Moody's rates Mega Bloks loan Ba3

Moody's Investors Service said it assigned first-time ratings to Mega Bloks Inc. in response to the company's announcement that it has purchased Rose Art Industries Inc. and its subsidiaries for about $350 million, including $35 million of assumed Rose Art debt.

More specifically, Moody's assigned a Ba3 rating to the $60 million five-year revolver of Mega Bloks Inc., the $40 million five-year revolver of Mega Bloks US, the $40 million five-year term loan A facility of Mega Bloks Inc. and the $260 million seven-year term loan B facility of Mega Bloks Finco.

Concurrently, Moody's assigned a speculative grade liquidity rating of SGL-3 to reflect the expectation of adequate near-term liquidity for the combined company.

The outlook is stable.

The transaction will be financed with proceeds from a $400 million revolving credit and term loan facility, $20 million of Mega Bloks common shares sold to Rose Art principals, and $55 million of privately placed subscription receipts that have been exchanged for Mega Bloks common equity at the end of July.

Moody's said the ratings are constrained by the significant customer concentration and seasonality of revenue, earnings and cash flow, despite the addition of Rose Art's new distribution channels and less seasonal revenue. The ratings are also constrained by the limited size of the combined company.

The ratings acknowledge the benefits of the Rose Art acquisition, which will enhance the combined company's leading positions in the construction toy and arts & crafts product segments. The rating agency also noted that Mega Bloks' international business has demonstrated strong growth over the last several years, which should continue in the near-to-intermediate term as the company enters new, sizable markets such as in Germany and Asia, the agency said.

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