Moody's cuts American Safety Razor

Moody's Investors Service downgraded American Safety Razor Co. including cutting its $25 million senior secured revolving credit facility due January 2005, $23.5 million senior secured term loan A due January 2005 and $41.7 million senior secured term loan B due January 2005 to B2 from B1 and its $69.3 million 9 7/8% series B senior notes due August 2005 to B3 from B2. The outlook is stable.

Moody's said the downgrade reflects American Safety Razor's declining profitability as a result of increasingly challenging economic and competitive conditions and its limited financial flexibility due to covenant proximity and term debt amortization.

Moody's said American Safety Razor's reduced profitability and liquidity limit the company's ability to respond to the frequent competitive initiatives and retailer merchandising changes that characterize the industry.

Although American Safety Razor was able to show a sales increase of 9.6% in 2002, its margins deteriorated, especially in the international razors segment, Moody's noted. Overall, American Safety Razor's gross margin and EBITDA declined by about 150 and 300 basis points, respectively, from fiscal 2001 to 2002. Since fiscal 2000, EBITDA (adjusted for the sale of the cotton business) has declined by around $12 million, or 26%, to around $33 million.

S&P raises Petco outlook

Standard & Poor's raised its outlook on Petco Animal Supplies Inc. to positive from stable and confirmed its ratings including its senior secured bank loan rating at BB- and subordinated debt at B.

S&P said the revision reflects Petco's improving financial profile and S&P's expectation that the company's credit measures could strengthen further, supported by its successful operating strategy.

Petco's strategy of targeting customer convenience has proven successful, resulting in healthy same-store sales trends, S&P noted. Despite a challenging retail environment, Petco reported strong same-store sales increases of 6% in the fourth quarter of 2002 and 8% for the full year. Operating margins expanded to 18.7% in 2002 from 18.1% a year ago due to the leveraging of same-store sales increases and a shift to higher margin pet services and supply products.

By targeting convenience shoppers, Petco is able to charge higher prices and achieve higher margins on pet food and supplies than its key competitor PetsMart Inc.

Industry demographics are expected to remain favorable since the largest pet owning segment, families with children under 18 years old, should continue to increase. Although the industry has some resistance to economic slowdowns, customers could trade down to less expensive products and reduce discretionary purchases. As such, persistent soft economic conditions could exert pressure on sales growth during 2003.

Petco's consistent sales and earnings growth over the last two years has resulted in stronger credit protection measures, S&P said. EBITDA coverage of interest and total debt to EBITDA improved to 2.2x and 4.8x in 2002 from 1.8x and 5.5x, respectively in 2001. Despite an aggressive growth strategy, store expansion has been manageable and largely funded with internally generated cash flow. As a result, debt levels are not expected to increase materially.

Moody's rates Amphenol's loan Ba2

Moody's Investors Service rated Amphenol's $750 million senior secured credit facilities at Ba2. The facility consists of a $125 million revolver due 2008, a $125 million term loan A due 2008 and a $500 million term loan B due 2010. The ratings outlook was changed to stable from positive.

Proceeds from the term loans will be used to prepay the existing term loans and to repay the $144 million senior subordinated notes.

Upon closing ratings will be withdrawn on Amphenol's $150 million revolver due 2004, $180 million term loan A due 2004, $285 million term loan B due 2006 and $144 million 9 7/8% senior subordinated notes due 2007.

Security for the facility is capital stock of all existing domestic subsidiaries of the borrowers and 65% of the capital stock of its material direct foreign subsidiaries, as well as the negative pledge on all assets of the company and its restricted subsidiaries, subject to certain exceptions. Furthermore, if the company's credit rating is lowered to a Ba3 by Moody's or BB- by Standard & Poor's, the facility will be secured by a first priority lien on all tangible and intangible assets of the company.

Ratings are based on the company's significant free cash flow, stable business model, strong balance sheet, track record of deleveraging, good interest coverage, diverse customer base, broad product range, strong market position and international diversification strategy, Moody's said.

Ratings also reflect the company's leveraged position, substantial decline in revenues over the last three years and the high level of intangibles.

The change in the ratings outlook reflects the weak economy and expectations for continued pressure on the company's overall operating performance over the next twelve plus months, Moody's explained.

For 2002, EBITDA coverage of interest was about 4.6 times and total debt to EBITDA was about three times, Moody's said.

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