationale for the spinoff is mainly to allow each of Save-A-Lot’s businesses to focus on their own distinct operations and strategies while positioning Save-A-Lot as an independent hard-discount grocery chain that finances its own growth.

The two publicly-traded companies would have separate management teams and boards of directors. SVU’s shareholders would own at least 80.1% of Save-A-Lot, while SVU would retain no more than 19.9%. SVU will be required to dispose of its outstanding common shares within five years of the spinoff. Fitch estimates the stake could be worth up to $400 million, assuming the market values Save-A-Lot at 8.0x–10.0x EBITDA, or $1.8 billion–$2.0 billion. A TSA agreement is also expected to exist between the two companies.

Fitch Base Case Assumptions — Including Save-A-Lot ($ Mil., Fiscal Year Ended February) 2015A 2016F 2017F 2018F Comments Revenue 17,820 17,900 18,000 18,200 Save-A-Lot grows at 4%–5% while retail

and independent grow at 1% post fiscal 2016.

Revenue Growth (%)a 3.9 — 1.0 1.0 Consolidated growth of 1%–2% once deflation pressure subsides.

Identical Store Sales (%) — Retail Food 1.0 (2.0) 0.5 0.5 Pharmacy and customer count pressure. Identical Store Sales (%) — Save-A-Lot 5.8 (2.0) 2.0 2.0 Deflation subsides. EBITDA 807 800 790 770 EBITDA flat to down as TSA winds down. EBITDA Margin (%) 4.5 4.5 4.4 4.3 Slight gross margin pressure is partially

offset by expense reductions. Working Capital Change (40) (15) (2.0) (2.0) Relatively flat working capital. Cash Flow from Operations 333 415 440 430 Lower pension contribution in 2016. Capex 239 285 300 300 New Save-A-Lot stores; remodeling

retail banners. Dividends — — — — — FCF 169 130 140 130 — Share Repurchases — — — — — Total Debt 2,728 2,640 2,500 2,400 FCF applied to voluntary debt reduction. Total Adjusted Debtb 3,960 3,920 3,860 3,860 — Adjusted Debt/EBITDAR (x) 4.1 4.1 4.1 4.1 Leverage remains around 4.0x. aExcludes effect of 53rd week in Fiscal 2015. bTotal Adjusted Debt includes rent expense capitalized at 8x. A – Actual. F – Forecast. TSA – Transition services agreement. Source: Fitch Ratings.

Leveraged Finance


In connection with the separation, Save-A-Lot intends to enter into borrowing arrangements expected to consist of new term loan and/or senior notes and a revolving asset-based loan (ABL) credit facility. However, the amount of debt Save-A-Lot issues and any amount distributed to SVU have not been determined.

According to Save-A-Lot’s Form 10, Save-A-Lot’s adjusted fiscal 2015 EBITDA, including the allocation of certain expenses, was $217 million. Fitch has performed a scenario analysis to assess SVU’s leverage post spin by considering varying levels of distribution and corresponding debt paydown. Fitch’s scenario analysis considers SVU’s book debt of $2.7 billion at the end of fiscal 2015; a combined $154 million of rent expense, for which $58 million is attributed to Save-A-Lot; and pro forma fiscal 2015 EBITDA of approximately $590 million and $217 million at SVU and Save-A-Lot, respectively. Fitch estimates SVU’s adjusted debt/EBITDAR could range from approximately 4.0x to 5.0x, assuming proceeds from any distribution is used to pay down debt.

Save-A-Lot The Save-A-Lot segment, which accounted for 27% of EBITDA in fiscal 2015, operates more than 1,300 hard discount stores under the Save-A-Lot banner. The mix of corporate-to-licensed stores has shifted from 30%/70% in fiscal 2011 to 34%/66% at Dec. 5, 2015, as the company has converted licensed stores to corporate stores and experienced net new store growth. Save-A-Lot leases 93% of its corporate-owned store square footage. The company offers a limited assortment (3,000 skus or items) in a 17,000-square foot box (average size), with private-label products representing 55%–60% of its mix, compared with the 80%–90% typical of hard discounters.

Post-Spinoff Leverage Scenario Analysis

Total Adjusted Debt/EBITDAR (x)

Save-A-Lot

Legacy SUPERVALU

Debt Paydown $0 Mil. 1.7 5.1

$100 Mil. 2.1 5.0 $250 Mil. 2.6 4.7 $500 Mil. 3.5 4.4 $750 Mil. 4.4 4.0


Post-Spinoff Leverage Analysis Assuming $0 Debt Paydown ($ Mil.) SVU Excluding Save-A-Lot Pro Forma EBITDA 590 Pro Forma EBITDAR 686 Book Debt (Year-End Fiscal 2015) 2,728 Adjusted Debt (8x Rent Expense) 3,496 Adjusted Debt/EBITDAR 5.1 Save-A-Lot Pro Forma EBITDA 217 EBITDAR 275 Book Debt — Adjusted Debt (8x Rent Expense) 464 Adjusted Debt/EBITDAR 1.7


Leveraged Finance


Identical store (ID) sales turned positive in the third quarter of fiscal 2014, due to price investments and enhanced fresh produce and meat offerings, and remained strong through the fourth quarter of fiscal 2015. ID sales are currently being negatively affected by deflation, particularly in protein. Segment EBITDA margin narrowed to 4.8% in fiscal 2015 from 5.7% in fiscal 2014, as management deliberately managed down prices to improve competitiveness. The company subsequently pulled back on broad-based price investments. EBITDA margin improved in the first three quarters of fiscal 2016 as higher gross margins and lower logistics costs were partially offset by higher occupancy and employee-related expenses.

SUPERVALU Segments

($ Mil., Pro Forma for NAI Salea) 2/25/12 2/23/13 2/22/14 2/28/15

40 Weeks Ended

12/5/15

40 Weeks Ended

11/29/14 Revenues

Retail Food 4,921 4,736 4,651 4,879 3,662 3,660 Save-A-Lot 4,221 4,195 4,228 4,613 3,568 3,498 Independent Business 8,194 8,166 8,036 8,134 6,195 6,227 Corporate — — 240 194 158 145 Total 17,336 17,097 17,155 17,820 13,583 13,530

Revenue Growth (%)

Retail Food (2.6) (3.8) (1.8) 4.9 0.1 — Save-A-Lot 8.5 (0.6) 0.8 9.1 2.0 — Independent Business (2.6) (0.3) (1.6) 1.2 (0.5) — Corporate — — — (19.2) 9.0 — Total (0.1) (1.4) 0.3 3.9 0.4 —

EBITDA Post Adjustmentsb

Retail Food 292 287 278 294 183 211 Save-A-Lot 292 246 241 221 171 156 Independent Business 326 286 294 292 223 217 Corporate (196) (169) (59) — 33 4 Total 714 650 754 807 610 588

EBITDA Margin (%)

Retail Food 5.9 6.1 6.0 6.0 5.0 5.8 Save-A-Lot 6.9 5.9 5.7 4.8 4.8 4.5 Independent Business 4.0 3.5 3.7 3.6 3.6 3.5 Total 4.1 3.8 4.4 4.5 4.5 4.3

EBITDA Breakdown (Excl. Corporate Segment) (%)

Retail Food 32 35 34 37 32 36 Save-A-Lot 32 30 30 27 30 27 Independent Business 36 35 36 36 38 37 Total 100 100 100 100 100 100 aIncludes transition services agreement (TSA) fees that would have been received from NAI in all periods except fiscal 2011. bAdjusted for unusual items. TSA expenses and fees, and pension costs for inactive participants are restated into corporate expenses. $60 Mil. of one-time TSA fees in fiscal 2014 are excluded. Save-A-Lot EBITDA as reported in Form 10 filed January 2016 is $217 Mil., which includes the allocation of certain expenses not reflected above. NAI – New Albertson’s, Inc. Source: Company filings, Fitch Ratings.

Leveraged Finance


In view of faster ID sales growth potential at Save-A-Lot, management is accelerating store growth. Save-A-Lot expects to open 90 new stores in fiscals 2016 and 2017 while maintaining mid to high single-digit growth beyond, per the company’s recently filed Form 10. Net of store closings, this would equate to 5%–7% annual square footage growth. Fitch believes sales from this segment could approach $6 billion over the next five years, from $4.6 billion in fiscal 2015, assuming a CAGR of 5%. Fitch also believes EBITDA could grow to around $300 million, from $217 million over the same time frame, assuming a 5% EBITDA margin.

Independent Business The Independent Business segment operates the second largest wholesale grocery distribution business in the U.S. (after C&S Wholesale Grocers), serving 1,871 stores nationally and another 224 stores on a secondary basis at Dec. 5, 2015. The segment accounted for 36% of SVU’s EBITDA in fiscal 2015. Sales in the Independent Business segment were down 0.6% in fiscal 2015 — excluding the 53rd week — and 1.6% in fiscal 2014, but EBITDA was relatively flat due to cost-reduction initiatives. Fitch projects flat to slightly higher EBITDA from this business in fiscal 2016, but believes there is potential for modest EBITDA pressure over time. The Independent Business segment sales declined 0.5% during the first three quarters of fiscal 2016 due to lost customers and lower sales to existing customers. Margins increased slightly on lower promotional funding, logistics cost and pension expense, which was partially offset by higher employee-related and occupancy expenses.

Retail Food The Retail Food segment, which accounted for 37% of LTM EBITDA in fiscal 2015, operates 194 supermarkets under the banners shown in the Store Banners table on the next page, which are SVU’s legacy supermarket assets, down from 1,065 stores prior to the March 2013 sale of NAI. Eighty-four percent of its retail square footage is leased. SVU has the leading position in the Minneapolis/St. Paul and Fargo, ND, markets, but smaller market shares in its other three markets.

The Retail Food segment generated positive ID sales for five consecutive quarters before turning negative in the first quarter of fiscal 2016. ID sales growth had been driven by price reductions, improvements in the quality of its fresh food (meat and produce) offerings, store remodels and enhanced customer service. During the first three quarters of fiscal 2016, ID sales were negatively affected by reduced promotional spending and its resulting impact on customer count as the company looked to offset pharmacy gross margin pressure. Fitch projects ID sales will experience an approximately 2% decline in fiscal 2016. EBITDA is also projected to decline due to a continuation of gross margin pressure in pharmacy and management’s intention to increase promotional spending in the fourth quarter.

ID Sales Trends (%) 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Retail Food (4.1) (3.0) (0.9) (1.9) 0.2 0.6 0.4 2.3 1.1 (0.3) (3.3) (2.6) ID Customer Count (3.5) (2.6) (0.7) (2.5) (0.6) 2.5 1.4 3.1 — (0.4) (4.2) (4.3) ID Basket (0.6) (0.4) (0.2) 0.6 0.8 (1.9) (1.0) (0.8) — 0.1 0.2 1.7

Save-A-Lot (Network) (2.6) (1.9) (0.3) 1.7 2.1 5.6 6.5 6.9 3.6 0.6 (1.6) (3.4) Save-A-Lot (Corporate) (1.2) 4.6 5.4 3.5 4.6 7.2 8.2 8.5 6.6 2.8 0.9 (0.4) ID Customer Count — 1.4 4.1 — 1.4 6.1 6.4 5.1 — 0.4 (1.2) 1.1 ID Basket — 3.2 1.3 — 3.2 1.1 1.8 3.2 — 2.4 2.1 (1.5)

ID – Identical store. Source: Company filings.

Leveraged Finance


Corporate Segment SVU began reporting income from the TSA as revenue to the corporate segment in fiscal 2014. Expenses in this segment include items not allocated to the operating segments. Fitch adds back noncash stock option expense. Segment EBITDA improved to a break-even level in fiscal 2015 from a loss of $59 million in fiscal 2014, due in part to lower net periodic pension expense. However, Fitch expects losses from this segment will widen as the TSA fees decline over the next few years.

Category Sales Data 2013 2014 2015 (Years Ending February) ($ Mil.) (%) ($ Mil.) (%) ($ Mil.) (%) Retail Food

Nonperishable Grocery 2,689 15.7 2,600 15.2 2,677 15.0 Perishable Grocery 1,428 8.3 1,463 8.5 1,574 8.8 Pharmacy 512 3.0 491 2.9 510 2.9 Fuel 77 0.4 67 0.4 83 0.5 Other 30 0.2 30 0.2 35 0.2 Total 4,736 27.6 4,651 27.1 4,879 27.3 Save-A-Lot

Nonperishable Grocery 2,865 16.7 2,829 16.5 2,986 16.7 Perishable Grocery 1,330 7.8 1,399 8.2 1,627 9.1 Total 4,195 24.5 4,228 24.6 4,613 25.8 Independent Business

Nonperishable Grocery 6,140 35.8 6,000 35.0 5,939 33.2 Perishable Grocery 1,935 11.3 1,951 11.4 2,099 11.7 Services 91 0.5 85 0.5 96 0.5 Total 8,166 47.6 8,036 46.8 8,134 45.5 Corporate

Services 42 0.2 240 1.4 194 1.3 Total Sales 17,139 100.0 17,155 100.0 17,820 100.0

Note: Fitch does not restate prior-year numbers. Source: Company filings.

Store Banners (As of Feb. 28, 2015) Market Banner Type Locations Stores Position Cub Foods Value Positioned Minneapolis/St. Paul 49 1 Farm Fresh Traditional Supermarket Hampton Roads; Richmond, VA;

Elizabeth City, NC 41 3

Shop ‘n Save Basic Grocery St. Louis 42 3 Shoppers Food Value Positioned Baltimore; Northern Virginia; and

Washington, D.C. 54 3–4

Hornbacher’s Traditional Supermarket North Dakota, Minnesota 6 1 Rainbow Value Positioned Minneapolis/St. Paul 2 Total Supermarkets — — 194 —

Save-A-Lot — Owned Hard Discount Primarily East of Mississippi 431 — Save-A-Lot — Licensed — — 903 — Total Save-A-Lot — — 1,334 —

Total Stores — — 1,528 —


Leveraged Finance


Fiscal 2017 Outlook On a consolidated basis, assuming Save-A-Lot is not spun off or sold, Fitch expects EBITDA to be relatively steady at approximately $800 million to slightly down over the next two years. This expectation assumes flat to modestly lower EBITDA from the Independent Business and Retail Food segments and lower TSA revenue that is offset by growth at Save-A-Lot. There could also be modest pressure on EBITDA from the continued wind down of the TSA in fiscal 2017/2018. Fitch expects FCF to approximate $140 million and be used in part for debt reduction, but anticipates growth in off-balance sheet debt (8x rents) as a result of the store expansion at Save-A-Lot, leading to steady adjusted leverage around 4.0x.

TSA Risk Manageable Following the sale NAI in March 2013, SVU entered into a TSA with AB Acquisition LLC (Albertsons Companies, Inc. following its proposed IPO) and its affiliates NAI and Albertson’s LLC (LLC). Fees from the TSA totaled $194 million in fiscal 2015. SVU has not disclosed the actual costs associated with providing these services or the breakdown of those costs, though management has indicated the TSA fees exceeded the related costs in fiscal 2015. The TSA had an initial term expiring September 2015, but the term was extended to September 2017.

SVU subsequently entered into a letter agreement with NAI and LLC in April 2015, in the wake of AB Acquisition’s acquisition of Safeway Inc. (Safeway), pursuant to which SVU provides services to transition and wind down the TSA. The agreement provides for $50 million of additional fees to be paid by NAI and AB Acquisition LLC over the life of the agreement, which SVU believes will cover its costs to provide transition services until they are assumed by Safeway.

SVU currently estimates the complete transition and wind down of the TSA will take three years, which Fitch believes presents some risk to EBITDA. Management initially had plans in place to mitigate the loss of two-thirds of the fiscal 2015 TSA revenues ($125 million) through cost reductions and additional revenue streams. However, the company announced in January 2016 that it had engaged in initiatives across its entire business that should offset at least 90% of the TSA revenue reduction when the wind down is complete.

An example of additional revenue streams to help with the offset was a new TSA entered into with Haggen, Inc. (Haggen), under which SVU will provide certain back-office services to Haggen’s 164 stores. However, Haggen filed for voluntary bankruptcy protection in September 2015, with plans to reduce its operations to 37 stores, which will reduce the amount of TSA revenue SVU receives from Haggen. The smaller footprint will also reduce revenue SVU’s Independent Business receives from distributing product to Haggen stores. SVU lowered its sales and EBITDA expectations for fiscal 2016 following its second-quarter earnings report due to lower revenue associated with Haggen and pressure being caused by lower pharmacy margins at its retail banners.

Ownership and Management Changes At the time it acquired NAI in March 2013, the Cerberus-led consortium Symphony Investors LLC (Symphony) also acquired 18% of SVU’s common stock for $4 per share through a combination of a tender offer and a share issuance by SVU. Symphony was 40% owned by Cerberus and 15% owned by each of Kimco Realty, Schottenstein Real Estate Group, Lubert-Adler Partners and Klaff Realty, L.P. Kimco Realty also held 3.2% of SVU’s shares directly, raising Symphony’s effective ownership to 21%.

Leveraged Finance


Symphony disclosed in an April 28, 2015, SEC filing that it had distributed its shares to its members and no longer beneficially owned any shares of SVU’s common stock. A separate filing indicated Cerberus had sold 15.8 million of its 21 million shares at a net sale price of $9.20 per share and is no longer a beneficial owner.

SVU announced in October 2015 that President and CEO Sam Duncan plans to retire in February 2016 for personal reasons. The company simultaneously promoted CFO Bruce Besanko to a newly created role of executive vice president (EVP) and COO, and Susan Grafton to EVP and CFO. Fitch does not anticipate any changes in operating or financial strategy as a result of these management changes. The company’s board of directors remains mainly independent and is the process of searching for a new CEO.


Adequate Liquidity SVU’s liquidity is adequate, supported by a $1 billion ABL credit facility, with a management-estimated borrowing base ranging from $900 million to $1 billion. Absent a separation of Save-A-Lot, Fitch projects FCF can average $100 million or more annually, down from $169 million in fiscal 2015, due to higher capex to support faster store growth at Save-A-Lot and stable to slightly lower EBITDA as the TSA agreement winds down. Fitch expects FCF would remain positive even with a spinoff of Save-A-Lot due to lower capex.

The company’s ABL facility and term loan are secured by certain of Save-A-Lot’s assets, including the equity interest in Moran Foods, LLC, its main operating entity, and Fitch therefore anticipates future amendments. While not anticipated, the facilities also have provisions for a possible sale of the Save-A-Lot business, with the first $750 million in proceeds going toward paying down the term loan and 50% of the proceeds in excess of $750 million, up to the amount that would cause the total secured leverage ratio to be 1.5x. The company does not currently pay a dividend, though it would be permitted under its debt facilities. Fitch believes a modest dividend could be initiated after the spinoff of Save-A-Lot.

Capital Structure SVU’s capital structure at Dec. 5, 2015 consists of borrowings under its $1 billion ABL facility; a $1.5 billion term loan secured by a portion of the company’s real estate and an equity pledge of the parent company of Save-A-Lot; $278 million of senior unsecured notes maturing in May 2016; $400 million of senior unsecured notes due June 2021; $350 million of senior unsecured notes due November 2022; and $233 million in capital leases. SVU redeemed the

Board of Directors Name Position Affiliation Gerald Storch Non-Executive Chairman CEO, Hudson’s Bay Company Sam Duncan CEO SUPERVALU Frank Savage Director Senior Advisor, Lazard Ltd. Matthew Pendo Director Managing Dir., Oaktree Capital Eric Johnson Director CEO, Baldwin Richardson Foods Francesca Ruiz de Luzuriaga Director Independent Business Consultant Wayne Sales Director Former CEO, Canadian Tire Donald Chappel Director CFO, The Williams Companies Irwin Cohen Director Retired Partner, Deloitte & Touche Philip Francis Director Former CEO, PetSmart Matthew Rubel Director Senior Advisor, Roark Capital Group


Leveraged Finance


remaining $278 million balance on its 2016 notes subsequent to the December quarter end. The redemption was funded with cash on hand and $140 million of borrowings under its ABL. The company’s next debt maturity is in 2019, when the ABL facility and term loan mature.

The term loan amortizes at 1% per year (or $15 million), but the company must prepay the term loan in the amount of 50% of excess cash flow when the secured leverage ratio is greater than 2.0x, and 25% when secured leverage is between 1.5x and 2.0x. Fitch estimates the secured leverage ratio, including capital leases, was 2.0x at Dec. 5, 2015. There is also $24 million of capital lease amortization per year.

Scheduled Debt Maturities ($ Mil., As of Dec. 5, 2015)

2016 341 2017 — 2018 — 2019 1,396 2020 — Thereafter 750

Note: Calendar years. 2016 includes $63 Mil. of secured term loan paydown given excess cash flow sweep. Source: Company filings, Fitch Ratings.

Liquidity ($ Mil., As of Dec. 5, 2015)

Cash 134 Revolver Availability 931 Total 1,065


Capitalization ($ Mil., As of Dec. 5, 2015) Description Amount (%) Secured Debt $1 Bil. Revolving ABL Facility Maturing September 2019 0 0 Secured Term Loan Facility Maturing March 2019 1,459 54 Total Secured Debt 1,459 54 Unsecured Debt 8.000% Senior Unsecured Notes Maturing May 2016 278 10 6.750% Senior Unsecured Notes Maturing June 2021 400 15 7.750% Senior Unsecured Notes Maturing November 2022 350 13 Net Discount on Debt (6) 0 Total Unsecured Debt 1,022 37 Capital Leases 233 9 Total Debt (Including Capital Leases) 2,714 100

ABL – Asset-based lending. Source: Company filings.

Leveraged Finance


Capital Transactions Timeline

June 2006Entered into $4 Bil. of senior secured credit facilities (secured by pledge of stock of subs).• $2 Bil. five-year revolver maturing in June 2011.• $750 Mil. five-year term loan A maturing in

June 2011.• $1.25 Bil. six-year term loan B maturing in

June 2012.

Acquired Albertson’s premier retail properties $2.7 Bil. in cash, $2.3 Bil. of stock and the assumption of $6.1 Bil. of debt.• More than doubled the size of the company.

October 2006Issued $500 Mil. of 7.5% senior unsecured notes due 2014.

November 2006Entered into $200 Mil., 364-dayA/R securitization program.

May 2007Amended and upsized to $300 Mil. the 364-day A/R securitization program.

May 2009Issued $1 Bil. of senior notes due May 2016.• Tendered for $232 Mil. of SVU’s 2009 notes, $177 Mil. Of Albertson’s 2009

notes, and $110 Mil. of Albertson’s 2010 notes.

Amended and downsized to $200 Mil. the 364-day A/R securitization program.

April 2010Amended and restated credit agreement• Downsized revolver to $1.5 Bil. and extended maturity to

April 2015.• Remaining $600 Mil. revolver matures on schedule in

June 2011.• Extended maturity of $500 Mil. term loan B-2 to

October 2015.• Remaining $502 Mil. of term loan B matures on schedule in

June 2012.

June 2011$600 Mil. unextended revolver expires.term loan A matures and is repaid.

August 20122012 refinancing• New $1.65 Bil., five-year ABL facility

replaced $1.5 Bil. revolver.• New $850 Mil., six-year secured term

loan B refinanced existing term loans B-2 and B-3.

March 2013Sold New Albertson's Inc. for $100 Mil. plus the assumption of $3.2 Bil. of debt.

Completed the following new financings:• $1 Bil. ABL facility.• $1.5 Bil. term loan facility, with proceeds used to repay

existing $834 Mil. term loan and $490 Mil. of 7.5% notes.• $200 Mil. A/R securitization program

is terminated.

May 2013Repriced $1.5 Bil. term loan facility.• Lowered rate to L+400 from L+500 and

lowered LIBOR floor to 1.00% from 1.25%.

Issued $400 Mil. of 6.75% senior unsecured notes due 2021.Repaid $372 Mil. of the 8% notes due 2016 in a tender offer.

January 2014Second amendment to term loan facility.• Lowered rate to L+350

from L+400.

April 2014Amended ABL facility.• Reduced rate to L+150–200 from

L+175–225. • Extended maturity to February 2019.

September 2014Second amendment to ABL facility• Extended maturity date to

September 2019.

November 2014Issued $350 Mil. of 7.75% senior unsecured notes due 2022, and used proceeds to repay like amount of the 8.0% notes due 2016.

2006 2010200920082007

2011 2015201420132012

April 2011First amendment to credit agreement• $86 Mil. of term loan B-1 ext. into term loan B-2.• $161 Mil. of term loan B-1 extended into

Term loan B-3, maturing April 2018.• Term loan B-3 receives $291 Mil. of new

advances, used to retire term loan A.

A/R – Accounts receivable. ABL – Asset-based lending.Source: Company filings.

Leveraged Finance


Pension Liability SVU’s company-sponsored pension plan (single employer pension plan) remains with SVU following the sale of NAI, and is closed to new participants. The company’s defined benefit pension plans had a funding shortfall of $532 million as of Feb. 28, 2015, up from $465 million as of Feb. 22, 2014, due to a decrease in the discount rate. SVU contributed $165 million to the plans in fiscal 2015 and plans to contribute $40 million–$50 million in fiscal 2016.

Amended Term Sheet with PBGC SVU amended its term sheet with the Pension Benefit Guaranty Corporation (PBGC) in September 2014 and made an additional contribution of $47 million to its pension plans. With this payment, the company has fully satisfied its commitment to the PBGC to make the $100 million of excess contributions to the pension. With the amended term sheet, SVU is no longer restricted from paying dividends, though management has indicated it has no current intention to pay a dividend. The revolver permits dividends of $50 million per year, provided the excess availability is in general over 15% and as long as no cash dominion event exists. The restricted payments basket was $294 million as of Dec. 5, 2015.

Credit Facility Terms Snapshot

Senior Secured ABL Facility Senior Secured Term Loan

Borrower SUPERVALU Inc. and certain operating subs with assets in the borrowing base.

SUPERVALU Inc.

Size $1 Bil. $1.5 Bil. Maturity Sept. 30, 2019, springs to 90 days before the maturity of the term

loan if any amounts remain outstanding on the term loan at that time. There is also a springing reserve provision for material debt (greater than $50 Mil.) that is due within 30 days of the date the reserve is established.

March 1, 2019

Pricing L + 150–200 L + 350 (LIBOR floor of 1.00%) Guarantors Each domestic, wholly owned, restricted sub that is not a borrower. Each domestic, wholly owned, restricted sub. Collateral — First Lien Certain accounts receivable, prescription files and inventory. Perfected first-priority lien on real estate collateral and related

equipment, intellectual property and equity in Moran Foods LLC. Collateral — Second Lien TL collateral. Second-priority lien on ABL collateral. Amortization N.A. 1% per annum with balance due at maturity. Incremental Facility Ability to upsize by $250 Mil. Up to $500 Mil. provided the pro forma net senior secured leverage

less than 2.5x. Voluntary Prepayment N.A. 101 soft call in event of repricing within six months. Mandatory Prepayments N.A. 50% of excess cash flow with step downs based on leverage, plus net

proceeds of certain asset sales related to collateral and debt issuances. In event of sale of equity interest in, or assets of, Moran Foods LLC, first $750 Mil. of net cash proceeds swept to TL, and thereafter 50% down to 1.5x net senior secured leverage.

Borrowing Base 90% of eligible credit card receivables. 85% of eligible pharmacy receivables. 85% of eligible wholesale receivables. 85% of net recovery percentage of nonperishable wholesale inventory. 90% of the NRV of eligible nonperishable retail inventory. Sum of 85% of perishable wholesale inventory plus 90% of perishable retail inventory (capped at 25% of borrowing base). 85% of appraised value of prescription files (capped at 25% of borrowing base).

N.A.

Cash Dominion Springing if excess availability less than the greater of (a) 15% of max credit for three days or (b) 12.5% of max credit at any time.

N.A.

Financial Covenants Springing FCCR of 1.0x when excess availability falls below 10% of the max credit. Asset sale covenant permits the sale of Moran Foods LLC, and permits sale of 10% of the total assets of the company.

None.

Negative Covenants The ABL can be used to make mandatory prepayments of the TL only if excess avail is at least 22.5% of the max credit.

Customary for facilities of this type. Asset sale covenant permits sale of Moran Foods LLC.

TL – Term loan. ABL – Asset-based lending. N.A. – Not available. NRV – Net realizable value. FCCR – Fixed-charge coverage ratio. Source: Company filings.

Leveraged Finance


MEPP Liability SVU also participates in multiemployer pension plans (MEPP), to which it contributed $39 million in fiscals 2014 and 2015. SVU’s portion of the underfunding of these plans totaled $447 million as of Feb. 28, 2015, down slightly from $455 million as of Feb. 22, 2014, on a market value minus accrued liability basis. During the first three quarters of fiscal 2016 and 2015, SVU contributed $31 million and $29 million to these plans, respectively.

Recovery Analysis Fitch’s ratings on individual debt issues are based on the Issuer Default Rating and the expected recovery in a distressed scenario. Fitch has allocated an assumed going concern enterprise value after administrative claims of approximately $2.7 billion — which assumes Save-A-Lot is not spun off — across the capital structure. Fitch arrives at this valuation by multiplying an assumed post-default EBITDA of approximately $610 million by a 4.9x multiple. The post-default EBITDA assumes a 33% decline in EBITDA at the Retail Food and Independent Business segments, due to store closures, and flat EBITDA at Save-A-Lot. The blended multiple is based on 4.0x for the Retail Food segment, 4.5x for the Independent Business segment and 6.5x for Save-A-Lot.

The $1 billion revolving ABL facility, which is assumed to be 70% drawn, is backed by inventories, receivables and prescription files, which Fitch collectively values at $1.3 billion. The $1.5 billion term loan is backed by real estate with a book value of $765 million and an

Recovery Analysis — SUPERVALU Inc. ($ Mil., Except Where Noted; IDR: B)


Liquidation Value (LV) Book Value Advance Rate (%)


Going Concern EBITDA 608

Cash 134 0 0 GC EV Multiple (x) 4.9

A/R 485 80 388

EV on GC Basis 2,997

Inventory 1,170 70 819 Pharmacy Scriptsa 116 100 116 Net PPEb 1,458 77 1,113

Total LV — — 2,436


Greater of GC or LV

2,997

Less: Administrative Claims (10%)

300

Adjusted EV Available for Claims

2,698

Distribution of Value Secured Priority Amount Value Recovered Recovery (%) Recovery Rating Notching Rating Sr. Secured ABL Revolverc 700 700 100 RR1 +3 BB Sr. Secured Term Loan 1,459 1,459 100 RR1 +3 BB

Concession Payment Availability Table Percentage Amount Adjusted EV Available for Claims — 2,698 Less Secured Debt Recovery — 2,159 Remaining Recovery for Unsecured Claims — 539 Concession Allocation 0 — Value to be Distributed to Senior Unsecured Claims — 539


Value Recovered Recovery

Recovery Rating Notching Rating

Sr. Unsecuredd 1,087 539 50 RR4 0 B Unsecured — — — — — — Sr. Subordinated — — — — — — Subordinated — — — — — — Sr. Equity — — — — — — aPharmacy scripts valuation assumes 199 pharmacies x 1,400 script files/store week x $8/script. bPPE valuation includes $765 Mil. of TL collateral valued at $1 Bil. (130% of BV) and $565 of remaining PPE (net of $92 Mil. of net capital lease assets) valued at 20%. cAssumes $700 Mil. drawn on the $1 Bil. ABL facility. dSenior Unsecured debt is composed of $1,028 Mil. of notes plus one-third of operating and capital lease rents. IDR – Issuer Default Rating. A/R – Accounts receivable. PPE – Property, plant and equipment. ABL – Asset-based lending. BV – Book value. Source: Fitch Ratings.

Leveraged Finance


estimated market value of approximately $1 billion, per the company in January 2013, and a pledge of the shares of Moran Foods, LLC (Save-A-Lot), which Fitch values at approximately $1.4 billion, assuming a 6.5x multiple of EBITDA (net of allocated corporate expenses). As such, both facilities are assumed to have outstanding recovery prospects (91%–100%) and are rated ‘BB/RR1’.

The senior unsecured notes are rated ‘B/RR4’, indicating average recovery prospects (31%–50%) recovery in a going concern scenario. Fitch believes in a liquidation scenario, SVU’s company pension plan’s underfunding of $532 million and MEPP’s underfunding of $447 million would rank ahead of the senior unsecured notes given the unique structural priorities available to the PBGC and pension plan fiduciaries. Therefore, in a liquidation scenario, there would be no recovery to the senior notes.


Leveraged Finance


Appendix A

Organizational Structure — SUPERVALU Inc.a($ Mil., As of Dec. 5, 2015)

SUPERVALU Inc.bIDR — B

Debt Issue$1.0 Bil. ABL Facilityc,d

$1.5 Bil. Term Loan Facilityc,d,e

Total Secured Debt8.000% Senior Unsecured Notes 6.750% Senior Unsecured Notes7.750% Senior Unsecured NotesCapital LeasesNet Discount on Debt Total Senior Unsecured DebtTotal SUPERVALU Inc. DebtLTM EBITDAf,g

Assetsf

aPro forma for April 2015 distribution of shares by Symphony Investors LLC to its members. bSUPERVALU Inc. is assumed to contain 75% of the independent business segment. cSUPERVALU Inc. is the lead borrower on the ABL facility and the sole borrower on the term loan. dThe term loan facility is guaranteed by all domestic, wholly owned, restricted subs; the ABL facility is guaranteed by those subs that are not coborrowers. eThe shares of Moran Foods, LLC are pledged to the term loan. f75% of the EBITDA and assets of the independent business segment are assumed to be at SUPERVALU Inc., and 25% at Other Operating Subs. gPre-corporate expense. hContains SUPERVALU’s five traditional supermarket banners: Cub Foods, Farm Fresh, Shop ‘n Save, Shopper’s Food and Hornbachers. iContains Save-A-Lot. jAssumed to contain 25% of the independent business segment. IDR – Issuer Default Rating. ABL – Asset-based lending.RR – Recovery Rating.Source: Company filings, Fitch Ratings.

Maturity Date

9/30/193/21/19

5/1/166/1/21

11/15/22

Amount0

1,4591,459

278400350233(6)

1,2552,714

2521,544

Public Shareholders

RatingBB/RR1BB/RR1

B/RR4B/RR4B/RR4

Moran Foods, LLCi

(Save-A-Lot)

LTM EBITDAg

Assets

Amount236

1,029

Retail Foodh

LTM EBITDAg

Assets

Amount266

1,406

Other Operating Subsj

LTM EBITDAf,g

Assets

Amount75

506

UpstreamSeniorUnsecuredGuaranteed

StockPledgee

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — SUPERVALU Inc. Overview Borrowers SUPERVALU Inc. as lead borrower and 19 of its subsidiaries Document Date and Location March 21, 2013

Exhibit 10.3 to 8–K dated March 26, 2013 April 17, 2014 Amendment Exhibit 10.1 to 8–K dated April 18, 2014 Sept. 30, 2014 Amendment No. 2 Exhibit 10.1 to 8–K date Sept. 30, 2014

Maturity Date Facility Type: Revolver Maturity Date: Earlier of 1) Sept. 30, 2019, and 2) 90 days prior to term loan maturity, if any outstanding then.

Description of Debt $1.0 Bil. asset-based revolving credit facility, subject to borrowing base. There is a springing reserve provision, whereby a reserve is placed against availability on the facility in the amount of any Material Indebtedness (defined as in excess of $50 Mil.) that is due within 30 days of the date the reserve is established.

Amount ($ Mil.) Facility Type: Revolver Commitment: $1.0 Bil. (Letter of Credit limit of $400 Mil.), incremental allowed up to $250 Mil. Outstanding: $0 outstanding as of Feb. 28, 2015.

Ranking Senior secured Security The loan parties have granted a first-priority security interest in their inventories, receivables and prescription files.

In addition, there is a second lien on term loan collateral (limited by limitation on liens covenants in bond indentures). Guarantee The facility is guaranteed on an unsecured basis by all restricted subs that are not borrowers. Debt Restrictions

Debt Incurrence Coverage Ratio Debt: None. Notable Permitted Debt: 1) Purchase money indebtedness, capital leases and debt to finance real estate improvements of up to $300 Mil. in aggregate and $100 Mil. in any given year; 2) term loan debt not to exceed $2.0 Bil.; 3) customer support transactions debt up to $250 Mil.; 4) unsecured debt that matures at least 91 days after Feb. 21, 2019, and has less restrictive covenants than the term loan; 5) receivables financing subsidiary of up to $200 Mil.; 6) letters of credit issued under Commercial letter of credit facility not to exceed $15 Mil.; 7) obligations under swap contract given the aggregate swap termination value does not exceed $25 Mil.; 8) all-purpose up to $30 Mil..

Limitation on Liens Permitted encumbrances include a general $30 Mil. carveout. Limitation on Guarantees Consistent with limitations on debt incurrence. Acquisitions/Divestitures

Change of Control (CoC) In the event of a change of control (defined as 35% voting control or, for the Cerberus investor group, 50% voting control), all amounts owed become immediately due and payable.

M&A, Investments Restriction If no cash dominion event exists, investments in cash of up to $125 Mil. at any one time are permitted unless no loans are then outstanding. A cash dominion event is defined as the existence of an event of default, or excess availability falls below 15% for three days, or below 12.5% at any time.

Sale of Assets Restriction 1) Store closures and related inventory liquidations net of store openings may not exceed 7.5% of total stores in any given fiscal year, and not exceed 15% of existing stores in the aggregate; 2) customer support transactions not to exceed $250 Mil.; 3) as long as excess availability is less than 22.5%, up to 10% of total assets and 30% of assets of Moran Foods LLC (Save-A-Lot); 4) the sale of all or substantially all of the equity or assets of Moran Foods LLC (Save-A-Lot) is permitted, provided that excess availability is at least 25%, the FCCR is at least 1.0x, and the total leverage ratio is not more than 4.25x; 5) sale leasebacks are permitted if sold at fair market value and, if a cash dominion even exists, the proceeds are used to repay the ABL obligations; 6) sale of prescription files limited to $12.5 Mil. in any fiscal year; 7) dispositions from store conversion transaction, given that together with store closings minus new stores does not exceed 7.5% of stores in the beginning of that fiscal year and does not exceed 15% of stores as of the closing date, and other customary item.

Restricted Payments

Restricted Payments (RP) RP Basket: None. Notable Permitted Restricted Payments: Dividends and share repurchases of up to $50 Mil. annually are permitted, provided that the excess availability is in general over 15%. Special Situation: No restriction on payments, if (1) the excess availability exceeds 22.5% and pro forma FCCR exceeds 1.0x or (2) the excess availability exceeds 35%.

Other

Cross-Default Yes, exceeding $50 Mil. Cross Acceleration N.A. MAC Clause A material adverse effect is an event of default. Equity Cure No. Covenant Suspension No. Required Lenders/Voting Rights Lenders holding more than fifty percent (50%) of the aggregate commitments.

FCCR – Fixed-charge coverage ratio. ABL – Asset-based lending. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.







Leveraged Finance


Bank Agreement Covenant Summary — SUPERVALU Inc. (Continued) Financial Covenants Leverage (Maximum) —

Coverage (Minimum) Consolidated Fixed-Charge Coverage Ratio 1.0x (springing when the excess availability is below 10%) Current Ratio (Minimum) — Net Worth (Minimum) — Principal Repayments

Mandatory/Tax Prepayment — Amortization Schedule — Callability/Optional Prepayment — Pricing

Coupon Type/Index Floating based off LIBOR Pricing Grid Quarterly Average Excess Availability Applicable Rate

Greater than 66.67% LIBOR + 150 bps

Greater than 33.33% but less than 66.67% LIBOR + 175 bps

Less than 33.33% LIBOR + 200 bps


Leveraged Finance


Appendix C

Term Loan Covenant Summary — SUPERVALU Inc. Overview Borrower SUPERVALU Inc. Document Date and Location March 21, 2013

Exhibit 10.1 to 8-K dated May 22, 2013 Jan. 31, 2014 Second Amendment Exhibit 10.1 to 8-K dated Jan. 31, 2014

Maturity Date Facility Type: Term Loan Facility Maturity Date: March 21, 2019

Description of Debt $1.5 Bil. secured term loan facility. Amount ($ Mil.) Facility Type: Term Loan Facility

Commitment: $1.5 Bil., with incremental allowed up to $500 Mil. Outstanding: $1.5 Bil.

Ranking Senior secured Security The term loan parties have granted a perfected, first-priority mortgage lien and security interest in Moran Foods, LLC (parent of

Save-A-Lot), certain of their owned or ground leased real estate and the equipment located on such real estate, and intellectual property. In addition, there is a second-priority security interest in the collateral securing the ABL agreement.

Guarantee The facility is guaranteed on an unsecured basis by SVU’s material, wholly owned domestic subsidiaries Debt Restrictions

Debt Incurrence Coverage Ratio Debt: Subject to Total Leverage Ratio < 4.0x, with a sublimit of $150 Mil. in restricted subsidiaries. Notable Permitted Debt: 1) Purchase money indebtedness, capital leases and debt to finance real estate improvements of up to $300 Mil. in aggregate and $100 Mil. in any given year; 2) receivables financing of up to $200 Mil.; 3) customer support transactions debt up to $250 Mil.; 4) obligations under swap contract given the aggregate swap termination value does not exceed $25 Mil.; and 5) additional all-purpose up to $30 Mil.

Limitation on Liens Permitted encumbrances include a general $30 Mil. carveout. Limitation on Guarantees Consistent with limitations on debt incurrence Acquisitions/Divestitures

Change of Control (CoC) In the event of a change of control (defined as 35% voting control or, for the Cerberus investor group, 50% voting control), all amounts owed become immediately due and payable.

M&A, Investments Restriction 1) Permitted investments include a general carveout of $100 Mil., plus the cumulative credit amount (as defined) provided that the pro forma total debt/EBITDA does not exceed 4.0x; and 2) SVU may acquire all or substantially all of the assets, or 100% of the equity, of a company in a similar line of business if total debt/EBITDA on a pro forma basis does not exceed 4.0x.

Sale of Assets Restriction 1) Store closures and related inventory liquidations net of store openings may not exceed 7.5% of total stores in any given fiscal year, and not exceed 15% of existing stores in aggregate; 2) customer support transactions not to exceed $250 Mil.; 3) sale of prescription files limited to $12.5 Mil. in any fiscal year; 4) SVU may sell Moran Foods, LLC, provided it does not trigger an event of default, conflict with the terms of any material indebtedness or constitute a change of control. (Mandatory Prepayment — The first $750 Mil. of net cash proceeds from sale of Moran Foods, LLC must be used to prepay the term loan, as well as 50% of the proceeds in excess of $750 Mil. up to the amount that would cause the total secured leverage ratio to be 1.5x.)

Restricted Payments

Restricted Payments (RP) RP Basket: RP not to exceed the cumulative credit which equals a) retained excess cash flow plus b) equity issuance proceeds minus c) restricted payments already made, given that the total leverage ratio less than 3.5x, on a pro forma basis. Notable Permitted Payment: Additional all-purpose payments, including prepayments for other debt, not to exceed $175 Mi.

Other

Cross-Default Yes, with a threshold of $50 Mil. Cross Acceleration N.A. MAC Clause No Equity Cure No Covenant Suspension No Required Lenders/Voting Rights Lenders representing more than 50% of the sum of all loans outstanding.

ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.





Leveraged Finance


Term Loan Covenant Summary — SUPERVALU Inc. (Continued) Financial Covenants Leverage (Maximum) — Coverage (Minimum) — Current Ratio (Minimum) —

Net Worth (Minimum) —

Principal Repayments Mandatory/Tax Prepayment Mandatory Prepayment with proceeds from: • Excess cash flow: up to 50% (subject to leverage test). • Priority collateral sale or other asset sale in excess of $5 Mil.: 100% of net proceeds if not reinvested in productive assets

within 365 days. • Moran LLC (Save-A-Lot) sale: 100% of first $750 Mil. of net proceeds and 50% of remaining proceeds in an amount to reduce

total secured leverage ratio to 1.5x. Amortization Schedule Date Term Loan Facility Quarterly through Dec. 31, 2018 $3.75 Mil. At maturity Balance due Callability/Optional Prepayment Optional prepayment. Pricing

Coupon Type/Index LIBOR + 350 bps (with a floor on LIBOR of 1.0%). Pricing Grid —


Leveraged Finance


Appendix D

Bond Covenant Summary — SUPERVALU Inc. Overview Issuer SUPERVALU Inc. Document Date and Location Indenture dated July 1, 1987 (Exhibit 4.1 to S-3 filed under Registration No. 33-52422)

First Supplemental Indenture dated Aug. 1, 1990 (Exhibit 4.2 to S-3 filed under Registration No. 33-52422) Second Supplemental Indenture dated Oct. 1, 1992 (Exhibit 4.1 to 8-K filed Nov. 13, 1992) Third Supplemental Indenture dated Sept. 1, 1995 (Exhibit 4.1 to 8-K filed Oct. 2, 1995) Fourth Supplemental Indenture dated Aug. 4, 1999 (Exhibit 4.2 to 10-Q filed Sept. 11, 1999) Fifth Supplemental Indenture dated Sept. 17, 1999 (Exhibit 4.3 to 10-Q filed Sept. 11, 1999)

Description of Debt Senior unsecured notes Maturity Date $278 Mil. of 8.00% notes due May 1, 2016

$400 Mil. of 6.75% notes due June 1, 2021 $350 Mil. of 7.75% notes due Nov. 15, 2022

Original Issue/Outstanding 8.000% notes: $1 Bil./$278 Mil. 6.750% notes: $400 Mil./$400 Mil. 7.750% notes: $350 Mil./$350 Mil.

Ranking Senior Security Unsecured Guarantee The notes are not guaranteed. Debt Restrictions Debt Incurrence No. Limitation on Liens Liens on operating properties (BV greater than 0.65% of consolidated net tangible assets) limited to greater of $200 Mil. or 10%

of consolidated net tangible assets. Limitation on Guarantees Subsidiaries may not guarantee other debt without fully and unconditionally guaranteeing the notes on a senior basis. Acquisitions/Divestitures Change of Control (CoC) The notes can be put at 101 with change of control (40% voting interest). M&A, Investments Restriction None. Sale of Assets Restriction Sale leasebacks are permitted insofar they (a) comply with the limitation on liens restriction, or (b) the proceeds, within six

months are applied to the purchase of operating assets or the repayment of debt under this indenture, or debt that is pari passu with debt under this indenture.

Restricted Payments Restricted Payments (RP) No. Other Cross-Default No. Cross-Acceleration Yes, exceeding $100 Mil. MAC Clause No. Equity Clawback Prior to June 1, 2016, the company may redeem up to 35% of the aggregate principal amount of the 6.75% notes due 2021 with

the proceeds of certain equity offerings at a redemption price of 106.750%, provided that 65% of the notes remain outstanding after the redemption. Prior to Nov. 15, 2017, the company may redeem up to 35% of the aggregate principal amount of the 7.75% notes due 2022 with the proceeds of certain equity offerings at a redemption price of 107.750%, provided that 65% of the notes remain outstanding after the redemption.

Covenant Suspension No

BV – Book value. MAC – Materially adverse change. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/95521/0000950131-95-002760.txt



Leveraged Finance


Appendix E

Financial Summary — SUPERVALU Inc.

12 Months

Three Months



LTM Ended

($ Mil.) 2/23/13 2/22/14 2/22/14 6/14/14 9/6/14 11/29/14 2/28/15 2/28/15 6/20/15 9/12/15 12/5/15 12/5/15 Profitability Operating EBITDAa 650 194 754 232 166 190 219 807 251 172 187 829 Operating EBITDA Margin (%) 3.8 4.9 4.4 4.4 4.1 4.5 5.0 4.5 4.6 4.2 4.5 4.6 FFO Return on Adjusted Capital (%) 31.8 21.3 21.4 18.7 17.9 14.7 21.9 22.0 21.6 21.8 23.3 23.3 FCF Margin (%) 3.7 6.2 (0.5) 0.4 1.4 (3.2) 5.2 0.9 1.2 2.8 (2.3) 1.7 Coverages (x) FFO Interest Coverage 2.5 (0.2) 2.3 2.8 2.8 2.6 3.2 2.8 3.1 3.3 4.0 3.4 Operating EBITDA/Gross Interest Expense 2.4 3.9 3.2 3.6 3.6 4.4 4.6 4.0 4.3 3.9 4.2 4.2 FFO Fixed-Charge Coverage 2.0 0.3 1.8 2.1 2.0 1.8 2.2 2.0 2.3 2.2 2.6 2.3 FCF Debt Service Coverage (LTM)b 2.6 0.5 0.5 1.4 1.9 0.7 1.6 1.6 0.8 0.9 1.2 1.2 Cash Flow from Operations/Capex 1.8 6.2 1.1 1.5 2.1 (0.7) 3.1 1.4 2.3 3.5 (0.3) 1.9 Leverage (x)b Long-Term Secured Debt/Operating EBITDA 1.7 1.9 1.9 1.9 1.9 1.4 1.8 1.8 1.8 1.8 1.8 1.8 Long-Term Secured Debt/FFO 2.7 4.9 4.9 5.5 6.0 5.4 3.9 3.9 3.8 3.6 3.1 3.1 Total Debt with Equity Credit/Operating EBITDA 4.4 3.7 3.7 3.6 3.6 4.1 3.4 3.4 3.3 3.3 3.3 3.3 FFO-Adjusted Leverage 4.9 5.8 5.8 6.4 6.6 7.9 5.4 5.4 5.4 5.3 4.8 4.8 Total Adjusted Debt/Operating EBITDAR 5.0 4.4 4.3 4.4 4.4 4.8 4.1 4.1 4.0 4.0 4.0 4.0 FCF/Total Adjusted Debt (%) 16.0 (2.4) (2.4) 3.4 6.3 4.2 4.3 4.3 5.4 6.8 7.8 7.8 Balance Sheet Short-Term Debt 74 45 45 43 36 384 35 35 305 308 224 224 Long-Term Senior Secured Debt 1,081 1,456 1,456 1,458 1,463 1,115 1,469 1,469 1,459 1,459 1,531 1,531 Long-Term Senior Unsecured Debt 1,734 1,276 1,276 1,261 1,247 1,724 1,224 1,224 948 946 959 959 Long-Term Subordinated Debt 0 0 0 0 0 0 0 0 0 0 0 0 Other Debt 0 0 0 0 0 0 0 0 0 0 0 0 Equity Credit 0 0 0 0 0 0 0 0 0 0 0 0 Total Debt with Equity Credit 2,889 2,777 2,777 2,762 2,746 3,223 2,728 2,728 2,712 2,713 2,714 2,714 Off-Balance Sheet Debtc 1,064 1,094 1,072 1,232 1,232 1,232 1,232 1,232 1,232 1,232 1,232 1,232 Total Adjusted Debt with Equity Credit 3,953 3,871 3,849 3,994 3,978 4,455 3,960 3,960 3,944 3,945 3,946 3,946 Cash Flow Funds From Operations 405 (60) 299 117 82 69 105 373 125 103 134 467 Change in Working Capital 12 352 (179) (60) 19 (123) 124 (40) (14) 55 (157) 8 Cash Flow from Operations 417 292 120 57 101 (54) 229 333 111 158 (23) 475 Total Non-Operating/Nonrecurring Cash Flow 481 0 (101) 0 2 0 73 75 1 0 3 77 Capex (228) (47) (111) (37) (47) (80) (75) (239) (49) (45) (75) (244) Dividends (37) 0 0 0 0 0 0 0 0 0 0 0 FCF 633 245 (92) 20 56 (134) 227 169 63 113 (95) 308 Net Acquisitions and Divestitures 38 1 14 (1) (41) (6) 0 (48) 0 (4) (1) (5) Net Debt Proceeds (386) (241) (123) (16) (18) 474 (490) (50) (17) (10) (8) (525) Net Equity Proceeds 0 1 177 2 3 0 2 7 2 7 1 12 Other (Investing and Financing) (293) 5 (42) 2 (2) (4) (43) (47) (25) 4 (4) (68) Total Change in Cash (8) 11 (66) 7 (2) 330 (304) 31 23 110 (107) (278) Ending Cash and Securities Balance 72 83 83 90 88 418 104 104 137 247 134 134 Short-Term Marketable Securities 0 0 0 0 0 0 0 0 0 0 0 0 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dIdentical store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings.

Leveraged Finance


Financial Summary — SUPERVALU Inc. (Continued)

12 Months

Three Months



LTM Ended

($ Mil.) 2/23/13 2/22/14 2/22/14 6/14/14 9/6/14 11/29/14 2/28/15 2/28/15 6/20/15 9/12/15 12/5/15 12/5/15 Income Statement Revenue 17,139 3,954 17,155 5,234 4,018 4,204 4,364 17,820 5,407 4,062 4,114 17,947 Revenue Growth (%) (1.1) 1.1 0.1 (0.1) 1.8 4.8 10.4 3.9 3.3 1.1 (2.1) 3.1 Operating EBIT 285 127 452 143 101 125 153 522 168 108 123 552 Gross Interest Expense 272 50 233 64 46 43 48 204 59 44 45 196 Sector-Specific Data Identical Store Sales (%)d (2.4) 0.2 (1.5) 0.6 0.4 2.3 1.1 1.0 (0.3) (3.3) (2.6) (2.6) No. of Stores 1,522 1,520 1,520 1,515 1,529 1,528 1,528 1,528 1,532 1,541 1,536 1,536 Gross Margin (%) 13.6 14.9 14.8 14.4 14.2 14.1 15.1 14.5 15.0 14.4 14.6 14.8 SG&A/Revenues (%) 12.0 11.7 12.1 11.6 11.7 11.1 11.6 11.5 11.9 11.7 11.6 11.7 Operating EBIT Margin (%) 1.7 3.2 2.6 2.7 2.5 3.0 3.5 2.9 3.1 2.7 3.0 3.1 Operating EBITDAR 783.0 228.2 888.0 270.5 204.5 228.5 257.5 961.0 289.5 210.5 225.5 983.0 Operating EBITDAR Margin (%) 4.6 5.8 5.2 5.2 5.1 5.4 5.9 5.4 5.4 5.2 5.5 5.5 Operating EBITDAR/(Interest + Rent) (x)b 1.9 2.7 2.4 2.6 2.4 2.8 3.0 2.7 3.0 2.6 2.7 2.8 Inventory Turnover (x)b 16.8 17.1 17.1 16.2 15.2 13.7 16.5 16.5 15.9 15.3 13.3 13.3 Accounts Payable Turnover (x)b 13.1 13.7 13.7 12.0 11.5 12.8 14.1 14.1 14.1 13.0 12.7 12.7 Return on Invested Capital (%)b 16.5 18.7 18.8 18.2 18.6 16.9 20.3 20.3 20.7 20.6 20.1 20.1 Return on Assets (%)b (13.3) 4.2 4.2 3.2 2.9 3.5 4.3 4.3 4.7 4.6 3.6 3.6 Capex/Depreciation (%)b 62.5 70.1 36.8 41.6 72.3 123.1 113.6 83.9 59.0 70.3 117.2 88.1 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dIdentical store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings.

Leveraged Finance


Retailing / U.S.A.

Toys ‘R’ Us, Inc. Full Rating Report

Key Rating Drivers Fourth-Quarter Positive; Long-Term Headwinds: An improved traditional toy market appears to have lifted holiday 2015 sales, with Toys ‘R’ Us, Inc. (Toys or HoldCo) reporting positive 2% consolidated same-store sales for November/December, the first positive same-store sales in more than five years.

However, competitive intensity — including channel shifts to discount and e-commerce formats, secular issues given low birth rates in developed markets and digitalization of gaming products — is still expected to pressure Toys’ top line. Fitch Ratings expects same-store sales to remain flat to modestly negative over the medium term.

Near-Term EBITDA Improvement: Barring material discounting activity in fourth-quarter 2015, Fitch expects EBITDA to improve to approximately $750 million in 2015, with the potential to cross $800 million in 2017, assuming relatively flat gross margin and modest reduction in selling, general and administrative (SG&A) expense. Fitch assumes Toys needs to invest further to improve its price perception and build out its omnichannel infrastructure. Toys’ domestic e-commerce penetration at 13% remains well below industry levels for various toy segments.

Adequate Liquidity: Fitch expects FCF to be around $70 million in 2015 and $100 million in 2016, barring any material swings in working capital. Excess availability under its domestic asset-backed loan (ABL) revolver during peak working capital season in 2016 is consequently expected to be similar to the $780 million in 2015.

Debt Wall in 2017: However, the company remains highly reliant on the capital markets to refinance debt, with $1.175 billion of debt due in 2017 and an additional $650 million due in 2018.

Rating Sensitivities Positive Rating Action: Positive rating action could result if there is sustainable improvement in Toys’ domestic same-store sales and online traffic — which indicates stable and/or improved market share — and meaningful cost restructuring. Toys would need to sustain EBITDA to a level where it can comfortably meet its obligations of interest expense, capex and taxes; fund any working capital swings; and manage refinancing of upcoming debt maturities on a timely basis.

Negative Rating Action: Toys’ inability to extend or refinance its $450 million 10.375% million senior notes and the $725 million 8.250% senior secured notes due 2017 in a timely manner would be of concern.

Negative rating action could also result if same-store sales trends in the U.S. and international businesses revert to midsingle-digit declines and/or gross margins decline meaningfully without any offset from cost reductions. This would indicate more severe market share losses and lead to tighter liquidity than Fitch’s current expectation over the next 18–24 months.

Ratings Toys ‘R’ Us, Inc. IDR CCC Senior Unsecured Notes CC/RR6

Toys ‘R’ Us - Delaware IDR CCC Sr. Secured Bank Facility B/RR1 Sr. Secured Term B-4 Loan CCC+/RR3 Sr. Secured Term B-2/B-3 Loan CCC/RR4 Sr. Unsecured Notes CC/RR6

Toys ‘R’ Us Property Co. I, LLC IDR CCC Sr. Unsecured Notes B/RR1 Toys ‘R’ Us Property Co. II, LLC IDR CCC Sr. Secured Notes B/RR1


Rating Outlook —

Financial Data Toys ‘R’ Us, Inc.

($ Mil.) FYE

1/31/15 LTM

10/31/15 Total Revenue 12,361.0 11,932.0 EBITDA 597.0 714.0 EBITDA Margin (%) 4.8 6.0 FCF 269.0 149.0 Total Adjusted Debt 9,740.0 10,592.0 Total Adj. Debt/EBITDAR (x) 8.0 7.9 EBITDAR/( Interest + Rent) (x) 1.1 1.3 Domestic/ International Same-Store Sales (%)a (1.0)/1.8 (1.8)/2.5 Real Estate Owned (%) 38 38 No. of Storesb 1,814 1,861 aSame-store sales for the LTM period reflects the performance for the nine months ended Oct. 31, 2015. bNumber of stores includes Toys’ international licensed stores.




Leveraged Finance


Business Profile Assessment Toys is the only large national brick-and-mortar specialty toy retailer left in the U.S. following a significant sector restructuring over the past decade. It has consequently faced increasing competition from online retailers and discounters, as consumers seek value and convenience versus broad product selection and customer service. Toys’ sales hovered around $13.5 billion–$14.0 billion and EBITDA held up at around $1.0 billion for six years through 2012. However, sales and EBITDA took a material step down in 2013 as pricing competition and promotional pressures intensified in a sluggish economic and consumer environment. Toys’ response has historically been lackluster, with weak execution both on top-line and inventory buys, and an unwieldy cost structure given a large physical store footprint.

Fitch Base Case Assumptions — Toys ‘R’ Us, Inc. ($ Mil., Year Ended Jan. 31) 2014A 2015F 2016F 2017F Comments Revenue 12,361 11,807 11,569 11,664 — Revenue Growth (%)

(1.5) (4.5) (2.0) 0.8 Reflects negative 5% FX in 2015 and negative 1% in 2016.

Same-Store Sales — Domestic (%) (1.0) (0.6) (1.0) (1.0) — Same-Store Sales — International (%) 1.8 2.7 2.0 2.0 — EBITDA 597 755 772 817 — EBITDA Margin (%)

4.8 6.4 6.7 7.0

Improvement mainly reflects SG&A savings. Gross margin in 2015-/2017 expected to remain flat at 35.5%.

Working Capital Change

261 (33) (27) (3)

Timing on payables/accruals led to meaningful positive FCF in 2014. Given volatility, changes assumed to be neutral.

Cash Flow From Operations 476 249 298 355 — Capex (207) (200) (200) (200) — Dividends — — — — — FCF 269 47 114 197 — Share Repurchases — — — — — Total Debt 4,788 4,765 4,750 4,732 — Total Adjusted Debta

9,740 9,325 9,310 9,290

Reflects decrease in gross rent expense to $570 Mil. in 2015 from $619 Mil. in 2014.

Total Adjusted Debt/EBITDAR (x) 8.0 7.0 6.9 6.7 — aTotal Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. SG&A – Selling, general and administrative. Source: Fitch Ratings.

Sales Performance — 2007–Sept. 30, 2015 ($ Mil.) 2007 2008 2009 2010 2011 2012 2013 2014 9M15 Net Sales 13,794 13,724 13,568 13,864 13,909 13,543 12,543 12,361 6,949 Net Sales Growth (%) 5.7 (0.5) (1.1) 2.2 0.3 (2.6) (7.4) (1.5) (5.8) Sources of Net Sales Growth (%) FX Translation 2.5 0.3 0.6 0.7 2.1 (1.0) (2.4) (1.9) (5.4) 53rd Week 1.2 (1.2) — — — 1.1 (1.1) — — Other — Net New Stores and Acquisitionsa 0.5 0.5 0.5 0.5 0.5 1.4 0.5 0.4 (0.3) Consolidated SSS Growth (Fitch estimate from 2007–2011) 1.5 (0.1) (2.2) 1.0 (2.3) (4.1) (4.4) 0.0 (0.1) Net Sales Growth Subtotal 5.7 (0.5) (1.1) 2.2 0.3 (2.6) (7.4) (1.5) (5.8) aFitch estimates. SSS – Same-store sales. Source: Company filings, Fitch Ratings.

Leveraged Finance


Secular/Competitive Pressures Dampen Revenue Growth Ongoing channel shift of toy sales to the discount and online channels — and secular issues in the Baby and Entertainment product categories, which compose roughly 50% of Toys’ revenues — underpin Fitch’s expectations for generally flat to modestly negative consolidated same-store sales growth through the medium term. Domestic same-store sales have been positive in only two of the last 12 quarters, hampered by the company’s exposure to the secularly challenged Baby (newborns and children up to four years old) and Entertainment (video game software, systems and accessories) categories. These categories are less than 30% of revenues internationally.

On a constant currency basis, international same-store sales have been positive in the 1%–3% range in each of the past seven quarters, benefiting from exposure to growth in action figures and construction toys within the core toy and Learning categories, and net sales from new locations. These two categories compose more than 50% of international revenues.

The ongoing encroachment by discount formats and the rise of e-commerce, particularly in the U.S., has contributed to a channel shift away from traditional specialty brick-and-mortar toy retailers. Online retailers such as Amazon are making inroads, particularly with consumables such as diapers via subscription and other programs. Toys has also been disadvantaged by having to maintain a large physical footprint year-round and bearing high levels of inventory risk compared with most competitors. Fitch’s expectation for sustained positive top-line momentum is muted.

Toys needs to invest aggressively in its omnichannel capabilities to help protect its market share given the rapid growth in online sales led by Amazon. Its current online penetration, at approximately 13% and 6% of domestic and global revenue in 2014, respectively, lags the overall industry, especially in its core categories, such as Baby and Core Toys, where Fitch estimates online penetration is in the low- to mid-20% range domestically. Toys’ online business grew strongly in the double-digit range annually between 2010 and 2012, but stalled in 2013.

The company is in the process of taking its e-commerce business back in-house to provide more focus and have better results. Even if online sales resume low- to mid-teens growth, thereby adding 100 bps–150 bps to overall same-store sales, it may not be adequate to offset negative same-store sales trends at the store level.

Toys E-Commerce Contribution ($ Mil.) 2009 2010 2011 2012 2013 2014 Total E-Commerce 602 782 1,000 1,129 1,157 1,229 YoY Growth (%) 4.2 29.9 27.9 12.9 2.5 6.2 % of Sales 2.8 3.5 4.5 5.2 5.7 6.1 Contribution to SSS (%) 0.1 0.8 1.0 0.6 0.1 0.4

Domestic Total Sales 8,317 8,621 8,393 8,149 7,638 7,524 YoY Growth (%) (1.9) 3.7 (2.6) (2.9) (6.3) (1.5) Total Domestic SSS (%) (3.0) 1.7 (1.7) (3.5) (5.0) (1.0)

Domestic E-Commerce 496 645 834 939 936 988 YoY Growth (%) (1.6) 30.0 29.3 12.6 (0.3) 5.6 % of Sales 6.0 7.5 9.9 11.5 12.3 13.1 Contribution to SSS (%) (0.1) 1.8 2.2 1.3 (0.0) 0.7

Domestic Store-Level Sales 7,821 7,976 7,559 7,210 6,702 6,536 YoY Growth (%) (1.9) 2.0 (5.2) (4.6) (7.0) (2.5)

Store-Level Contribution to Total SSS (%) (2.9) (0.1) (3.9) (4.8) (5.0) (1.7) Implied Store-Level SSS (%) (3.1) (0.1) (4.2) (5.3) (5.6) (1.9)

SSS – Same-store sales. YoY – Year-over-year. Source: Company filings, Fitch Ratings.

Leveraged Finance


Category Mix Poses Additional Headwind

Baby Category Hurt by Low Birth Rates

The Baby category (38% of domestic revenue) has been declining in low to mid single-digit rates in Toys’ domestic business since 2011. For the most part, Toys is a slow-growth, developed market story with more than 80% of sales in the U.S., Europe and Japan. The population is shrinking in continental Europe and Japan, which composed 22% of 2014 revenues, with fertility rates under the 2.1x needed to maintain a stable population. The U.S. growth rate is also shrinking, limiting the market for categories dependent on this population, such as Toys’ Baby category (baby clothes, joggers, diapers, etc.).

Entertainment Affected by Digitalization

Entertainment, which represents around 10% of total revenue, presents another difficult spot for Toys. While U.S. computer and video game dollar sales have been roughly flat at $15.5 billion from 2012 to 2014 per The NPD Group (NPD), there has been a decline in the physical format at brick-and-mortar retailers, and an increase in subscription and digital downloads. U.S. computer and video games purchased at retail stores have consequently declined to 34% of total dollar sales in 2014 from 44% in 2012.

Market Share Losses in Traditional Toy Category

After flat sales of around $22 billion over the past five years, the U.S. traditional toy industry grew 6.5% in first half of 2015, according to NPD. Virtually every category except arts and crafts was up at least 4%. Youth electronics and games/puzzles increased by double digits, with action figures and building sets up 8%. However, Toys’ domestic traditional toy sales remained flat, indicating market share loss.

The company is currently enjoying above normal traditional toy sales related to Star Wars and other entertainment-related releases. Toys released holiday results on Jan. 8, 2016, showing consolidated same-stores sales up 3.7% for the nine-week period ending Jan. 2, 2016 (2.9% domestically and 5.1% internationally). However, sustaining positive same-store sales post Star Wars remains challenging.

The global toy market has been flat at approximately $84 billion over the past four years. The U.S. represents the largest market, with sales of nearly $22 billion, followed by Japan, China, the U.K. and France. These countries combined account for slightly more than 50% of global toy sales. Strong performance in emerging markets has driven most global market

Sales Mix by Category Domestic International

(%) 2010 2011 2012 2013 2014 YTD

10/31/15 2010 2011 2012 2013 2014 YTD

10/31/15 Baby 37.2 37.5 37.9 37.7 38.0 47.8 21.7 21.6 21.6 20.4 20.2 25.6 Learning 20.9 21.5 22.4 22.8 22.7 18.7 26.9 27.8 29.2 30.8 31.1 28.7 Core Toy 15.5 15.9 16.0 16.2 17.4 14.1 21.3 22.0 21.9 22.7 23.5 21.0 Entertainment 13.7 13.0 11.7 11.3 10.2 6.5 13.4 11.9 11.4 10.0 8.5 6.1 Seasonal 11.4 11.3 11.3 11.3 11.2 12.1 15.9 15.9 15.2 15.3 15.9 17.7

YoY Change Juvenile 3.7 (1.9) (2.1) (6.8) (0.7) (4.7) 4.7 4.7 (2.2) (14.1) (2.4) (9.6) Learning 10.5 0.2 1.2 (4.6) (1.9) (0.4) (0.5) 8.7 2.7 (4.1) (0.4) (5.0) Core Toy 8.6 (0.1) (2.3) (5.1) 5.8 (0.3) 4.8 8.7 (2.7) (5.7) (2.1) (9.9) Entertainment (8.4) (7.6) (12.6) (9.5) (11.1) (11.3) (14.2) (6.6) (6.3) (20.2) (16.2) (23.7) Seasonal 1.0 (3.5) (2.1) (6.3) (2.4) (3.9) 1.1 5.2 (6.5) (8.5) (2.5) (12.4)


Leveraged Finance


growth, while sales in developed markets remain relatively stagnant. Toys is skewed toward developed markets, with over 90% of its stores located in these mature markets.

Impact on Gross Margin/SG&A Gross margins have been reasonably steady, except for poor inventory management in 2013 which caused a 160-bps contraction to 35%. Gross margins grew to 35.8% in 2014 due to better inventory management, and improved year over year in the first half of 2015. However, Toys began pricing competitively in Baby, Learning and Core Toys in third-quarter 2015 domestically, and Fitch expects fourth-quarter 2015 gross margin to be down 75 bps. Gross margin for 2015 should consequently end at 35.5%, and Fitch expects it to remain relatively flat thereafter. However, ongoing pricing investment could put further pressure on margins.

Toys’ expense structure remains scaled for a much larger organization. SG&A (including depreciation and amortization) was roughly $4.3 billion in 2014 against sales of about $12 billion, which was relatively flat to SG&A levels when revenues peaked at nearly $14 billion in 2010.

Sales Trends by Major International Markets ($ Mil.) 2007 2008 2009 2010 2011 2012 2013 2014 Japan 1,643 1,786 1,791 1,866 1,988 1,795 1,374 1,308 Continental Europe 1,630 1,611 1,587 1,493 1,574 1,439 1,447 1,405 U.K. 1,146 902 891 792 758 735 680 710 Other (Canada, Australia and Asia) 925 945 982 1,092 1,196 1,425 1,404 1,414 Total 5,344 5,244 5,251 5,243 5,516 5,394 4,905 4,837 % of Total Net Sales Japan 11.9 13.0 13.2 13.5 14.3 13.3 11.0 10.6 Continental Europe 11.8 11.7 11.7 10.8 11.3 10.6 11.5 11.4 U.K. 8.3 6.6 6.6 5.7 5.4 5.4 5.4 5.7 Other (Canada, Australia and Asia) 6.7 6.9 7.2 7.9 8.6 10.5 11.2 11.4 YoY % Change Japan (0.4) 8.7 0.3 4.2 6.5 (9.7) (23.5) (4.8) Continental Europe 17.4 (1.2) (1.5) (5.9) 5.4 (8.6) 0.6 (2.9) U.K. 14.7 (21.3) (1.2) (11.1) (4.3) (3.0) (7.5) 4.4 Other (Canada, Australia and Asia) 24.5 2.2 3.9 11.2 9.5 19.1 (1.5) 0.7 Total 11.8 (1.9) 0.1 (0.2) 5.2 (2.2) (9.1) (1.4)


29303132333435363738

2007 2008 2009 2010 2011 2012 2013 2014 9M14 9M15

Fourth Quarter Full Year

Gross Margins — Toys 'R' Us, Inc.


(%)

Leveraged Finance


Toys has begun to address this imbalance with its cost-savings program, which began in 2014. The program is slated to take $325 million out of its expense structure by the end of 2016 and generated $100 million in domestic cost savings during 2014, which included eliminating 500 positions. While the company reduced SG&A by $300 million in the first nine months of fiscal 2015, only about half of it is attributed to the cost-cutting initiatives, while the other half is due to translation of international costs into a much stronger U.S. dollar. Fitch anticipates another $100 million or so in expense reduction through 2016, with a portion of it invested into growing top line.

SG&A Performance ($ Mil.) 2007 2008 2009 2010 2011 2012 2013 2014 9M14 9M15 Net Sales 13,794 13,724 13,568 13,864 13,909 13,543 12,543 12,361 7,379 6,949 SG&A (Including D&A) 4,142 4,247 4,101 4,280 4,388 4,428 4,297 4,263 2,994 2,694 SG&A Growth 283 105 (146) 179 108 40 (131) (34) (3) (300) SG&A Growth (%) 7.3 2.5 (3.4) 4.4 2.5 0.9 (3.0) (0.8) — (10.0) SG&A/Sales (%) 30.0 30.9 30.2 30.9 31.5 32.7 34.3 34.5 40.5 38.8

SG&A – Selling, general and administrative. D&A – Depreciation & Amortization. Source: Company filings, Fitch Ratings.

Operating Trends — Domestic and International Segments Sales ($ Mil.) 2006 2007 2008 2009 2010 2011 2012 2013 2014

LTM 10/31/15

U.S. 8,270 8,450 8,480 8,317 8,621 8,393 8,149 7,638 7,524 7,387 International 4,780 5,344 5,244 5,251 5,243 5,516 5,394 4,905 4,837 4,545 Total 13,050 13,794 13,724 13,568 13,864 13,909 13,543 12,543 12,361 11,932 % of Total Sales U.S. 63.4 61.3 61.8 61.3 62.2 60.3 60.2 60.9 60.9 61.9 International 36.6 38.7 38.2 38.7 37.8 39.7 39.8 39.1 39.1 38.1 Comp Store Sales (%) U.S. 0.2 2.7 (0.1) (3.0) 1.7 (1.7) (3.5) (5.0) (1.0) (3.0) International 3.1 2.9 (3.4) (2.8) (3.1) (2.7) (5.0) (3.3) 1.8 2.4 Store Units U.S. 837 845 846 849 868 876 875 873 872 865 International (Incl. Licensed Stores) 678 715 713 717 744 777 828 889 942 996 Gross Margin U.S. 33.5 34.3 34.3 34.8 34.8 34.3 35.4 32.6 34.1 34.1 International 34.4 35.6 35.0 35.9 36.6 38.0 38.3 38.7 38.6 38.2 EBITDA (Before Corporate Expenses) ($ Mil.) U.S. 913 877 818 879 829 774 796 450 542 645 International 381 473 331 463 482 504 445 343 345 363 Total 1,294 1,350 1,149 1,342 1,311 1,278 1,241 345 887 1,008

EBITDA Margin (Before Corporate Expenses) (%) U.S. 11.0 10.4 9.6 10.6 9.6 9.2 9.8 5.9 7.2 8.7 International 8.0 8.9 6.3 8.8 9.2 9.1 8.2 7.0 7.1 8.0 % of Total EBITDA (Before Corporate Expenses) U.S. 70.6 65.0 71.2 65.5 63.2 60.6 64.1 5.5 61.1 64.0 International 29.4 35.0 28.8 34.5 36.8 39.4 35.9 94.5 38.9 36.0

Comp – Comparable. Source: Company filings, Fitch Ratings.

Leveraged Finance



Refinancing Cliff in 2017 Toys held $396 million of cash — $143 million held at the Toys ‘R’ Us - Delaware, Inc. (Toys-Delaware) level — and $1.0 billion of availability under its various revolvers as of Oct. 31, 2015, including $780 million available under its domestic $1.85 billion facility. Availability under the domestic ABL should be approximately the same next year given Fitch’s expectation of modest, though positive, FCF in 2016 and 2017.

Current liquidity is adequate over the next 24 months. However, Toys has significant debt maturities of $1.175 billion and $600 million in 2017 and 2018, respectively, including $850 million of unsecured debt at HoldCo.

Highly Leveraged Capital Structure Toys was acquired by Bain Capital, LLC; KKR & Co., LP and Vornado Realty Trust on July 21, 2005, for $7.6 billion, implying an 11.8x EBITDA multiple based on an LTM EBITDA of $642 million for the period ended April 30, 2005. Fitch did not adjust for the approximately $160 million in inventory markdowns that were taken in 2004 primarily to liquidate selected older toy store inventory. This resulted in approximately $6.3 billion of debt on the company’s balance sheet at closing and an operating company-property company (OpCo-PropCo) structure to access the commercial mortgage-backed securities market as part of the LBO financing.

Toys’ leverage (adjusted debt/EBITDAR) was 8.0x in 2014 and Fitch expects it to decrease to the 6.5x–7.0x over the next 24 months driven by EBITDA growth. This compares with a relatively stable leverage profile in the high-5x to low-6x range through 2012, when sales held up at more than $13.5 billion and EBITDA hovered around the $1 billion level. No dividend has been paid to the private equity sponsors since the LBO.

Leveraged Finance


Capital Structurea ($ Mil., At Oct. 31, 2015)

Face Value Amount (%)

Bank Debt, Term Loan and International Real Estate-Backed Facilities USD1.85 Bil. Secured Revolver Due 3/21/19 814 14.9 USD280 Mil. FILO Tranche A-1 Loan Facility Due 10/24/19 280 5.1 GBP263 Mil. U.K. Term Loan Facility Due 7/7/20 406 7.4 USD400 Mil. Secured Term Loan Facility (Term B-2) Due 5/25/18 131 2.4 USD225 Mil. Secured Term Loan Facility (Term B-3) Due 5/25/18 66 1.2 USD1,025 Mil. Secured Term Loan Facility (Term B-4) Due 4/24/20 1,018 18.7 YEN24.9 Bil. (USD324 Mil.) Toys-Japan Unsecured Credit Lines Due 2015−2016 3 0.1 EUR75 Mil. Spanish Term Loan Facility Due 1/29/16 26 0.5 EUR48 Mil. French Term Loan Facility Due 2/27/18 51 0.9 Toys−Japan 1.850%−2.850% Loans Due 2015–2021 56 1.0 GBP138 Mil. European and Australian Asset-Backed Revolver Due 12/18/20b 79 1.4 Total Bank Debt, Term Loan and Real Estate Facilities 2,930 53.7 Senior Secured Notes 8.500% Senior Secured Notes Due 12/1/17 (PropCo II) 725 13.3 Total Senior Secured Notes 725 13.3 Senior Unsecured Debt 10.375% Notes Due 8/15/17 450 8.2 7.375% Notes Due 10/15/18 400 7.3 Senior Unsecured Term Loan Due 8/21/19 (PropCo I)c 929 17.0 8.750% Notes Due 9/1/21 22 0.4 Total Senior Unsecured Notes 1,801 33.0 Subtotal 5,456 100.0 Finance Obligations Associated with Capital Projects 191 Capital Lease Obligations 26 Asia JV Short-Term Borrowings 8 Total Debt 5,681 aSee org chart in Appendix A for reference of where each debt class resides. bThe facility was extended for five years on Dec. 18, 2015. cReflects repayments subsequent to quarter end in the amount of $25 Mil. due to requirement to prepay outstanding term loans with 25% of TRU Propco I’s annual excess cash flow. FILO – First in, last out. JV – Joint venture. Source: Company filings.

Liquidity ($ Mil., At Oct. 31, 2015) Cash 396 Unused U.S./Canada Revolvera 780 Unused International Revolvers 233 Total 1,409 aThe U.S./Canada revolver availability reflects a minimum excess availability covenant, which was $125 Mil. at Oct. 31, 2015. Source: Company filings.

Scheduled Debt Maturities ($ Mil., At Oct. 31, 2015) 2016 14 2017 1,189 2018 648 2019 1,255 2020 1,388 Thereafter 78

Note: Excludes credit facility borrowings, finance obligations and capital leases. Source: Company filings, Fitch Ratings.

Leveraged Finance


Intercompany Obligations Despite relatively flat book debt, Toys has incurred significant intercompany borrowings, particularly between the HoldCo and Toys-Delaware.

HoldCo issued $783 million of notes due to Toys-Delaware between 2005 and 2012, and all of the notes are documented, unsecured and include a market rate interest. Fitch estimates the total amount will increase to just over $900 million in 2015, reflecting accrued interest due to the payment-in-kind interest option were outstanding. The $229 million notes (expected to be $255 million in 2015) issued in fiscal 2012 are expressly subordinated in right of payment to the senior obligations of HoldCo, which implies that the remaining $650 million are pari passu with the $850 million HoldCo notes.

While Toys-Delaware had $376 million in short-term loans at the end of 2014 (and $327 million as of Oct.31, 2015) due to HoldCo, Fitch does not assume HoldCo can effectuate a setoff against its long-term obligation to Toys-Delaware. The short-term unsecured loans at Toys-Delaware are used to fund seasonal working capital needs and are therefore considered unsecured claims that rank below all the secured debt at Toys-Delaware. Fitch does not believe HoldCo can net these current assets against their debt due to Toys-Delaware because any liquidation proceeds from the HoldCo assets would need to pay down both the $850 million HoldCo notes and the $650 million notes due to Toys-Delaware on a pro rata basis to avoid giving a preferential treatment to the Toys-Delaware debt.

Recovery Analysis and Considerations Fitch has conducted a recovery analysis across Toys’ organizational structure to determine expected recoveries in a distressed scenario to each of the company’s debt issues and loans. Toys’ debt is at three types of entities: OpCo, PropCo and HoldCo, with a summary structure highlighted below. Please also refer to the Organizational Structure for Recovery Purposes chart and Recovery Analysis table for details.

Toys ‘R’ Us, Inc. (HoldCo)

(I) Toys-Delaware is a subsidiary of HoldCo.

(a) Toys ‘R’ Us Canada (Toys-Canada) is a subsidiary of Toys-Delaware.

(b) PropCo II is a subsidiary of Toys-Delaware.

(II) Toys ‘R’ Us Property Co. I, LLC (PropCo I) is a subsidiary of HoldCo.

OpCo Debt

Fitch takes the higher of liquidation value or enterprise value (EV, based on 5.0x–5.5x multiple applied to the stressed EBITDA) at the OpCo levels — Toys-Delaware and Toys-Canada. The 5.0x–5.5x is consistent with the low end of the 10-year valuation for the public retail space and Fitch’s average distressed multiple across the retail portfolio. The stressed EV is adjusted for 10% administrative claims.

Long-Term Notes Payable due to Toys-Delaware from HoldCo

($ Mil.) 2/1/14 1/31/15 Note Issued by Parent in Fiscal 2005 286 299 Note Issued by Parent in Fiscal 2009 201 222 Note Issued by Parent in Fiscal 2012 206 229 Note Issued by Parent in Fiscal 2012 90 90 Long-Term Notes Receivable from Parenta 783 840 aIncludes accrued and unpaid interest. Source: Company reports, Fitch Ratings.

Leveraged Finance


Toys-Canada

Toys has a $1.85 billion ABL revolver with Toys-Delaware as the lead borrower, and this contains a $200 million subfacility in favor of Canadian borrowers. Any assets of the Canadian borrower and its subsidiaries secure only the Canadian liabilities, other than 65% of Canadian real estate that secures the whole facility, with 50% toward the Canadian subfacility and 15% applied toward the domestic ABL and first in, last out (FILO) term loan. The $200 million subfacility is more than adequately covered by the EV, calculated based on stressed EBITDA at the Canadian subsidiary. Therefore, the fully recovered subfacility is reflected in the recovery of the consolidated $1.85 billion revolver discussed below.

The residual value of approximately $200 million is applied toward the ABL revolving facility and term loan.

Toys-Delaware

The recovery on the various debt tranches at the Toys-Delaware level is based on the: liquidation value of the domestic assets at the Toys-Delaware level estimated at over $1.5 billion; estimated value for Toys’ trademarks and IP assets, which are held at Geoffrey, LLC as a wholly owned subsidiary of Toys-Delaware; equity residual from Toys-Canada; and the benefit to the new B-4 term loan from an unsecured guarantee from the indirect parent of PropCo I.

The $1.85 billion revolver is secured by a first lien on inventory and receivables of Toys-Delaware. In allocating an appropriate recovery, Fitch has considered the liquidation value of domestic inventory and receivables assumed at seasonal peak, at the end of the third quarter, and has applied advance rates of 75% and 80%, respectively. Fitch assumes $1.3 billion, or approximately 70%, of the facility commitment is drawn under the revolver. The facility is fully recovered and is therefore rated ‘B/RR1’.

The FILO term loan is secured by the same collateral as the $1.85 billion ABL facility and ranks second in repayment priority relative to the ABL. The FILO tranche is governed by the residual borrowing base within the ABL facility and benefits from a lien against 15% of the estimated value of real estate at Toys-Canada. The facility is rated ‘B/RR1’ based on outstanding recovery prospects (91%–100%), as it benefits from the excess liquidation value of domestic inventory and accounts receivable, and the recovery on the Canadian real estate.

The $1,025 million B-4 term loan benefits from the same credit support as the existing B-2 and B-3 term loans, which includes a first lien on all present and future IP, trademarks, copyrights, patents, websites and other intangible assets, and a second lien on the ABL collateral. It also benefits from an unsecured guaranty by the indirect parent of PropCo I and is secured by a first-priority pledge on two-thirds of the Canadian subsidiary stock.

After prorating the ascribed value of the IP assets (estimated at $350 million) and the residual equity in Toys-Canada, and applying the benefit from the guaranty by the indirect parent of PropCo I, the B-4 term loan is expected to have good recovery prospects (51%–70%), and is therefore rated ‘CCC+/RR3’.

The $200 million in remaining B-2 and B-3 term loans are rated ‘CCC/RR4’, as they are expected to have average recovery prospects (31%–50%) mainly from their prorated claim against the IP assets. The $22 million 8.75% debentures due Sept. 1, 2021, have poor recovery prospects (0%–10%) and are therefore rated ‘CC/RR6’.

Leveraged Finance


Valuation of Trademarks and IP

Toys’ trademarks and IP assets held at Geoffrey, LLC are the first lien collateral backing the senior secured term loans issued at Toys-Delaware. The annual license fees paid by HoldCo’s international subsidiaries were $80 million as of Oct. 31, 2015, a decline from $102 million in 2012.

In terms of valuing the trademarks, Fitch has applied a 4.0x–5.0x multiple to the LTM royalty stream from Toys’ international subsidiaries (excluding Canada) to arrive at a value of $350 million. While the multiple paid could potentially be better, resulting in a higher IP valuation, there could be further downward pressure on the royalty stream itself given weakness in its international businesses.

PropCo Debt

At the PropCo levels PropCo I, PropCo II and other international PropCos LTM net operating income (NOI) is stressed at 20%.

PropCo I and PropCo II are set up as bankruptcy-remote entities with a 20-year master lease through 2029 covering all the properties within the entities, which requires Toys-Delaware to pay all costs and expenses related to leasing these properties from these two entities. The ratings on the PropCo debt reflect a distressed capitalization rate of 12% applied to the stressed NOI of the properties to determine a going-concern valuation. The stressed rates reflect downtime and capital costs that would need to be incurred to re-tenant the space.

Applying these assumptions to the $725 million 8.50% senior secured notes at PropCo II and the $985 million senior unsecured term loan facility at PropCo I results in recovery in excess of 90%. Therefore, these facilities are rated ‘B/RR1’.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

020406080

100120140

2007 2008 2009 2010 2011 2012 2013 2014 LTM 3Q15

Licensing Fees from Foreign Affiliates (LHS) Royalty Rate (RHS)

International Licensing Fees

Note: Royalty Rate is calculated based on the annual license fees paid by HoldCo's international subsidiaries over the revenues generated by the international subsidiaries excluding Canada.Source: Company filings, Fitch Ratings.

($ Mil.) (%)

Sensitivity of Trademarks and IP Valuation Multiple on Royalty Stream (x) ($ Mil.) 4 5 6 7 8 Discount Rate On LTM Royalty Streama 0% 320 400 480 560 640 (5%) 304 380 456 532 608 (10) 288 360 432 504 576 (15) 272 340 408 476 544 (20) 256 320 384 448 512 aRoyalty stream was $80 Mil. as of Oct. 31, 2015. Source: Fitch Ratings.

Leveraged Finance


The PropCo II notes are secured by 123 properties. The PropCo I unsecured term loan facility benefits from a negative pledge on all PropCo I real estate assets, which includes 322 properties (318 stores, three distribution centerss and HQs). Fitch typically limits the recovery rating on unsecured debt at ‘RR2’, or two notches above the Issuer Default Rating level (under its criteria Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers). However, in the few instances where the recovery waterfall suggests an ‘RR1’ rating and such a Recovery Rating is supported by the structural and legal characteristics of the debt, unsecured debt may qualify for an ‘RR1’ rating. The rating also benefits from the structural consideration that Toys has limited capacity to secure debt using real estate, given there is a limitation on principal property of domestic subsidiaries at 10% of consolidated net tangible assets under the $400 million of 7.375% notes due 2018 issued by HoldCo.

As described above, the residual value of $300 million after fully recovering the $985 million term loan at PropCo I is applied toward the Delaware B-4 term loan via an unsecured guaranty by the indirect parent of PropCo I.

Toys ‘R’ Us, Inc. — HoldCo Debt

The $450 million 10.375% unsecured notes due Aug. 15, 2017 and the $400 million 7.375% unsecured notes due Oct. 15, 2018 no longer benefit from the residual value at PropCo I, and there is no residual value ascribed from Toys-Delaware or other operating subsidiaries. Therefore, the HoldCo debt and the $650 million senior notes due to Toys-Delaware considered pari passu with the publicly traded HoldCo notes have poor recovery prospects (0%–10%) and are rated ‘CC/RR6’.


Leveraged Finance


Organizational Structure for Recovery Purposes — Toys ‘R’ Us, Inc. Based on Going Concern ($ Mil., As of Oct. 31, 2015)

Toys ‘R’ Us, Inc. (Holdco)IDR — CCC

10.375% Unsecured Notes due 8/15/17 7.375% Unsecured Notes due 10/15/18Sr. Unsec. Notes due to Toys-DelawareSubordinated Notes due to Toys-Delaware

Revenue EBITDA (Fitch Defined)

aAdjusted EBITDA at Toys-Delaware and Toys-Canada are based on Fitch’s estimates. IDR – Issuer Default Rating. ABL – Asset-based lending. FILO – First in, last out. NOI – Net operating income. DC – Distribution center. Source: Company filings, Fitch Ratings.

450 400 650255

11,932714

CC/RR6CC/RR6——

Amount Rating

Residual Value to HoldCoTOY-DelawarePropCo ITOY-JapanTOY-EuropeTotal

0 00 0 0

Ups

tream

gua

rant

ee o

f U.S

. ter

m lo

ans.

100%

100%

100%

00

——

Recovery (%)

Toys ‘R’ Us Property Co. I, LLC (TRU PropCo I)IDR — CCC

Negative Pledge on 318 stores — three DCs — HQ

Sr. Unsecured Term Loan Facility due 8/21/19

Estimated Net Operating Income Stressed Net Operating IncomeEV (at 12% Cap Rate)

929

190 152

1,267

B/RR1

Amount

Rating

100

——

Recovery (%)

Toys ‘R’ Us International Subsidiaries

(Fitch Assumes no recovery

value for HoldCo from international operations)

Toys ‘R’ Us-Delaware, Inc. (U.S. Opco)IDR — CCC

$1.85 Bil. Sec. ABL due 3/21/19$280 Mil. FILO Term Loan

due 10/24/19$1,025 Mil. Secured Term Loan

Facility (Term B-4) due 4/24/20$400 Mil. Secured Term Loan Facility

(Term B-2) due 5/25/18$225 Mil. Secured Term Loan Facility

(Term B-3) due 5/25/188.750% Debentures due 9/1/21 Finance Obligations Associated with

Capital Projects Operating Lease Claims Rejected

(One-Third of Leases Rejected)

1,295

280

1,018

131

6622

191

600

B/RR1

B/RR1

CCC+/RR3

CCC/RR4

CCC/RR4CC/RR6

Amount Rating

100

Recovery (%)

RevenueEBITDAa

Consolidated — U.S. OpCo incl. PropCo II and Canada

RevenueEBITDA (Fitch Defined EBITDA —

PropCo II — Canada — IPCo)Stressed EBITDA (Fitch-Defined EBITDA

— PropCo II — Canada)EV (5.0x EBITDA)

EV Minus Administrative Claims + Upstream Residual Value + Recovery on Canadian Subfacility

Delaware U.S. excl. Canada excl. PropCo II

8,211366

7,403

176

3501,750

1,761

100

71

35

353

—

—

——

—

—

——

—

Toys ‘R’ Us Property Co. II, LLC (TRU PropCo II)IDR — CCC

Secured by 123 properties

8.500% Sr. Sec. Notes due 12/1/17 Net Operating Income Stressed Net Operating Income EV (at 12% cap rate)

725 99 80

663

B/RR1

Amount Rating

91———

Recovery (%)

100%

Assumptions for the Recovery Analysis:• Fitch-Adjusted EBITDA does not add back sponsor fees,

compensation expense and impairment on long-lived assets compared to company-reported adjusted EBITDA.

• Recovery Enterprise Value = 5.0x–5.5x stressed EBITDA –10% administrative claims for OpCo entities or stressed NOI discounted at 12% cap rate for PropCo entities.

• U.S./Canadian revolver balances are based on 70% drawn of full commitment.

•Operating lease claims assumed in recovery based on lesser of (x) min. rental payments in next three years and (y) greater of gross rent in last fiscal year and 15% of total rental commitments. 100% of the leases are assumed to be rejectedunder the liquidation scenario.

100%

Toys ‘R’ Us Canada (Canadian OpCo)IDR — CCC

Operates 85 stores in Canada; 23 properties owned incl. head office/DC

$200 Mil. Sec. ABL Revolver due 3/21/19 Revenue EBITDA Stressed EBITDA EV (5.5x EBITDA) EV Minus Administrative Claims

140 8089166

362326

Amount

100—————

Recovery (%)

Geoffrey, LLC (IPCo)

Res

idua

l Val

ue fr

om T

oys-

Can

ada

= $1

86 M

il.

License Fees from Foreign Affiliates 80

Wayne Real Estate Parent Company, LLC

Unsecured guarantee of B-4 Term Loan

Rating

Leveraged Finance


Recovery Analysis Toys ‘R’ Us Delaware, Inc. (U.S. OpCo) ($ Mil., IDR: CCC) Advance Available to Going Concern Enterprise Value Liquidation Valuea Book Value Rate (%) Creditors Going Concern EBITDA (Excluding Propco II and Canada)b 350 Cash 143 0 GC EV Multiple (x) 5.0 Accounts Receivable 60 80 48 Going Concern Enterprise Value 1,750 Inventory 2,000 75 1,500 Less Administrative Claims (10%) 175 Trademarks and IP 350 100 350 Adjusted Enterprise Value for Claims 1,575 Total 2,553 1,898 Canadian Revolver Recovery 140 Less Administrative Claims (10%) 190 Equity Residual from Toys ‘R’ Us Canada 186 Liquidation Value 1,708 Equity Residual from Toys ‘R’ Us PropCo I applied toward Term B-4 Loan 300

Canadian Revolver Recovery 140 Equity Residual from Toys ‘R’ Us Canada 156

Total Adjusted Enterprise Value for Claims 2,201

Equity Residual from Toys ‘R’ Us PropCo I Applied Toward Term B-4 Loan 300

Total Adjusted Liquidation Value for Claims 2,305 Distribution of Value

First and Secured Priority Amount Value

Recovered Recovery


$1.85 Bil. Revolver 1,295.0 1,295.0 100 RR1 +3 B $280 Mil. FILO Term Loan 280.0 280.0 100 RR1 +3 B $1.025 Bil. Term B-4 Loans 1,018.3 697.2 68 RR3 +1 CCC+ $205 Mil. B-2/B-3 Term Loan 196.0 66.7 34 RR4 0 CCC Allocation of Total Adjusted Enterprise Value for Claims Adjusted Enterprise Value for Claims 2,004.6 Less Secured Debt Recovery 2,338.9 Remaining Recovery for Unsecured Claims —


Recovered Recovery


8.750% Debentures Due 9/1/21 22.0 0.0 0 RR6 –2 CC Finance Obligations Associated with Capital Projectsc 789.0 0.0 0 aToys ‘R’ Us Delaware assets excluding Canada are estimated at normalized peak seasonal levels, which is typically in the third quarter. Fitch notes that actual domestic inventory (excluding Canada) at the end of third-quarter 2014 was higher than $2.0 Bil. bToys-Delaware’s going concern EBITDA (excluding PropCo II and Canada) assumes that post-bankruptcy revenues are $5 Bil (about 65% of 2014 revenues) and EBITDA margin returns back to the 7% level reached between 2007 and 2013. cFitch estimates about $600 Mil. in operating lease claims. IDR – Issuer Default Rating. FILO – First in, last out. Source: Company filings, Fitch Ratings.

Recovery Analysis Toys ‘R’ Us Canada ($ Mil., IDR: CCC) Going Concern Enterprise Value Going Concern EBITDAa 66 GC EV Multiple (x) 5.0 Going Concern Enterprise Value 329 Less Administrative Claims (10%) 33 Adjusted Enterprise Value for Claims 296


Recovered Recovery


$200 Mil. Canadian Subfacility 140.0 140.0 100 RR1 +3 B Allocation of Adjusted Enterprise Value for Claims Adjusted Enterprise Value for Claims 296 Less Secured Debt Recovery 140.0 Value Distributed to Toys ‘R’ Us Delaware, Inc. 156 aThe Canadian business going concern EBITDA reflects ongoing revenue of $775 Mil. or 10% below 2014 levels with an EBITDA margin of 8.5%. Source: Company filings, Fitch Ratings.

Leveraged Finance


Recovery Analysis Toys ‘R’ Us Property Co. II, LLC ($ Mil., IDR: CCC) Going Concern Enterprise Value LTM Net Operating Income 99 Discount (%) 20 Projected Post-Default NOI 80 Cap Rate (%) 12 Adjusted Enterprise Value for Claims 667


Recovered Recovery


Senior Secured 725.0 667.0 92 RR1 +3 B Value to be Distributed to Toys ‘R’ Us 0.0

NOI – Net operating income. Source: Company filings, Fitch Ratings.

Recovery Analysis Toys ‘R’ Us Property Co. I, LLC ($ Mil., IDR: CCC) Going Concern Enterprise Value LTM Estimated Net Operating Income 190 Discount (%) 20 Projected Post-Default NOI 152 Cap Rate (%) 12 Adjusted Enterprise Value for Claims 1,267


Recovered Recovery


Senior Unsecured 929.0 929.0 100 RR1 +3 B Value to be Distributed to Term B-4 Loan 338.0

NOI – Net operating income. Source: Company reports, Fitch Ratings.

Recovery Analysis Toys ‘R’ Us, Inc. (HoldCo) ($ Mil., IDR: CCC) Going Concern Enterprise Value Going Concern EBITDA Residual Value from Toys ‘R’ Us Property Co. I, LLC


Recovered Recovery


Senior Unsecureda 1,500.0 0.0 0 RR6 –2 CC Subordinated Notes 255.0 0.0 0 — — — aIncludes senior unsecured notes due to Toys-Delaware. See section on Intercompany Obligations. Source: Company filings, Fitch Ratings.

Leveraged Finance



Leveraged Finance


Appendix A

Organizational Structure — Toys ‘R’ Us, Inc.($ Mil., As of Oct. 31, 2015)

Toys ‘R’ Us, Inc. (HoldCo) IDR — CCC

10.375% Sr. Unsec. Notes due 8/15/17 7.375% Sr. Unsec. Notes due 10/15/18Sr. Unsec. Notes due to Toys-DelawareSubordinated Notes due to Toys-Delaware

Revenue EBITDA (Fitch Defined)a

Consolidated Debt Total Adjusted Debt/EBITDAR (x)

aFitch-adjusted EBITDA does not add back sponsor fees, compensation expense and impairment on long-lived assets compared to reported adjusted EBITDA. bInternational EBITDA is calculated as the balance of company’s consolidated EBITDA minus U.S. Opco’s EBITDA and TRU PropCo I’s net operating income (NOI). c$1.85 billion ABL revolver including a $200 million subfacility in favor of Canadian borrowers. dToys ‘R’ Us-Delaware’s consolidated revenue includes licensing fees from unaffiliated third parties, but excludes other revenues related to transactions with related parties. eNOI at PropCos is calculated as operating earnings plus depreciation. PropCo I’s NOI is based on Fitch’s estimates. fAdjusted EBITDA at Toys-Delaware is based on Fitch’s estimates. IDR – Issuer Default Rating. ABL – Asset-backed loan. FILO – First in, last out. Source: Company filings, Fitch Ratings.

450 400650255

11,932714

5,5407.9

CC/RR6CC/RR6——

Amount Rating

100%

Bain Capital Partners LLCKKR & Co., L.P.Vornado Realty TrustManagement and Directors

32.6%32.6%32.6%2.1%

Toys ‘R’ Us-Delaware, Inc. (U.S. Opco)IDR — CCC

USD1.85 Bil. Secured ABLdue 3/21/19c

USD280 Mil. FILO Term Loan due 10/24/19

USD1,025 Mil. Secured Term Loan Facility (Term B-4) due 4/24/2

USD400 Mil. Secured Term Loan Facility (Term B-2) due 5/25/18

USD225 Mil. Secured Term Loan Facility (Term B-3) due 5/25/18

8.750% Debentures due 9/1/21Finance Obligations Associated

with Capital Projects

Revenued

EBITDA (Fitch Defined)e,f

Consolidated Debt(Including PropCo II and Canada)

814

280

1,018

131

6622

191

8,211366

3,251

B/RR1

B/RR1

CCC+/RR3

CCC/RR4

CCC/RR4CC/RR6

Amount Rating

Toys ‘R’ Us Property Co. II, LLC(TRU PropCo II)

IDR — CCC


8.500% Senior Secured Notesdue 12/1/17

Net Operating Incomee

725

99

B/RR1

Amount Rating

Toys ‘R’ Us Canada (Canadian OpCo)

USD200 Mil. Secured Revolver due 3/21/19c

Revenue EBITDAf

—

80891

Amount

Geoffrey, LLC (IPCo)

Toys ‘R’ Us Property Co. I, LLC (TRU PropCo I)

IDR — CCC

Negative Pledge on 318 stores — three DCs — HQ

Senior Unsecured Term LoanFacility due 8/21/19

Net Operating Incomee

929

190

B/RR1

Amount Rating

International (Excluding Canada)International Revenue% of Consolidated Revenue

International EBITDAb

% of Consolidated EBITDA

3,72131

15822

Toys ‘R’ Us-Japan, Ltd.(Japan Sub.)

Unsecured Revolver due 2015–2016

1.850%–2.850% Loans due 2015–2021

3

56

Amount

Toys ‘R’ Us Europe, LLC (European OpCo)

TRU Australia Holdings, LLC (Toys Australia)

European Borrowers

GBP138 Mil. Multicurrency ABL due 12/18/20 79Amount

Toys ‘R’ Us Properties (U.K.) Limited (U.K. PropCo)

Secured by 31 propertiesGBP263 Mil. Term Loan Facility due 7/7/20 406

Amount

Toys ‘R’ Us France Real Estate SAS (France PropCo)

Secured by nine propertiesEUR48 Mil. Term Loan Facility due 2/27/18 51

Amount

Toys ‘R’ Us Iberia Real Estate SL (Spain PropCo)


EUR75 Mil. Term Loan Facility due 1/29/16 26Amount

100%

Ups

tream

gua

rant

ee o

f U.S

. ter

m lo

ans

.

100%

100%

100%

100%

Downstream Guarantee of European ABL

100%

License fees from Foreign Affiliates 80

$336 Mil. short-term loans payable to

HoldCo.

100%

Wayne Real Estate Parent Company, LLC

Unsecured guarantee of B-4 Term Loan

Leveraged Finance


Appendix B

Bank Agreement Covenant Summary — Toys ‘R’ Us – Delaware, Inc. Overview Borrower Toys ‘R’ Us Delaware, Inc. (lead borrower), Toys ‘R’ Us (Canada) Ltd. (Canadian borrower). Description of Debt $1.85 Bil. secured asset-based revolving credit facility, including a $200 Mil. subfacility in favor of Canadian borrowers

$280 Mil. FILO term loan (Tranche A-1 loan facility) Document Date First amendment to third amended and restated credit agreement and to security agreement dated Oct. 24, 2014

(Exhibit 10.1 to 10-Q filed Dec. 11, 2014) Third amended and restated credit agreement dated March 21, 2014 (Exhibit 10.1 to 10-Q filed June 12, 2014), originally dated July 21, 2005, as amended as of Dec. 21, 2005; July 19, 2006; and June 24, 2009 Amendment No. 1 to amended and restated intercreditor agreement dated Oct. 24, 2014 (Exhibit 10.3 to 10-Q filed Dec. 11, 2014) Amended and Restated Intercreditor Agreement, dated as of Aug. 24, 2010 (Exhibit 4.5 to 10-Q filed Sep. 10, 2010)

Amount $1.85 Bil. full commitment split between a $1.65 Bil. U.S. facility and a $200 Mil. Canadian facility subject to a borrowing base consisting of specified percentage of eligible inventory and eligible credit card receivables and certain real estate less any applicable availability reserves. Accordion feature of $1,150 Mil. under the revolving facility subject to no default. $280 Mil. FILO term loan (Tranche A-1 loan facility)

Maturity Date ABL Facility: 3/21/19 (with a springing maturity date if the Toys-Delaware term loans due fiscal 2018 are not repaid 30 days prior to maturity). $280 Mil. FILO Term Loan (Tranche A-1 Loan Facility): 10/24/19 subject to a springing maturity to 2018 if the remaining secured Term B-2 and Term B-3 loans have not been refinanced, extended or otherwise replaced or repaid prior to such time.

Ranking Senior secured. Security Secured by a first lien on inventory and receivables of Toys-Delaware and its domestic subsidiaries. Any assets of the Canadian

borrower and its subsidiaries secure only the Canadian liabilities, besides 65% of Canadian real estate, which secures the whole facility (with 50% toward the Canadian subfacility and 15% applied toward the domestic ABL and FILO term loan). Second lien on 65% of Toys-Canada equity.

Guarantee Guaranteed by Toys-Delaware and material wholly owned U.S. subsidiaries, including TRU Puerto Rico (but excluding TRU PropCo II, Geoffrey, LLC [IPCo], and its subsidiaries and foreign subsidiaries); Canadian subsidiaries only guarantee the obligations under the Canadian revolver.


Notable Permitted Debt: 1) $2.75 Bil. aggregate debt basket composed of (i) term loan, (ii) permanent financing facility maturing on or after the revolver with amortization capped at $200 Mil. per year or $500 Mil. prior to maturity; (iii) debt of special-purpose entities of the lead borrower, including supplemental real estate facilities; and (iv) any other unsubordinated debt, provided it is either capped at $750 Mil. or the consolidated interest coverage ratio of more than or equal to 2.0x; 2) no restriction on subordinated debt; 3) additional all-purpose unsecured debt up to $100 Mil.

Limitation on Liens Generally not permitted for debt except existing liens on debt and refinancings thereof; general carveout of $100 Mil. Limitation on Guarantees Guarantees are defined as debt and, hence, governed by debt restriction. Also see investment section below. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as occupancy of majority of board seats or acquisition of more than 25% voting stock after an IPO and constitutes

an event of default. M&A, Investments Restriction Ratio test permitted provided the following payment conditions are satisfied: (i) no event of default; (ii) excess availability of more

than $225 Mil. during any projected 12 fiscal months; and (iii) pro forma fixed-charge coverage of more than 1.0x. Carveouts: General carveout of $100 Mil.; $100 Mil. carveout for guarantees provided to nonloan parties (such guarantee can only exceed $25 Mil. at any time if projected monthly excess availability is more than $225 Mil. during any projected 12 fiscal months); $25 Mil. for investments in foreign subsidiaries; $250 Mil. for investments to secure obligations of TRU (Vermont), Inc. as an insurance captive.

Sale of Assets Restriction General carveout of $100 Mil. provided no event of default and the proceeds are used to repay the loans; real estate asset sales are permitted provided such sale is made at FMV, such leases on market terms and consideration shall be at least 50% in cash if assets are sold to non-affiliated entity or 100% in cash if sold to affiliated entity; store closures and related inventory dispositions are permitted provided that the number of stores closed shall not exceed 15% of the total loan parties’ stores as of the beginning of any fiscal year or 30% cumulatively (net of new store openings) and net proceeds from the sales shall be used to prepay the loans.

Restricted Payments Restricted Payments (RPs)) RP Basket: None.

Notable Permitted Payments: Repayment of the HoldCo 7.625% 2011 notes and the 7.875% 2013 notes provided pro forma excess availability for the one-month prior and six months’ projected pro forma for such payment is at least $250 Mil. Special Situation: no restriction if excess availability of more than $225 Mil. and pro forma fixed-charge coverage ratio of more than 1.1x.

Other Cross-Default Yes, exceeding $190 Mil. note that a master lease liquidation event (acceleration of any CMBS/real estate debt incurred by special

purpose entities) does not constitute an event of default. Cross-Acceleration N.A. MAC Clause None. Equity Cure None. Cash Dominion Events Sweep cash toward prepayment of the loans if (a) either excess availability falls below $150 Mil. for any three days in a 30-day

period; (b) excess availability at any time is less than $130 Mil.; or (c) specified event of default occurs. Required Lenders/Voting Rights 50% of total commitments.

FILO – First in, last out. ABL – Asset-based lending. FMV − Fair market value. CMBS − Commercial mortgage-backed securities. N.A. – Not applicable. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

http://www.sec.gov/Archives/edgar/data/1005414/000100541414000049/tru1112014-ex101.htm





Leveraged Finance


Term Loan Agreement Covenant Summary — Toys ‘R’ Us – Delaware, Inc. Overview Borrower Toys ‘R’ Us Delaware, Inc. Description of Debt Senior secured term loan credit facility. Document Date Third amendment to amended and restated credit agreement dated Oct. 24, 2014 (Exhibit 10.2 to 10-Q filed Dec. 11, 2014).

Intermediate company unsecured guarantee dated Oct. 24, 2014 (Exhibit 10.4 to 10-Q filed Dec. 11, 2014) between Toys ‘R’ Us Delaware, Inc. and Wayne Real Estate Parent Company, LLC Incremental Joinder Agreement No. 2, dated April 10, 2012, filed as Exhibit 10.4 to 10-Q dated June 8, 2012 Incremental Joinder Agreement, dated May 25, 2011, filed as Exhibit 10.1 to 10-Q dated June 10, 2011 Security agreement dated Aug. 24, 2010, filed as Exhibit 4.3 to 10-Q dated Sept. 10, 2010 First lien intercreditor agreement dated Aug. 24, 2010, filed as Exhibit 4.4 to 10-Q dated Sept. 10, 2010 Amended and restated intercreditor agreement dated Aug. 24, 2010, filed as Exhibit 4.5 to 10-Q dated Sept. 10, 2010 Amended and restated credit agreement dated Aug. 24, 2010, filed as Exhibit 10.2 to 10-Q dated Sept. 10, 2010

Original Size/Outstanding Term B-2: $400 Mil./$134 Mil. Term B-3: $225 Mil./$67 Mil. Term B-4: $1.025 Mil./$1.010 Mil.

Maturity Date Term B-2 and B-3: May 25,2018 Term B-4: April 4, 2020

Ranking Senior secured. Security Secured by first lien on trademarks and intellectual property rights and second lien on accounts receivable and inventory of Toys-

Delaware and its domestic subsidiaries. The B-4 term loan is also secured by a first lien on 65% of Canada Toys-Canada equity; a first lien on certain unencumbered real property when liens limitation in 2018 HoldCo notes are no longer in effect. Term-B-2 and Term B-3 are pari passu with Term B-4 in terms of payment on the common liens.

Guarantee Guaranteed by Toys-Delaware and its existing and future direct and indirect subsidiaries, including Geoffrey, LLC (IPCo) but excluding TRU PropCo II or any other special-purpose real estate entities. Term B-4 has, in addition, unsecured guarantee by indirect parent holding company of PropCo I, Wayne Real Estate Parent Company, LLC.

Financial Covenants None. Debt Restrictions Debt Incurrence Coverage Ratio Debt: None.

Notable Permitted Debt: 1) ABL borrowing up to the greater of $2.5 Bil. and the combined borrowing base; 2) additional incremental term loans up to $175 Mil.; 3) capital lease obligations up to $250 Mil.; 4) debt to refinance the 2021 debentures ($22 Mil. outstanding); other secured debt provided no event of default and senior secured leverage ratio is less than or equal to 1.75x; 4) $150 Mil. debt secured by PP&E provided proceeds applied fully for loan repayment; 5) unsecured, later-maturing debt provided pro forma fixed-charge coverage ratio is more than or equal to 2.0x, no event of default and no scheduled repayment, mandatory redemption, or sinking fund obligation; 6) additional all-purpose debt up to $100 Mil.

Limitation on Liens Carveouts: Liens on PP&E securing indebtedness up to $150 Mil. provided senior secured leverage is less than or equal to 1.75x; general carveout of $100 Mil.

Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as less than 100% of equity interest in the borrower or acquisition of more than 50% voting stock of the borrower

or HoldCo and constitutes an event of default. M&A, Investments Restriction General carveout of $100 Mil. for permitted acquisition without notifying administrative agent.

Carveout for permitted investments: overall subject to fixed-charge coverage test of 2.0x; investments in connection with permitted acquisition with purchase price subject to a limit (determined by cumulative 50% consolidated net income commencing Aug. 2, 2009, plus equity issuance proceeds plus upstream dividend and distribution); investments consisting of posting letter of credit, $250 Mil. for guarantees or cash collateral to secure obligations of TRU (Vermont), Inc. in respect of insurance policies issued in favor of Holdings and its domestic subsidiaries; $100 Mil. for unsubordinated intercompany loans to nonloan parties; and general carveout of $100 Mil.

Sale of Assets Restriction No notable carveout; for permitted asset sales, there shall be no event of default and provided that 75% of the cash proceeds from real property sales or 100% from other asset sales to be applied for loan repayment; sale-leaseback permitted provided 100% of sales proceeds applied for loan repayment.

Restricted Payments Restricted Payments (RPs) RP Basket: 50% of cumulative consolidated net income of Toys ‘R’ Us-Delaware, Inc. commencing Aug. 2, 2009, plus 100%

equity issuance proceeds plus 100% upstream dividend and distribution. Subject to fixed-charge coverage ratio < 2.0x. Notable Permitted Payments: 1) Prepayment or repayment of 7.625% notes due 2011 and 7.875% notes due 2013 are permitted provided U.S. OpCo’s total net leverage is less than 4.75x; 2) distributions to HoldCo for the purpose of HoldCo operating expense and interest expense of HoldCo notes; and 3) additional all-purpose payments up to $50 Mil.

Other Cross-Default Yes, exceeding $100 Mil. of debt at any loan party (excluding HoldCo and any direct or indirect subsidiary of HoldCo). Cross-Acceleration N.A. Required Lenders/Voting Rights 50% of total commitments.

ABL – Asset-based lending. PP&E − Property, plant and equipment. N.A. – Not applicable. Source: Company filings, Fitch Ratings.










Leveraged Finance


Bank Agreement and Term Loan Covenant Summary — Toys ‘R’ Us – Delaware, Inc. Financial Covenants (Maintenance) Excess Availability (Minimum) ABL Revolver: Excess availability (line cap minus outstanding balance) at all times of at least $125 Mil. (of which no more than

$50 Mil. may be attributable to Canadian excess availability). Line cap is defined as the lower of total commitments and combined borrowing base.

Other Term Loan: No financial covenants; only incurrence tests, such as senior secured leverage test, fixed-charge coverage test, or U.S. OpCo total net leverage test to constrain debt incurrence, investments and restricted payments.

Principal Repayments Mandatory/Tax Prepayment ABL Revolver: Sweep cash toward prepayment of the loans if (a) either excess availability falls below $150 Mil. for any three days

in a 30-day period; (b) excess availability at any time is less than $130 Mil.; or (c) specified event of default occurs. Term Loan Facility: Excess Cash: 50% of excess cash flow, with stepdown to 25% if total net leverage is less than 1.75x, then 0% if total net leverage is less than 1.4x. Asset Sale: 100% of net proceeds subject to company’s reinvestment rights. New Debt: 100% of net proceeds from debt issuance other than permitted under the credit facilities.

Amortization Schedule Term loans amortize at a 0.25% quarterly installment (1.0% annually) with the balance due upon maturities. Callability/Optional Prepayment None. Pricing Coupon Type/Index ABL Revolver: LIBOR plus 150 bps−175 bps or prime rate plus 50 bps−75 bps depending on utilization of the facility; commitment

fee equals 0.25%. Term Loan B-2 and B-3: LIBOR plus 3.75% or base rate plus 2.75% with stepdown to LIBOR plus 3.50% or base rate plus 2.50%

if total leverage less than or equal to 1.75x; LIBOR floor of 1.50% or base rate floor of 2.50%. Term Loan B-4: LIBOR plus 8.75% with LIBOR floor of 1% or base rate plus 7.75% with base rate floor of 2%.


Leveraged Finance


Appendix C

Term Loan Agreement Covenant Summary Toys ‘R’ Us Property Co. I, LLC Overview Borrower Toys ‘R’ Us Property Co. I, LLC (PropCo I) Description of Debt Senior unsecured term loan facility. Document Date and Location Term Loan Credit Agreement dated Aug. 21, 2013, filed as Exhibit 10.4 to 10-Q dated Sept. 17, 2013. Original Issue/Outstanding $985 Mil./$985 Mil. Maturity Date 8/21/19 Ranking Senior unsecured. Security Negative pledge on 342 properties (338 stores, three DCs and headquarter building) held in a bankruptcy-remote entity with a

20-year master lease covering all the properties. Guarantee Guaranteed on a senior unsecured basis by all of PropCo I’s subsidiaries but not by HoldCo or U.S. OpCo. Debt Restrictions Debt Incurrence Coverage Ratio Debt: None.

Notable Permitted Debt: 1) Incremental term loan facility plus then outstanding principal amount up to the difference between 65% of the appraised value of then owned and leased properties; and 2) additional all-purpose debt up to $50 Mil.

Limitation on Liens Negative pledge on 342 properties. Limitation on Guarantees Not permitted to guarantee obligations outside of PropCo I and its subsidiaries. Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as less than 100% of equity interest in the borrower or acquisition of more than 50% voting stock of the

borrower and constitutes an event of default (EoD). M&A, Investments Restriction None. Sale of Assets Restriction Asset sales permitted provided at least 75% of proceeds in cash or equivalent; if cumulative appraised value of all asset sales

exceeds $200 Mil. and pro forma loan to value ratio exceeds 75%, or if an EoD has incurred, 100% of the greater of (i) net cash proceeds of such asset sales (including the amount of any related termination payments made pursuant to the master lease agreement) and (ii) 65% of appraised value of properties disposed of in such sale, shall be used to repay the term loan.

Restricted Payments Restricted Payments (RPs) RP Basket: 50% of retained cash flow, with retained cash flow defined as 75% of cumulative excess cash flow (ECF) and 100%

of asset sale proceeds (including amount of any related termination payments made pursuant to the master lease agreement) in excess of the amount required for mandatory prepayment of term loan, plus 50% of declined ECF sweep by PropCo I term loan lenders, plus 100% of equity proceeds, plus certain permitted tax distributions. So long as pro forma FCCR is not less than 2.0x, RP basket can include additional 50% of retained cash flow and 50% of declined ECF sweep. Notable Permitted Payments: None.

Other Cross-Default PropCo I or its subsidiaries’ default on material debt of more than $20 Mil. is defined as an event of default. Any payment

default in excess of $15 Mil. by U.S. OpCo under its master lease with PropCo I beyond the stated grace period shall cause the master lease to terminate, which in turn would be an event of default.

Cross-Acceleration N.A. Mandatory Prepayments 25% of ECF sweep commencing fiscal year ending 1/31/15; 100% of net cash proceeds from incurrence of indebtedness other

than permitted indebtedness by the Borrower and its subsidiaries; In terms of repayment with proceeds from asset sales, see Sales of Assets Restriction.

Voluntary Prepayments 102 and 101 soft call protection in year one and year two for term loan repricing. Amortization Schedule Amortize at a 0.25% quarterly installment (1.0% annually) with the balance due upon maturities. Coupon L + 500 with LIBOR floor of 1.00%.

DC – Distribution center. N.A. – Not applicable. Source: Company filings, Fitch Ratings.


Leveraged Finance


Appendix D

Bond Covenant Summary Toys ‘R’ Us, Inc. Overview Issuer Toys ‘R’ Us, Inc. Description of Debt 10.375% senior notes. 7.375% senior notes. Document Date Indenture dated Aug. 1, 2012, filed as Exhibit4.1 to 10-Q

dated Dec. 7, 2012. Indenture dated May 28, 2002, filed as Exhibit 4.3 to S-3 dated May 29, 2002.

Maturity Date 8/15/17 10/15/18 Original Issue/Outstanding $450 Mil./$450 Mil. $400 Mil./$400 Mil. Ranking Senior but structurally subordinated to the OpCo debt. Senior but structurally subordinated to the OpCo debt. Security Unsecured. Unsecured. Guarantee None. None. Debt Restrictions Debt Incurrence Coverage Ratio Debt: Pro forma fixed-charge coverage ratio

(FCCR) more than or equal to 1.75x on Toys ‘R’ Us, Inc.’s consolidated basis. Notable Permitted Debt: 1) Capital lease and PP&E debt up to the greater of $400 Mil. and 5% of total assets for debt to finance capitalized leases; 2) additional all-purpose up to $250 Mil.

None.

Limitation on Liens Liens permitted subject to debt incurrence covenants; liens on PP&E securing indebtedness up to $150 Mil.; general carveout of $100 Mil.

Liens on principal property of domestic subsidiaries are limited to a maximum of 10% of consolidated net tangible assets or 15% of consolidated capitalization. There is no limit on the company’s ability to pledge working capital or the assets of international subsidiaries.

Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence, governed by both related covenants.

None.

Acquisitions/Divestitures Change of Control (CoC) A CoC is defined as less than 100% of equity interest in the

borrower or acquisition of more than 50% voting stock of the borrower or HoldCo and constitutes an event of default. There is a CoC put at 101.

None.

M&A, Investments Restriction Carveouts: $100 Mil. for investments in U.K. Propco prior to April 30, 2014; investments in permitted business up to $50 Mil.; Investment in any subsidiary or any joint venture in connection with intercompany cash management arrangements; general carveout of $150 Mil.

None.

Sale of Assets Restriction Not permitted unless 75% of proceeds are in cash (or permitted asset swap), provided any noncash consideration is less than 5% of the assets; and sale proceeds shall be reinvested in 450 days or proceeds in excess of $50 Mil. are used to repay senior notes.

Carveout for sale-leaseback transactions: permitted if net proceeds are at least equal to the sum of all acquisition costs of principal property and a lien incurred thereon would be permitted.

Restricted Payments Restricted Payments RP Basket: 50% of cumulative consolidated net income

commencing Oct. 30, 2012, plus 100% equity issuance proceeds plus 100% upstream dividend and distribution, subject to fixed-charge coverage ratio > 2.0x. Notable Permitted Payments: 1) Redemption of employee’s stock option up to$15 Mil. per calendar year ($30 Mil. after an IPO), with unused amounts in any calendar year carried forward in the next three succeeding years;;investments in unrestricted subsidiaries up to 2.5% of the company’s total assets; and 2) additional all-purpose up to $100 Mil. Special Situation: No restriction on payments if total leverage ratio is less than 3.85x.

None.

Other Cross-Default No None. Cross-Acceleration Yes, exceeding $175 Mil. for debt at HoldCo and its restricted

subsidiaries. None.

MAC Clause None. None. Equity Clawback Maximum 40% of the issue can be redeemed at 110.375% with

proceeds from an IPO before Feb. 15, 2015. None.

Covenant Suspension Upon an upgrade to investment-grade ratings and given no event of default. Callability No call up to 2/15/15 unless under the condition of required

notice of redemption, then callable at make whole plus 50 bps; 2/15/15 105.188%; 2/15/16 102.594%; 2/15/17 and thereafter 100.000%.

Call at make whole plus 50 bps.

Applicability of Covenants U.K. Propco and Toys ‘R’ Us, Inc.’s Asian joint venture are defined as unrestricted subsidiaries and therefore are not subject to any of the restrictive covenants contained in the Indenture.

None.

PP&E – Property, plant and equipment. MAC − Material adverse change. Source: Company filings, Fitch Ratings.



Leveraged Finance


Bond Covenant Summary Toys ‘R’ Us Property Co. II, LLC (PropCo II Notes) Overview Description of Debt 8.500% senior secured notes. Document Date and Location Indenture dated Nov. 20, 2009, filed as Exhibit 4.14 to 10-K filed on March 24, 2010. Maturity Date 12/1/17 Original Issue/Outstanding $725 Mil./$725 Mil. Ranking Senior secured. Security Secured by first liens on all the existing (128 properties held in a bankruptcy-remote entity with a 20-year master lease covering

all the properties) and future real estate properties. Guarantee Guaranteed by TRU PropCo II and its subsidiaries but not by HoldCo or U.S. OpCo. Debt Restrictions Debt Incurrence Coverage Ratio Debt: None.

Notable Permitted Debt: 1) Additional unsecured debt up to $50 Mil.; 2) $150 Mil. additional notes incurred in connection with acquisition of new properties subject to the master lease provided new property leverage ratio (principal of additional notes/new property rent) is less than or equal to 6.75x.

Limitation on Liens None. Limitation on Guarantees Not permitted to guarantee obligations outside of PropCo II and its subsidiaries Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 50% voting stock, but does not constitute an event of default. There is a 101 CoC put. M&A, Investments Restriction None Sale of Assets Restriction Asset sales permitted provided at least 90% of proceeds in cash or equivalent and subject to 720 days of reinvestment period. Restricted Payments Restricted Payments (RPs) RP Basket: 50% of cumulative FCF plus 100% of equity/debt issuance proceeds plus 100% of asset sale proceeds from

permitted investments plus 100% of proceeds from declined tender offer of PropCo II notes provided no event of default. Notable Permitted Payments: None.

Other Cross-Default No Cross-Acceleration Yes, exceeding $20 Mil. Callability Up till Dec. 1, 2013 Maximum 10% of aggregate principal amount at 103%

2013 104.250% 2014 102.125% 2015 and thereafter par

Equity Clawback None. MAC Clause Any payment default in excess of $15 Mil. by U.S. OpCo under its master lease and termination of the master lease constitute an

event of default. Covenant Suspension If rated investment grade by both Moody’s and S&P provided no event of default.

MAC − Material adverse change. S&P – Standard and Poor’s. Source: Company filings, Fitch Ratings.


Leveraged Finance


Appendix E

Financial Summary — Toys ‘R’ Us, Inc.




LTM Ended


Operating EBITDAa 1,029.0 980.0 (49.0) 464.0 521.0 24.0 52.0 — 521.0 597.0 61.0 105.0 27.0 714.0 Operating EBITDA Margin (%) 7.4 7.2 (2.0) 8.8 4.2 1.0 2.1 — 10.5 4.8 2.6 4.6 1.2 6.0 FFO Return on Adjusted Capital (%)b 15.5 15.3 13.8 11.8 11.8 12.2 12.0 12.0 14.7 14.7 14.6 15.3 15.3 15.3 FCF Margin (%) (0.4) 1.9 (19.9) 19.5 (0.7) (19.2) (8.4) (13.5) 25.8 2.2 (28.9) (3.7) (16.3) 1.2

Coverages (x) FFO Interest Coverage 2.3 2.2 (0.1) 4.5 0.9 (0.0) 0.5 (0.0) 5.4 1.5 0.3 1.0 0.2 1.7

Operating EBITDA/ Gross Interest Expense 2.3 2.0 (0.3) 4.5 1.0 0.2 0.5 — 4.7 1.3 0.5 1.0 0.2 1.6 FFO Fixed-Charge Coverage 1.6 1.5 0.4 2.4 1.0 0.6 0.8 0.5 2.9 1.2 0.7 1.0 0.7 1.3 FCF Debt Service Coverageb 0.5 0.9 0.7 0.7 0.7 0.7 0.5 0.8 1.1 1.1 0.8 1.0 0.9 0.9 Cash Flow from Operations/Capex 0.8 1.9 (6.6) 17.3 0.6 (11.2) (3.4) (5.3) 19.9 2.3 (14.7) (1.2) (5.6) 1.7


Operating EBITDA 0.9 3.3 5.9 7.2 7.2 7.4 7.7 4.4 6.2 6.2 6.4 5.9 6.2 6.2 Long-Term Secured Debt/FFO 1.5 5.5 16.8 (134.8) (134.8) 343.7 377.3 27.5 17.1 17.1 16.7 13.9 13.3 13.3 Total Debt with Equity Credit/ Operating EBITDA 5.0 5.5 7.6 9.6 9.6 10.2 11.0 10.7 8.0 8.0 8.2 7.7 7.9 7.9 FFO-Adjusted Leverage 6.1 6.2 7.5 9.0 9.0 8.9 9.2 9.4 7.6 7.6 7.7 7.5 7.6 7.6 Total Adjusted Debt/ Operating EBITDAR 6.1 6.5 7.7 8.7 8.7 8.9 9.3 9.2 8.0 8.0 8.1 7.8 7.9 7.9 FCF/Total Adjusted Debt (%) (0.6) 2.4 (0.3) (0.9) (0.9) (0.6) (1.5) 0.1 2.8 2.8 0.7 1.9 1.4 1.4


Long-Term Senior Secured Debt 891.0 3,189.0 4,451.0 3,774.0 3,774.0 3,781.0 3,773.0 2,368.0 3,680.0 3,680.0 4,039.0 4,031.0 4,443.0 4,443.0 Long-Term Senior Unsecured Debt 3,955.0 1,801.0 1,141.0 1,144.0 1,144.0 1,330.0 1,474.0 3,277.0 932.0 932.0 974.0 1,025.0 993.0 993.0 Long-Term Subordinated Debt — — — — — — — — — — — — — — Other Debt — — — — — — — — — — — — — — Equity Credit — — — — — — — — — — — — — — Total Debt with Equity Credit 5,170.0 5,343.0 5,746.0 5,019.0 5,019.0 5,246.0 5,424.0 5,773.0 4,788.0 4,788.0 5,215.0 5,282.0 5,640.0 5,640.0 Off-Balance Sheet Debtc 4,880.0 5,176.0 5,024.0 5,024.0 5,024.0 4,952.0 4,952.0 4,952.0 4,952.0 4,952.0 4,952.0 4,952.0 4,952.0 4,952.0 Total Adjusted Debt with Equity Credit 10,050.0 10,519.0 10,770.0 10,043.0 10,043.0 10,198.0 10,376.0 10,725.0 9,740.0 9,740.0 10,167.0 10,234.0 10,592.0 10,592.0

Cash Flow Funds From Operations 592.0 582.0 (205.0) 369.0 (28.0) (109.0) (45.0) (129.0) 498.0 215.0 (82.0) 4.0 (87.0) 333.0

Change in Working Capital (273.0) (45.0) (226.0) 719.0 172.0 (329.0) (114.0) (151.0) 855.0 261.0 (548.0) (49.0) (235.0) 23.0 Cash Flow from Operations 319.0 537.0 (431.0) 1,088.0 144.0 (438.0) (159.0) (280.0) 1,353.0 476.0 (630.0) (45.0) (322.0) 356.0 Total Non-Operating/ Nonrecurring Cash Flow — — — — — — — — — — — — — — Capex (380.0) (286.0) (65.0) (63.0) (238.0) (39.0) (47.0) (53.0) (68.0) (207.0) (43.0) (39.0) (57.0) (207.0) Common Dividends — — — — — — — — — — — — — — FCF (61.0) 251.0 (496.0) 1,025.0 (94.0) (477.0) (206.0) (333.0) 1,285.0 269.0 (673.0) (84.0) (379.0) 149.0 Net Acquisitions and Divestitures (46.0) 5.0 8.0 4.0 35.0 3.0 6.0 6.0 2.0 17.0 2.0 8.0 — 12.0 Net Debt Proceeds (171.0) 175.0 415.0 (737.0) (334.0) 211.0 183.0 406.0 (956.0) (156.0) 430.0 42.0 361.0 (123.0) Net Equity Proceeds — — (1.0) 8.0 — — — — — — — — — — Other (Investing and Financing) (34.0) (14.0) (21.0) (25.0) (81.0) (9.0) (2.0) (26.0) (39.0) (76.0) (4.0) (2.0) (3.0) (48.0) Total Change in Cash (312.0) 417.0 (95.0) 275.0 (474.0) (272.0) (19.0) 53.0 292.0 54.0 (245.0) (36.0) (21.0) (10.0) Ending Cash and Securities Balance 701.0 1,118.0 369.0 644.0 644.0 372.0 353.0 406.0 698.0 698.0 453.0 417.0 396.0 396.0 Short-Term Marketable Securities — — — — — — — — — - — — — — aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

Leveraged Finance


Financial Summary — Toys ‘R’ Us, Inc. (Continued)




LTM Ended


Revenue 13,909.0 13,543.0 2,491.0 5,267.0 12,543.0 2,479.0 2,440.0 2,459.0 4,983.0 12,361.0 2,325.0 2,293.0 2,331.0 11,932.0 Revenue Growth (%) 0.3 (2.6) (4.5) (8.7) (7.4) 2.9 2.7 (1.3) (5.4) (1.5) (6.2) (6.0) (5.2) (5.6) Operating EBIT 626.0 573.0 (141.0) 363.0 133.0 (80.0) (43.0) (86.0) 429.0 220.0 (26.0) 19.0 (53.0) 369.0 Gross Interest Expense 443.0 481.0 189.3 104.3 524.0 108.0 102.0 129.0 112.0 451.0 114.0 106.0 113.0 445.0 Sector-Specific Data Same-Store Sales (%)d (1.7) (3.5) (5.2) (4.1) (5.0) 4.0 1.5 (1.0) (4.5) (1.0) (2.3) (2.5) (0.9) (1.8) No. of Stores 1,653 1,703 1,756 1,762 1,762 1,894 1,919 1,826 1,814 1,814 1,841 1,841 1,861 1,861 Gross Margin (%) 35.7 36.6 36.0 31.8 35.0 37.0 37.5 36.9 33.9 35.8 37.1 38.2 35.7 35.7 SG&A/Revenues (%) 31.5 32.7 42.2 24.7 34.2 40.7 39.9 41.1 25.5 34.5 39.1 38.3 38.9 30.3 Operating EBIT Margin (%) 4.5 4.2 (5.7) 6.9 1.1 (3.2) (1.8) (3.5) 8.6 1.8 (1.1) 0.8 (2.3) 3.1 Operating EBITDAR Margin (%) 11.8 12.0 4.3 11.8 9.2 7.2 8.5 6.3 13.6 9.8 9.3 11.3 7.8 11.2 Operating EBITDAR/ (Interest + Rent) (x)b 1.6 1.4 0.3 2.4 1.0 0.7 0.8 0.5 2.5 1.1 0.8 1.0 0.7 1.3 Inventory Turnover (x)b 4.1 3.9 2.3 3.7 3.7 3.5 3.5 2.4 3.7 3.7 3.4 3.4 2.3 2.3 Accounts Payable Turnover (x)b 5.9 6.1 3.8 5.7 5.7 6.1 6.7 3.9 5.2 5.2 5.8 6.2 3.7 3.7 Return on Invested Capital (%)b 11.6 11.0 9.5 8.0 8.0 7.8 7.6 8.1 9.5 9.5 9.8 10.6 10.7 10.7 Return on Assets (%)b 1.7 0.4 (6.4) (13.8) (13.8) (15.0) (15.8) (9.2) (4.1) (4.1) (3.4) (2.7) (1.8) (1.8) Capex/Depreciation (%)b 94.3 70.3 70.7 62.4 61.3 37.5 49.5 61.6 73.9 54.9 49.4 45.3 71.3 60.0 aEBITDA is adjusted for stock-based compensation. bRatios in quarters are calculated on an LTM basis. cReflects 8x gross rent expense. dSame-store sales for LTM period reflects latest nine-month performance. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

Leveraged Finance


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