S&P downgrades MEGA Brands

Standard & Poor's said it lowered its ratings on MEGA Brands Inc. and its subsidiaries, including the long-term corporate credit rating by two notches to CC from CCC.

The outlook is negative.

At the same time, S&P lowered the issue-level rating on the company's senior secured debt three notches to C from CCC and revised the recovery rating on the bank loan to 5 from 4. The 5 recovery rating indicates an expectation of modest (10%-30%) recovery in the event of a payment default, in contrast to a 4 recovery rating, which indicates S&P's expectation of average (30%-50%) recovery.

"The downgrade and revision to the recovery rating reflect our view that MEGA Brands' very weak liquidity position and operating performance, as well as high debt leverage, have resulted in a higher risk of default," said S&P credit analyst Lori Harris in a news release. "The company's operating cash flow remains constrained by what we consider its heavy debt burden and poor operating results."

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