Moody's downgrades GNC

Moody's Investors Service said it downgraded General Nutrition Centers, Inc.'s senior secured credit facilities to B1 (LGD3, 46%) from Ba3 (LGD3, 42%) and affirmed its corporate family rating at B1, probability of default rating at B1-PD and speculative grade liquidity rating at SGL-1. The outlook remains stable.

The downgrade follows GNC's announcement that it increased its term loan by $250 million. Moody's expects the proceeds to be ultimately used to fund share repurchases and estimates that the ratio of debt to EBITDA will increase to 4.2 times from 3.9 times for the lagging 12 months ended Sept. 30.

The agency said the downgrade reflects that the proposed $250 million term loan add-on results in a higher proportion of secured debt in the capital structure relative to the unsecured trade and lease rejection claims. The affirmation of the remaining ratings acknowledges that GNC's credit metrics will remain in line with its B1 corporate family rating despite the increase in debt levels.

GNC's B1 corporate family rating continues to be supported by the company's well-known brand name in its target markets along with Moody's favorable view of the vitamin, mineral and nutritional supplement category.

Moody's said key credit concerns include GNC's sizable concentration in sports nutrition, which is a much more limited product segment than the vitamin, mineral and nutritional supplement category, and the potential risk arising from adverse publicity and product liability claims with regard to certain products sold by GNC, particularly diet products and herbs.

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