Rating Action: Moody’s assigns B2 CFR to Sound United; first lien term loan rated B2Global Credit Research – 07 Apr 2021New York, April 07, 2021 — Moody’s Investors Service, (“Moody’s”) assigned ratings to DEI Sales, Inc. (dba Sound United), including a B2 Corporate Family Rating (CFR) and a B2-PD Probability of Default Rating. Concurrently, Moody’s assigned a B2 rating to the company’s proposed $380 million senior secured first lien term loan due 2028. The outlook is stable.Net proceeds from the proposed $380 million first lien term loan, after paying fees and expenses, are expected to be used to refinanced approximately $322.3 million of existing debt, and to pay a $52 million dividend distribution to shareholders. Concurrent with the transaction, the company will also enter into a new $75 million asset based lending (ABL) revolving facility due 2026 (unrated) that is anticipated to be undrawn at close.All ratings are subject to Moody’s final review of the documentation.Assignments:..Issuer: DEI Sales, Inc….. Probability of Default Rating, Assigned B2-PD…. Corporate Family Rating, Assigned B2….Senior Secured 1st Lien Term Loan, Assigned B2 ( LGD4) Outlook Actions: ..Issuer: DEI Sales, Inc. ….Outlook, Stable RATINGS RATIONALE Sound United’s B2 CFR broadly reflects its high financial leverage with debt/EBITDA expected at around 3.9x for fiscal year end March 31, 2021 (ratios are Moody’s adjusted, otherwise stated), pro forma for the proposed transaction and the recent Bowers & Wilkins (B&W) acquisition. Sound United’s core products are discretionary with exposure to cyclical consumer spending and changes in consumer preferences and technology trends. In particular, component audio speakers and AV receivers, the company’s largest revenue contributors, are mature segments of the home audio market and are exposed to the increased penetration of sound bars, wireless speakers, and all-in-one devices. Also, the consumer electronics industry is highly competitive featuring larger players with greater financial resources, and the company has supplier and customer concentration. Governance factors consider the company’s aggressive financial policies under private equity ownership, including high financial leverage, growth through acquisitions strategy, and debt funded shareholder distributions.Sound United’s credit profile also reflects its solid foothold in its core audio products with well-known brands in key product categories that garner some support from a core end customer base including sound bars, wireless speakers, and all-in-one devices. The acquisition of B&W further enhanced the company’s product portfolio, adding a well-recognized brand in the premium audio category with better growth prospects than audio speakers and AV receivers. Demand for the company’s products has been very high over the past few quarters, benefiting from the increase in consumer spending on home entertainment. The legacy Sound United segment reported year-over-year revenue and adjusted EBITDA (management calculation) growth of 22% and 40% respectively, for the third quarter ending December 31, 2020. Moody’s expects continued good consumer demand at least thought the first half of calendar 2021, that combined with the company’s historically high backorder levels should support stable revenue and EBITDA in fiscal 2021. In addition, the company expects to achieve about $24 million of synergies in the next 12 months. Sound United has good geographic diversification with almost 50% of sales outside the US, primarily in Europe and Japan. the company’s very good liquidity is supported by its relatively healthy cash balance of $80 million, Moody’s expectations for free cash flow in the $45-$50 million range over the next 12 months, and its access to an undrawn $75 million ABL revolver due 2026, and lack of meaningful near-term debt maturities.The B2 rating assigned to the company’s proposed $380 million first lien term loan consistent with the CFR reflects the term loans‘ preponderance within the company’s capital structure.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody’s analysis has considered the effect on the performance of Sound United from the current weak global economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The weak economic conditions experienced because of the coronavirus pandemic is a unique downturn with mixed effects on Sound United’s business. Country lockdowns and social distancing measures in efforts to curve the spread of the pandemic negatively impacted the company’s sales and supply chain due to retail stores and manufacturing facilities closures, as well as equipment installers inability to access customers’ homes. However, home audio equipment demand subsequently increased to very high levels as consumers spending shifted to home improvement, and entertainment activities such as movie theaters closed or restricted access in 2020. Moody’s expects these activities to be more broadly open in 2021 but still below pre-coronavirus levels and for consumer demand to continue to be elevated at least through the first half of 2021.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody’s expectation for continued good consumer demand at least through the first half of calendar 2021 combined with Sound United’s historically high backorder levels should support debt/EBITDA leverage remaining at around 3.9x over the next 12-18 months. The stable outlook also reflects Moody’s expectations the company will maintain good liquidity over the next 12-18 months.Ratings could be upgraded if the company demonstrates consistent organic revenue and earnings growth, with debt/EBITDA sustained below 3.5x, and free cash flow/debt percentage in the high single digits. A ratings upgrade would also require maintenance of at least good liquidity and financial policies that support credit metrics at the above levels.Ratings could be downgraded if the company’s revenue or profit margin deteriorates, or if debt/EBITDA is sustained above 4.5x. Ratings could also be downgraded if the company completes a large debt-financed acquisition or shareholder distribution that materially increases financial leverage, or if liquidity deteriorates for any reason including negative free cash flow or increased reliance on the revolving facility.The proposed first lien credit agreement contains provisions for incremental debt capacity up to the greater of $130.0 million and 100% of consolidated pro forma EBITDA for the most recent test period, plus reallocated amounts under the general debt basket, plus additional amounts subject to a pro forma first lien senior secured net leverage requirement not to exceed 3.0x (if pari passu secured). Up to $65 million of the incremental term loans may be incurred with an earlier maturity date than the initial term loans. Subsidiaries must provide guarantees whether or not wholly-owned, eliminating the risk that guarantees will be released because they cease to be wholly-owned. There are no express “blocker” provisions which prohibit the transfer of specified assets to unrestricted subsidiaries; such transfers are permitted subject to carve-out capacity and other conditions. There are no express protective provisions prohibiting an up-tiering transaction. The above are proposed terms and the final terms of the credit agreement can be materially different.The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Vista, California, DEI Sales, Inc. through its subsidiary Sound United, LLC (Sound United) is a designer and manufacturer of home audio equipment under brands Denon, Polk Audio, Marantz, Definitive Technology, HEOS, Classe, Boston Acoustics, and Bowers & Wilkins. Pro forma for the B&W Acquisition annual revenue are approximately $800 million. The company has been majority-owned by affiliates of Charlesbank Capital Partners, LLC since 2011, with FS KKR Capital Corp holding a minority stake since 2020.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued [with/with no] amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Oliver Alcantara Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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