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  Title	Moody's Ratings upgrades pH Beauty's CFR to B3; outlook is stable
  ID	6036718
  External ID	7480927364
  Author	Unknown
  Published Date	Jan. 20, 2025, 7:19 a.m.
  Summary	New York, January 17, 2025 -- Moody's Ratings (Moody's) upgraded pH Beauty Holdings III, Inc.'s (pH Beauty) Corporate Family Rating (CFR) to B3 from Caa1, and its Probability of Default Rating to B3-P
  Tags	None
  URL	https://ratings.moodys.com/ratings-news/435777
  Sentiment	Negative: 0.07892    Neutral: 0.14669    Positive: 0.77439
  Relevance	0.03361

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  Content ID	3694589
  Key	4a1eece0-6723-4a45-a82b-a76be7b8d52f
  Content	New York, January 17, 2025 -- Moody's Ratings (Moody's) upgraded pH Beauty Holdings III, Inc.'s (pH Beauty) Corporate Family Rating (CFR) to B3 from Caa1, and its Probability of Default Rating to B3-PD from Caa1-PD. At the same time, we assigned the B3 ratings to the company's backed senior secured first lien bank credit facilities due 2027. The first lien senior secured facilities consist of a $15 million revolving credit facility expires in June 2027 and an approximately $425 million first lien term loan (upsized from $272 million remaining balance) due in September 2027. The proceeds from the upsized first lien senior secured term loan will be used to repay all the remaining second lien term loan, pay a $96 million dividend, and the related fees and expenses. The ratings on the existing senior secured term loans and revolving credit facility are unchanged and will be withdrawn at transaction close. The rating outlook is changed to stable from positive. The CFR upgrade reflects that the maturity extension materially reduces the company's default risk in the next 2 years. The B3 CFR also reflects pH Beauty's improved operating performance supported by the strong growth of its skincare brand Byoma, a better cost structure as a result of the company's cost saving initiatives, and adequate liquidity including positive free cash flow and no near term refinancing risks. These positives are offset by the company's aggressive financial strategy which included a $96 million dividend payout in fiscal 2025. It also reflects our expectation that Moody's debt-to-EBITDA leverage will fall below 5x in the next 12 months. Nevertheless, strategic uncertainties remain as the company continues to explore brand divestitures. While debt repayment with cash proceeds from a successful sale would likely be credit positive, the final amount and use of proceeds would need to be considered. Moreover, if any debt remains outstanding after such a sale, we would then need to evaluate the remaining business including its smaller scale, more limited brand diversity, its capital structure, growth prospects and cash generation potential. In addition, the majority of its suppliers are outside North America and a significant portion is sourced from China. Although the company is actively diversifying its venders, any tariff can potentially have significant impact on the company's cost structure. The B3 ratings on the new first lien senior secured bank credit facility, in line with the B3 CFR, reflects the elimination of the loss absorption cushion provided by the refinanced second lien term loan as well as the upsize of the first lien term loan. The first lien senior secured bank credit facility will represent the preponderance of debt in the capital structure. RATINGS RATIONALE The B3 CFR reflects pH Beauty's small scale, moderately high leverage, and modestly positive FCF generation. Although we anticipate the majority of the proceeds from any brand divestitures will be used to repay debt, strategic uncertainty remains about the asset makeup following any potentially brand divestitures. Moreover, the company sources most of its products outside North America. Although the company is actively diversifying its suppliers, any material changes in tariff could potentially hurt the company's cost structure. We view financial policies as aggressive under private equity control and we believe event risks related to shareholder distributions persist following the proposed debt-funded dividend. pH Beauty expanded to skincare and introduced Byoma brand in 2022. Since then, the company has enjoyed double-digit sales growth in this brand, mainly through new product introduction and expansion of distribution. We view the company's other businesses as more discretionary and less attractive than skin care. Consumers are more likely to cut spending on beauty tools/accessories such as makeup brushes, and on sunless tanning products and bath accessories in an economic downturn. Moreover, the cosmetic accessories and facial skin care industries are highly competitive with many branded product companies that are significantly larger, more diverse, financially stronger, and which have much greater investment capacity. pH Beauty's rating is supported by the company's strong brand name recognition in niche markets, solid demand in beauty and cosmetics, and the company's category expansion to skincare. As of September 30, 2024, debt-to-EBITDA was 5.4x pro forma for the proposed transaction. Assuming no changes in the business mix, we expect pH Beauty's debt-to-EBITDA to decline to a low 4.0x in the next 12-18 months as the company continues to introduce new products, expand its distribution channels, and grow its international business. A comprehensive review of all credit ratings for the respective issuer(s) has been conducted during a rating committee. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS The stable outlook reflects our view that pH Beauty will continue to maintain its credit metrics over the next 12-18 months assuming no change in business mix and the potential tariff is manageable. The stable outlook also assumes that the company will maintain at least adequate liquidity include positive free cash flow. The ratings could be downgraded if pH Beauty experiences customer or competitor actions that pressure revenues and earnings, significant cost impact from any potential tariff or if it fails to generate positive free cash flow. Acquisitions, shareholder distributions, earnings weakness or other actions that materially increases the company's leverage, or a deterioration in liquidity could also result in a downgrade. An upgrade could be considered if pH Beauty demonstrates a track record of profitable growth, reduces Moody's adjusted debt-to-EBITDA to below 4.5x, and maintains good liquidity including FCF/debt sustained above 5%. The principal methodology used in these ratings was Consumer Packaged Goods published in June 2022 and available at https://ratings.moodys.com/rmc-documents/389866 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology. pH Beauty is a designer of cosmetic accessories, bath accessories, sunless tanning and facial skin care products. Key brands include Real Techniques, EcoTools, Freeman, Tan-luxe, Isle of Paradise, Tanologist, and BYOMA. Yellow Wood Partners acquired the company in 2017 and the company acquired Paris Presents in 2018. pH Beauty generated $370 million in revenue for the 12 months ending September 30, 2024.. REGULATORY DISCLOSURES For 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 on https://ratings.moodys.com/rating-definitions For any affected securities or rated entities receiving direct credit support/credit substitution from another entity or entities subject to a credit rating action (the supporting entity), and whose ratings may change as a result of a credit rating action as to the supporting entity, the associated regulatory disclosures will relate to the supporting entity. Exceptions to this approach may be applicable in certain jurisdictions. For ratings issued on a program, series, category/class of debt or security, certain regulatory disclosures applicable to each rating of a subsequently issued bond or note of the same series, category/class of debt, or security, or pursuant to a program for which the ratings are derived exclusively from existing ratings, in accordance with Moody's rating practices, can be found in the most recent Credit Rating Announcement related to the same class of Credit Rating. For provisional ratings, the Credit Rating Announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. Moody's does not always publish a separate Credit Rating Announcement for each Credit Rating assigned in the Anticipated Ratings Process or Subsequent Ratings Process. These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. The Global Scale Credit Rating(s) discussed in this Credit Rating Announcement was(were) issued by one of Moody's affiliates outside the EU and UK and is(are) endorsed for use in the EU and UK in accordance with the EU and UK CRA Regulation. Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Dawei Ma Asst Vice President - Analyst John E. Puchalla, CFA Associate Managing Director Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2025 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY'S”). All rights reserved. MOODY'S CREDIT RATINGS ASSESSMENTS, OTHER OPINIONS, AND MATERIALS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR MATERIALS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. 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