S&P cuts Muzak

Standard & Poor's said it assigned its B+ rating to Muzak LLC's $35 million term B loan, an addition to its existing secured bank loan facility. At the same time, a recovery rating of 1 was assigned to the entire $95 million secured bank loan facility.

In addition, S&P said it lowered its rating on Muzak's $220 million senior unsecured notes due 2009 to CCC+ from B-, because recovery values for these lenders may be reduced by the increase in priority debt in the revised capital structure.

S&P affirmed all other ratings, including the B corporate credit rating on Muzak and its parent, Muzak Holdings LLC. The outlook is negative.

The term loan will be used to refinance about 60% of Muzak's $56 million in 13% senior discount notes. The refinancing of a portion of the senior notes with lower rate bank debt will reduce future interest expenses slightly, but it does not materially alter Muzak's credit profile.

S&P said the rating on Muzak continues to reflect its high financial risk due to a heavy reliance on debt and debt-like preferred stock to fund its growth. The rating also reflects the business risks associated with Muzak's lack of operating diversity. Also, despite the company's long operating history, the demand for its products is limited, a fact that is evidenced by its low target market penetration. The company is further hindered by the large upfront capital it requires to fund new customer accounts.

Partially offsetting these concerns are the company's leading market position, sizable recurring revenue base, solid margins, and customer diversity.

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