S&P rates Linens 'n Things notes B

Standard & Poor's said it assigned a B corporate credit rating to Linens 'n Things Inc. and a B rating with a recovery rating of 2 to the proposed $650 million senior secured floating-rate notes due 2014 to be co-issued by Linens and Linens 'n Things Center Inc.

The outlook is negative.

Proceeds of the notes, together with about $650 million in equity contribution, will be used to fund the acquisition of the company by an investor group led by Apollo Management LP, which agreed in November to acquire the company for about $1.3 billion.

S&P said the ratings reflect Linens' recent weak operating performance, low profitability and productivity relative to its key competitor and high pro forma debt leverage that will curtail cash flow coverage of interest. These risks are tempered by its good position in the growing specialty home furnishings segment and adequate liquidity.

The company will be highly leveraged following the acquisition, with pro forma lease-adjusted total debt to EBITDA reaching about 7.5x for the 12 months ended Oct. 1, the agency said. Although Linens has generated modest amounts of free cash flow in 2003 and 2004, free cash flow was negative in 2005 due to the decline in operating performance and significant capital spending to fund store growth.

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