Rating Action: Moody’s affirms SHO Holdings’ Caa2 CFR; PDR appended with limited default designation

New York, August 13, 2020 — Moody’s Investors Service today affirmed SHO Holding I Corporation’s (d.b.a. Shoes for Crews, “SFC”) corporate family rating (“CFR”) at Caa2, and assigned Caa1 ratings to its amended first lien senior secured credit facilities. The rating outlook remains stable. At the same time, Moody’s affirmed the company’s Caa2-PD/LD probability of default rating (“PDR”) and appended the rating with a “/LD” designation. Moody’s views the company’s recent amend and extend transaction as a distressed exchange under its definition of default, as the issuer did not meet its original cash debt service obligations as outlined in their original debt agreement resulting in an economic loss to lenders. The transaction is not a default under the company’s credit agreements. Moody’s will remove the /LD designation in three business days.

The affirmation reflects SFC’s improved liquidity position resulting from the transaction, whereby the company extend maturities of its first lien credit facilities to April 2024 and its unrated second lien credit facility to October 2024. While slightly increasing interest rates, the company is able to pay a portion of interest in-kind (“PIK”) for limited time periods, and amortization of its first lien principal was waived for the first two quarters, to be repaid at maturity. The company also eased covenant restrictions by replacing the springing first lien leverage test with new minimum liquidity test and a minimum EBITDA test that begins in the second quarter of 2021. Furthermore, the company’s shareholders contributed around $20 million of additional equity into the business, proceeds of which were used to repay a portion of outstanding borrowings under the company’s primary first lien revolver. As such, the company now has adequate liquidity to support the business over the next twelve months.

The affirmation also reflects, however, that while near term liquidity and financial leverage has improved due to the transaction, SFC still maintains an unsustainable capital structure with lease-adjusted debt/EBITDAR exceeding 10 times and pro form EBITA/Interest coverage of less than 1 time. Substantial earnings improvement and or debt reduction is needed to improve leverage to more sustainable levels. The global coronavirus (COVID-19) pandemic has had an unprecedented negative impact on SFC’s customer base, including temporary shut downs and reduced traffic at a majority of its restaurant, food service, cruise line, and other hospitality customers. While Moody’s expects a gradual sequantial improvement in operating performance beginning in the second half of 2020, significant risk and uncertainty remains with regards to the overall pace of recovery and ability to improve leverage to sustainable levels.

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 our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on SFC of the deterioration in credit quality it has triggered, given its exposure to widespread customer closures, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

…. Probability of Default Rating, Affirmed Caa2-PD/LD (/LD appended)

…. Corporate Family Rating, Affirmed Caa2

….Senior Secured Bank Credit Facility, Withdrawn , previously rated Caa1 (LGD3)

SFC’s Caa2 CFR reflects its high debt and leverage stemming from the 2015 acquisition of a controlling stake of the company by CCMP Capital Advisors, LLC (“CCMP”), the 2016 acquisitions of SureGrip Footwear and Mozo, and subsequent weak operating performance reflected in reduced profitability and weak free cash flow generation. While Moody’s expects sequential improvement in the second half of 2020, the impact of the coronavirus pandemic on Shoes for Crews’ customer base to will continue to pressure operating results for the remainder of the year before modestly recovering in 2021. The rating also reflects the company’s very small revenue scale versus other rated apparel companies, and its narrow product focus on slip resistant footwear for work environments, with a focus in the foodservice, retail supermarkets and industrial industries. Positive rating consideration is given to the recurring purchase of technical footwear caused by normal wear and tear and foodservice employee turnover, the company’s long-standing customer relationships with low concentration, and established payroll deduction programs within its customer base that creates a barrier to entry due to the embedded technology within customers’ human resource systems.

The stable outlook reflects Moody’s expectation for modest improvement in operating performance and credit metrics over the next twelve months, and that the company will maintain adequate liquidity.

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

Ratings could be downgraded if operating performance or liquidity deteriorates leading to an increased probability of default.

A ratings upgrade would require material improvement in financial leverage, through both profit growth and debt reduction, leading to a more sustainable capital structure. An upgrade would also require the company to maintain at least an adequate liquidity profile, with positive free cash flow generation and ample covenant cushion.

SHO Holding I Corporation, which does business as “Shoes for Crews,” designs, markets and manufactures slip resistant footwear and other safety products in the United States and certain European countries. Revenue for the twelve month period ended March 2020 approached $200 million. The company is headquartered in Boca Raton, Florida. The company has been majority owned by private equity firm CCMP Capital Advisors, LLC since 2015.

The principal methodology used in these ratings was Apparel Methodology published in October 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1182038. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this 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. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.

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Michael M. Zuccaro Vice President - Senior Analyst Corporate Finance Group 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 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 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

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