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S&P downgrades DirectBuy

 16 September 2011      

MERRILLVILLE, Indiana (15 September 2011) - Standard and Poor's Ratings Services has lowered its corporate credit rating for DirectBuy Holdings Inc. from ‘B' to ‘CCC' and revised its outlook to ‘negative' because of declining membership and outstanding legal issues.

The agency said it not only lowered its rating on DirectBuy's US$335 million in senior secured notes to ‘CCC-' but revised its recovering rating from ‘3' to ‘5' meaning S&P expects modest recovery for lenders in the event of default.

Founded as United Consumer Club in 1971, DirectBuy is a consumer club offering a wide variety of big ticket items - everything from furniture, mattresses and major appliances to flooring, kitchen cabinetry and plumbing fixtures, among others. On its web site, DirectBuy claims to have some 400,000 members in Canada and the United States and offers some one million different products with no retail mark-up.

The company has approximately 15 outlets in Canada - eight of which are in Ontario with the balance being in British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick. All are believe to be franchise stores.

DirectBuy's business model charges consumers a membership fee for access to its product offering. The fees are reportedly in the $3,000 to $4,000 range for two- to three-year terms.

"The rating actions follow the persistent decline in theDirectBuy's membership base, and our expectation that this trend will continue because of the continued weak U.S. economy and the company's legal issues over its sales practices,"  Standard & Poor's credit analyst Andy Sookram explained in a statement. "As a result, we see its operating performance and financial flexibility weakening from current levels."

S&P also noted DirectBuy is facing several lawsuits in the U.S. They allege the company misrepresented the actual costs of product marketed to members. In fact, a Connecticut court has rejected the company's proposed settlement in one of these suits.

"We believe economic conditions in the U.S. and pending litigation issues will hurt the company's performance," Sookram said. "As a result, we project the decline in total membership to remain in the high-single-digit area for fiscal 2012. This would lead to contraction in EBITDA margin to about 40.5% over the next 12 months compared with our estimated level of 42% for fiscal 2011."

DirectBuy is owned by private equity firm Trivest Partners, which acquired it in December 2007.


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