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JO-ANN STORES: Moody’s Cuts CFR to Caa1 & Alters Outlook to Stable

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Moody’s Investors Service downgraded Jo-Ann Stores LLC.’s corporate family rating to Caa1 from B3, its probability of default rating to Caa1-PD/LD, its first lien term loan to Caa1 and second lien term loan to Ca. The outlook was changed to stable from negative.

The downgrades reflect Jo-Ann’s series of open market debt repurchases at a material discount to par which Moody’s has deemed to be a distressed exchange and event of default under Moody’s definition of default. Moody’s appended the company’s probability of default rating with an LD designation which will be removed within 3 business days of the closing of all trades (expected over the next few weeks).

The aggregate reduction in the face amount of debt is about $218 million. Moody’s estimates pro-forma debt/EBITDA will drop to 6.1x from nearly 7.0x. Jo-ann has adequate liquidity evidenced by cash balances at the end of Q1 of $147 million and revolver availability of $83 million.

Downgrades:

Issuer: Jo-Ann Stores LLC.

Probability of Default Rating, Downgraded to Caa1-PD /LD from B3-PD (/LD appended)

Corporate Family Rating, Downgraded to Caa1 from B3

Senior Secured 1st Lien Term Loan, Downgraded to Caa1 (LGD3) from B3 (LGD3)

Senior Secured 2nd Lien Term Loan, Downgraded to Ca (LGD6) from Caa1 (LGD5)

Outlook Actions:

Issuer: Jo-Ann Stores LLC.

Outlook, Changed to Stable from Negative

RATINGS RATIONALE

Jo-Ann Stores LLC. (Caa1 stable) is constrained by challenges caused by the outbreak of COVID-19, the company’s small size and leverage profile, weak operating results in FY20 going into the pandemic due to stagnant demand, and margin pressure. Governance risk is a key rating constraint given the company’s financial sponsor ownership can lead to aggressive financial strategies. Jo-Ann is supported by the re-opening of the vast majority of it stores by early June, rising demand for personal protective equipment that is expected to continue, and to improving demand for do-it-yourself arts and crafts and higher margins relative to other retail segments and adequate liquidity. The company received essential service status and so the vast majority of its stores have been either fully open and or providing curbside and buy-online-pick-up-in-store services which has helped the company partially mitigate the impact of the pandemic.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody’s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The pandemic exacerbated the pressure on the company’s debt trading prices leading to the company’s decision to repurchase its debt at a substantial discount which is reflected in its action.

The stable outlook reflects that Jo-Ann can manage through the COVID-19 challenges given the demand for its products and adequate liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be downgraded if liquidity deteriorates or should the probability of default increase including should the company pursue further transactions Moody’s would deem to be a distressed exchange.

Rating could be upgraded once the impact of COVID-19 subsides, if EBIT/interest can sustain above 1.25x, and when the probability of transactions Moody’s would deem to be a distressed decline.

Through its operating subsidiaries, Jo-Ann Stores Holdings Inc. is a leading retailer of fabrics and craft supplies offering a wide range of products for quilting, apparel, craft and home décor sewing. Jo-Ann operates 867 retail stores in 49 states as of November 2, 2019. Annual revenues are approximately $2.3 billion. The company is majority owned by affiliates of Leonard Green & Partners L.P.

The principal methodology used in these ratings was Retail Industry published in May 2018.

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