Fitch Initiates 'CCC' IDR for Spectrum Brands; Outlook Stable.

NEW YORK -- Fitch Ratings has initiated rating coverage of Spectrum Brands, Inc. (SPC) as follows:

-- Issuer Default Rating (IDR) 'CCC';

-- Senior secured bank facility 'B/RR1';

-- Senior subordinated debentures 'CCC-/RR5'.

The Rating Outlook is Stable. Approximately $2.3 billion of debt is covered by these actions.

The rating reflects SPC's high leverage with FFO adjusted leverage of 8.06 times (x) as well as debt/EBITDA of 7.68x for the last 12 months (LTM) ending July 2, 2006. Much of SPC's $2.3 billion in total debt was the result of seven acquisitions completed since the fiscal year ended (FYE) Sept. 30, 2003, with the bulk occurring in 2005. The acquisitions served to lessen the company's reliance on essentially one product - the Rayovac battery. However, poor performance in batteries combined with high levels of acquisition-related debt has hampered free cash flow which declined from $163.5 million at the FYE Sept. 30, 2005 to $22 million at the LTM ending July 2, 2006. There has also been a declining trend in interest coverages since the 2005 acquisitions. EBITDA/interest has fallen steadily from 3.09x at FYE03 to 1.75x at LTM July 2, 2006. The company's high leverage provided little flexibility for a myriad of issues over the past two years: competitive actions in grooming, a structural change in the European battery market, retailer inventory adjustments in batteries and lawn & garden during 2005 and 2006 in North America and escalating commodity costs which served to more than offset restructuring savings and price increases.

SPC is a leading provider of private label batteries in its Europe/Rest of World (ROW) segment. Batteries represent 70% of this segment and about half is private label. Private label is growing rapidly, however margins are significantly less robust than SPC's branded batteries and continues to be under pressure. The Europe/ROW segment represented 29% of revenues and 30% of operating income (before corporate overhead and restructuring and related charges) for the nine months ending July 3, 2005 with a nine month operating margin of 14.6%. For the comparable period in 2006, revenues have declined 17% with operating profits down 43%. Part of the revenue decline was the company walking away from $30 million in low-margined revenues. SPC intends to remain a private-label participant. Given that the pressure is expected to continue while the company works on lowering its operating costs, profits from this key region is expected to be a drag on the consolidated performance in the near term. Additionally, while the company has hedged it zinc exposure through the first half of FYE07, the reset in light of expected tightness in the zinc market and other energy related costs will contribute to margin pressure as well. The current trajectory in the near term appears negative without actions to provide additional financial flexibility.

SPC's management has historically been able to achieve cost savings ahead of schedule. The company is in the process of three separate actions -acquisition integration, flattening the North American organization, and reorganizing its European operation. These are expected to lead to cost savings of $150 million by 2008. The company reports that it is on track with all initiatives. The ability to execute on cost savings and the company's leading brands are also encompassed in the ratings. The company has had to amend their financial covenants twice in the past year to address declining operations. Thus, a concern is that continued declines in Europe which will take several quarters to address, potential competitive actions by participants who have substantially more resources, as well as increased commodity costs still exist and could continue to pressure margins and complying with covenants. SPC reports that it should comply with its covenants into the foreseeable future but the ratios appear to be relatively tight. SPC's ability to continue working well with its bank group is necessary.

The Rating Outlook is Stable as the company has announced their discomfort with the present levels of leverage given underperformance against forecast and has hired Goldman Sachs to evaluate potential asset sales. The company's intent is to review its line of business with a plan to begin executing asset sales by next spring. Lines of businesses to be sold, cash flow lost and amount of debt reduction is unknown at present. The goal to de-leverage is viewed positively in light of recent performance trends. Incorporated into the Stable Outlook is the expectation that the company will be able to receive waivers, if needed, from its debt-holders.

The Recovery Ratings and notching in the debt structure reflect Fitch's recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. The recovery ratings for the bank facility ('RR1', reflecting 91%-100% recovery) benefit from a substantial enterprise value which more than covers maximum outstanding. There is also covenants and conditions precedent to each loan which provides protection and precludes sizeable amounts of debt without sizeable increases in cash flow. The senior subordinated debentures ('RR5', reflecting expected recovery of 10%-30%) reflect the expectation of below average recovery prospects in a distressed case.

Virtually all of SPC's revenue growth from $573 million in FYE02 to the $2.359 billion in FYE05 was derived from acquisitions. Revenues in the nine months ending July 2, 2006 also increased 13% to $1.943 billion benefiting from late FYE05 acquisitions. It is to be noted however that if sales were adjusted to assume that all acquisitions during 2005 were treated as if they had been completed on the first day of fiscal 2005 (pro forma), net sales for the nine months would have declined 6%. On an as reported basis, FYE05's gross margin declined 480bps to 37.9% due to mix (320bps) and purchase accounting inventory value charges (160bps) which increased costs of goods sold. A normalized EBITDA margin with the 160bps added back would be 14%. However, poor performance in batteries and escalating commodity costs during the nine months ending July 2, 2006 reduced the EBITDA margin to 11.5% -250bps below prior year. Thus while leverage (debt/EBITDA) is down slightly to 7.7x from 7.9x at the end of the fiscal year, LTM July 2, 2006 EBITDA/interest has continued to weaken as the current fiscal year bears the full brunt of the debt and interest rate increases as the financial covenants were amended in December and May.

SPC is a global branded consumer products company with operations in seven product categories: consumer batteries; lawn and garden; pet supplies; electric shaving and grooming; household insect control; electric personal care products, and portable lighting. Today, batteries represent just 33% of global revenues from 90% in 2002 (41% derived internationally).

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The ratings above have been initiated by Fitch as a service to investors. The issuer did not participate in the rating process other than through the medium of its public disclosure.