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Moody's downgrades MEGA
Moody's Investors Service said it downgraded MEGA Brands, Inc.'s corporate family rating to Ca from Caa2, probability-of-default rating to Caa3 from Caa2 and $96.9 million revolving credit facility due July 2010 to Caa3 (LGD4, 57%) from Caa1 (LGD3, 35%) as well as MEGA Brands Finco's $260 million seven-year term loan B facility to Caa3 (LGD4, 57%) from Caa1 (LGD3, 35%).
The speculative-grade liquidity rating remains SGL-4.
The outlook is negative.
The agency said the downgrade follows the posting of the company's fourth-quarter and full-year 2008 results and reflects the fact that MEGA's financial flexibility deteriorated further in the fourth quarter due to lower-than-expected sales, high costs and special items.
In addition, Moody's said the prospects for 2009 are grim - despite the likelihood of some expense savings following a plant closing and lower developmental expenses following last year's launch of MAGNEXT as well as lower input costs - given the recent downward trend in commodity prices.
The SGL-4 rating reflects weak liquidity, the agency said. Although the bank facility was amended to waive all covenants for the fourth and first quarters, the company will need to generate cumulative bank-defined EBITDA of $4 million by June 30, $24 million by Sept. 30 and $37 million for the full year to satisfy covenants remaining this year. Absent further waivers, Moody's believes a covenant default later in the year is quite likely.
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