S&P rates Vertis notes B-

Standard & Poor's assigned a B- rating to Vertis Inc.'s proposed $250 million senior notes due 2009 and confirmed its existing ratings including its senior secured debt at B+ and senior unsecured debt at B-. The outlook is negative.

S&P said the ratings reflect Vertis' high debt levels and the competitive market conditions. These factors are offset by the company's leading market positions, long-standing customer relationships, and experienced management team.

For the first quarter of 2003, Vertis generated $371 million in revenues and $34 million in EBITDA, S&P noted. This represented 7.7% and 27.4% respective declines over the same period in 2002. EBITDA margins for the quarter were significantly lower than anticipated; at 9% versus 12% in the first quarter of 2002.

The drop in profitability was primarily attributable to increased pricing pressure as a result of the continued weak economic environment, higher maintenance costs, and a customer shift towards simpler products in direct mail.

At the end of March 31, 2003, Vertis had approximately $1.3 billion in debt (including the company's accounts receivable backed notes and mezzanine debt at the holding company level). The mezzanine debt at the holding company does not pay cash interest through 2005. As a result, the company's consolidated trailing 12-month operating lease-adjusted debt to EBITDA was in the low-6x area and EBITDA coverage of total interest was in the high-1x area, S&P said. Operating company total debt to EBITDA is below 6x and EBITDA coverage of cash interest is more than 2x.

The negative outlook reflects Vertis' weaker-than-anticipated operating performance and the continued soft advertising market, S&P added.

S&P raises General Binding outlook

Standard & Poor's raised its outlook on General Binding Corp. to stable from negative and confirmed its ratings including its subordinated debt at B-.

S&P said the outlook revision is based on General Binding's improved operating results and debt reduction.

S&P added that it expects that management will continue to improve profitability despite a flat market for office equipment and supplies, and that the company will maintain credit ratios appropriate for the rating.

With a focus on improving profitability by increasing high-margin product sales and reducing costs, General Binding increased EBITDA by 11% in 2002 over the previous year, despite flat sales, S&P noted. The company has improved profit margins across most of its business lines, with the exception of the Document Finishing Group, which represented 27% of 2002 revenues. As a result, the EBITDA margin, adjusted for nonrecurring charges and operating leases, rose to 12.1% for the 12 months ended March 31, 2003, from 9.6% in fiscal 2001.

Credit measures (adjusted for nonrecurring charges and operating leases) are in line with the rating. EBITDA coverage of interest expense was 2.0x for the 12 months ended March 31, 2003, the same as the previous year, S&P said. Profitability improvements were offset by higher interest expense. While the company continues to reduce debt, it remains highly leveraged, with total debt to EBITDA of 4.5x at March 31, 2003, versus 6.1x in 2001.

Moody's rates Smithfield notes Ba2

Moody's Investors Service assigned a Ba2 rating to Smithfield Foods Inc.'s planned $250 million senior unsecured notes and confirmed its existing ratings including its $300 million 8% senior unsecured notes due 2009 at Ba2 and $200 million 7.625% senior subordinated notes due 2008 at Ba3. The outlook remains negative.

Moody's said the continuing negative outlook reflects financial leverage at a level that is quite high for the rating; uncertainty about the pace, extent and sustainability of a cyclical recovery in hog markets; and Smithfield's consequent ability over the near term to restore financial measurements to more appropriate levels for the rating.

Smithfield's ratings could become pressured if a hog market recovery fails to sustain itself in the near term or the glut of fresh meat continues to constrain packing margins even as hog and cattle input prices cyclically increase, Moody's said.

The outlook also incorporates potential acquisition event risk relating to Smithfield's interest in acquiring Farmland's pork business (no agreement currently is in place). Ratings would be pressured if the acquisition were largely debt funded or overly dependent on realizing synergies or selling assets to produce deleveraging cash flows.

Smithfield's ratings are limited by the company's high operating leverage (low margins, high fixed costs, and asset intensity), exposure to volatile commodity input and output prices, rapid growth, and acquisition event risk.

The current hog and protein market environment is challenging, and the pace of recovery is uncertain, Moody's commented. The industry's hog breeding herd has started to reduce, which eventually should provide a cyclical uplift to hog prices.

The recovery has been slower than anticipated, however, and cyclical recovery in Smithfield's hog production profitability may be muted by a continued supply overhang in fresh meat (beef, pork and poultry), which has been pressuring processing margins.

Longer term, consolidation of the retail grocery sector and growth of Wal-Mart and club stores may limit fresh meat pricing flexibility (and the ability to quickly pass through cost increases) to a greater extent than in the past, Moody's said. Additionally, changes in export markets, such as reduced access to Russia for poultry exports and increased competition in export markets from Brazil, may continue to pressure meat pricing and processing margins.

Moody's raises Terra outlook, rates notes Caa1

Moody's Investors Service assigned a Caa1 rating to Terra Capital, Inc.'s new $200 million guaranteed second priority senior secured notes due 2010 and confirmed its $200 million of guaranteed senior secured notes due 2008 at B3 and $175 million guaranteed senior secured revolving credit facility due 2005 at B1. Moody's raised the outlook to stable from negative.

The stable outlook reflects Moody's expectation that Terra will sustain the current volume of business due to improved crop prices and limited near-term competition from imports, and that higher prices will somewhat offset the impact of higher natural gas prices.

Moody's said the ratings reflect Terra's high leverage, continued net losses, weak coverage of interest expense, negative retained earnings, the sensitivity of its cash flows to fluctuations in natural gas prices and agricultural market risks including the impact of seasonality, government subsidies, weather, farm income, and corn and wheat production on sales.

The ratings also reflect the high cost position of North American nitrogen producers relative to global producers with access to lower cost sources of natural gas. The ratings, however, also take into account the company's various leading domestic shares within its nitrogen products and methanol segments, the diversity of its customer base, the strategic locations of its domestic plants, favorable near-term pricing fundamentals and its adequate liquidity, Moody's said.

The new senior notes will be secured by second priority liens on the company's domestic cash, account receivables and inventories (the revolving credit facility has first priority liens on these assets). The

Caa1 rating of the notes reflects Moody's belief that in a distressed scenario, the amount of collateral may not be sufficient to fully support the debt.

S&P rates Apogent notes BB+

Standard & Poor's assigned a BB+ rating to Apogent Technologies Inc.'s $250 million of senior subordinated notes due 2013 and confirmed its existing ratings including its senior debt at BBB-. The outlook is stable.

S&P said Apogent's competition is strong, and the company bears some technology risk. Moreover, although research funding is expected to accelerate, growth could be inconsistent, reflecting continued pharmaceutical industry consolidation and budgetary-constrained, government-funded health-care and research spending in the near term.

Nevertheless, S&P said it expects credit measures consistent with the rating: Funds from operations to lease-adjusted debt is expected to average about 20%, and EBIT coverage of interest is expected to average at least 4x. Total debt to capital is projected to be in the 50%-60% range on an ongoing basis.

Apogent recently announced that it will buy back approximately 15% of outstanding common shares in a Dutch auction, financing the purchases with debt. S&P said it estimates that the transactions will raise lease-adjusted total debt to capital to about 60% from 44%. Acquisitions, which have played a major role in providing the company with an expanded product portfolio, now are expected to diminish as a growth strategy for the company.

S&P puts Dole on positive watch, rates notes BB-

Standard & Poor's assigned a BB- rating to Dole Food Co. Inc.'s planned $400 million senior unsecured notes due 2010 and put its existing ratings on CreditWatch positive including its $400 million 7.25% notes due 2009, $475 million 8.875% senior unsecured notes due 2011 and $175 million 7.875% debentures due 2013 at B+ and $300 million 7% senior notes due 2003 at BBB-.

S&P said the CreditWatch placement reflects the expected improvement in residual coverage afforded the senior unsecured notes following the repayment of $400 million toward the senior secured credit facility. Upon completion of the transaction, S&P will raise the rating on the senior unsecured notes to BB-.

The ratings on Dole are supported by its leadership in the production, marketing, and distribution of fresh fruit and vegetables, S&P said. These factors are partially offset by the significant increase in financial risk related to the leveraged buyout and the high level of risk associated with the global fresh produce industry.

Furthermore, operating performance can be affected by uncontrollable factors such as global supply, political risk, currency swings, weather, and disease. These industry risks are somewhat mitigated by the company's geographic and product diversity in the fresh produce industry.

Dole's operating margins, which are forecasted to be in the mid-9% range for fiscal 2003, are typically somewhat more stable than those of most other fresh produce firms, due to the company's product and geographic diversity and higher percentage of value-added products, S&P said. However, margin pressure will be seen in 2003 due to incrementally higher commodity costs of fruit and fuel.

Dole's credit measures are weak for the rating following the leveraged buyout, S&P added. Pro forma total debt to operating EBITDA will be at the high end of the 4.0x range for fiscal 2003 and gradually improve as partial proceeds from divestitures and land sales, along with operating cash flow, are used to repay debt. Pro forma operating EBITDA coverage for fiscal 2003 will be in the low 2.0x range.

Moody's cuts Vertis, rates notes B3

Moody's Investors Service assigned a B3 rating to Vertis, Inc.'s proposed $250 million senior notes due 2009, changed the outlook to stable from negative and lowered the company's other ratings including its $348 million 10.875% senior notes due 2009 to B3 from B2 and $250 million senior secured revolving credit facility, $108 million senior secured term loan A and $184 million senior secured term loan B to B2 from B1.

Moody's said the ratings reflect Vertis's high leverage, competitive pressure, relatively narrow margins, and the dependency of its business upon customer insert and direct mail spending which has experienced a protracted slowdown since 2001.

The ratings are supported by Vertis's scale, its ability to maintain and grow EBITDA during 2002 (largely through cost-cutting measures), its solid market position in the newspaper insert and direct mail businesses and the strength of its well-established customer relationships.

Vertis's total debt (including securitization and parent mezzanine debt) to EBITDA of approximately 6.7 times at the end of March 2003 represented a deterioration from the end of the prior quarter and prompted management to question ongoing covenant compliance should fragile economic conditions continue, Moody's said. Excluding parent "mezzanine" debt, leverage stood at 6.0 times EBITDA at the end of the first quarter of 2003.

The stable rating outlook reflects the alleviation of near-term liquidity and debt repayment pressure following the proposed note issue and bank covenant amendments, Moody's said. The rating outlook also incorporates an expectation that financial performance will remain challenged through 2003.

S&P puts Rent-Way on positive watch, rates loan BB-, notes B-

Standard & Poor's put Rent-Way Inc. on CreditWatch positive including its $435 million senior secured credit facility at CCC.

S&P said the CreditWatch placement is based on the company's announcement that it plans to offer $215 million of senior secured notes together with a proposed new revolving bank credit facility.

The proceeds will be used to refinance the company's existing bank loan that matures in December 2003, eliminating a significant near-term concern. Moreover, Rent-Way's settlement of its accounting lawsuit is subject to the bank loan refinancing by July 31.

Upon completion of the deal, S&P will raise the corporate credit rating to B+ from CCC. In addition, Rent-Way Inc.'s proposed $60 million secured bank loan will be assigned a BB- rating, and its proposed $215 million senior secured notes will be assigned a B- rating. The outlook will be stable.

The ratings reflect the company's participation in the highly competitive and fragmented rent-to-own retail industry, the negative impact of accounting irregularities on the company over the past several years, and a highly leveraged capital structure, S&P said. These risks are somewhat offset by the company's established position in its sector and operational restructuring that has recently improved operating performance and strengthened financial controls.

Rent-Way's ability to compete effectively over the past several years has been negatively affected by accounting irregularities and the significant amount of time, financial and managerial resources expended to address them, S&P said. However, over time, management has implemented a restructuring plan that has improved operating performance and strengthened financial controls, paving the way for continued improvement. Initiatives included the elimination of excessive, poor condition, and lower priced merchandise, rationalization of rental rates, closure of underperforming stores, and the introduction of higher-end, higher-margin merchandise.

Pro forma for the refinancing transaction, the company is highly leveraged with total debt to EBITDA of about 4.5x, while cash flow protection measures are weak with EBITDA coverage of interest of about 2.0x and FFO to total debt of 13%, S&P said. Credit protection measures could improve over the next several years as the company is required to use excess free cash flow to repay debt.

S&P rates Terra notes B

Standard & Poor's assigned a B rating to Terra Industries Inc.'s proposed $200 million senior secured notes due 2010 and confirmed its existing ratings including its senior secured debt at BB- and senior unsecured debt at B. The outlook is negative.

S&P said Terra's ratings reflect the company's fair business position as a leading North American producer of nitrogen fertilizer, offset by high financial risk. The proposed refinancing will improve the company's debt-maturity schedule and liquidity position.

Good market shares are offset by cyclicality in Terra's highly competitive commodity businesses and a relatively narrow scope of operations, S&P said. In addition, these businesses are sensitive to volatility in raw material costs, primarily natural gas.

In particular, the nitrogen fertilizer sector has below-average business characteristics, including low barriers to competitive entry, profitability that is highly dependent on fluctuating natural gas costs, and inconsistent product demand due to changing planting patterns. Still, a growing population, higher incomes, and improved diets support long-term prospects, S&P said.

Profitability and cash flows have been constrained by overcapacity in global nitrogen markets, higher natural gas and feedstock costs, and difficult planting seasons.

Debt levels are high because of acquisitions and an aggressive capital spending program. Operating margins were 11% in 2002, compared with 17% in 2000 (financial results benefited from favorable natural gas forward-pricing contracts). Funds from operations to total debt is almost 12%, below the 15% to 20% range considered appropriate for the ratings. The high debt levels continue to strain financial flexibility, and the significant upswing in pricing and profitability needed to provide meaningful and sustainable improvements in cash flows is not expected to occur in the near term. The ratings incorporate expectations that a gradual recovery in business conditions should result in cash flow generation that is in excess of internal needs, leading to debt reduction and a strengthening of credit protection measures. Operating margins should average at least 15% during the cycle. EBITDA interest coverage should average 2.0x to 2.5x. Capital spending in 2003 is expected to remain constrained, S&P said.

Moody's rates Rent-Way notes B3

Moody's Investors Service assigned a B3 rating to Rent-Way, Inc.'s planned senior secured second lien bonds due 2010. The outlook is stable.

Moody's said the ratings reflect Rent-Way's very high leverage and modest free cash flow relative to total debt and the company's limited track record under its current size and operating structure.

While profitability improved in the fiscal year ended September 2002, and operating margins showed further year-to-year improvement for the first quarter of fiscal 2003, Rent-Way's profitability and cash flow will need to show and sustain still stronger improvements in order to comfortably cover fixed charges and reduce leverage, Moody's said.

In addition, the company's limited time since restructuring its operations and reducing its store count creates uncertainty about the amount of ongoing inventory and capital reinvestment needed to compete effectively and generate anticipated levels of revenue and profitability.

The ratings also assume that remaining legal actions, which follow the discovery of accounting fraud in late 2000, will be substantially settled at a cash cost to the company of no more than $10 million.

In addition to reducing leverage significantly, the recent sale of 295 stores could lead to improvements in overall productivity, Moody's said. There has already been an increase in productivity measures for remaining stores over the past year, indicating better traffic and better penetration of the customer base. Also supporting the ratings are the benefits of ongoing changes to store systems and financial reporting systems, and Rent-Way's position as the second or third largest company in a highly fragmented retail segment with only a few sizable competitors.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.