S&P cuts Delco Remy, rates loan B+

Standard & Poor's downgraded Delco Remy International, Inc. and assigned a B+ rating to its new $250 million revolving credit facility due 2006. Ratings lowered include Delco Remy's $140 million 10.625% senior subordinated notes due 2006 and $165 million 11% senior subordinated notes due 2009, both cut to CCC+ from B, and its $145 million 8.625% senior notes due 2007, cut to B- from B+. The outlook is negative.

S&P said it cut Delco Remy because of the company's weaker-than-expected financial performance, which has resulted in a deterioration of credit protection measures. S&P expects financial performance will remain weak over the near term.

Key credit measures are weak with total debt to EBITDA of around 6.4 times and EBITDA interest coverage of about 1.4x as of March 31, 2002, S&P noted.

S&P said it had expected total debt to EBITDA of between 3x-4x and EBITDA interest coverage of between 2x-3x.

Flexibility is limited, though somewhat improved as the company recently installed a new bank credit facility, which provides the company with some additional liquidity, S&P said. The company is expected to have around $60 million in availability under its new credit facility.

Market conditions are expected to remain challenging and could offset some of the benefits. In the intermediate term, credit measures are not expected to improve materially, with total debt to EBITDA expected to average in the 5x-6x range and EBITDA interest coverage averaging around 2x, S&P added.

S&P says Sealy unchanged

Standard & Poor's said Sealy Corp.'s rating and outlook are unchanged by the company's write-offs of some assets related to its retail affiliates disclosed in Sealy's recent 10-Q filing. S&P gives Sealy a B+ corporate credit rating with a stable outlook.

Sealy wrote off $5.8 million in goodwill and other assets related to a mattress retailer that ceased operations in May 2002, S&P noted. Sealy also took a $19.5 million charge for bad debt expense related to accounts receivable to other affiliated mattress retailers.

S&P said Sealy's strong market position and stable cash flow should allow the company to maintain its credit profile.

Moody's rates NCI Building's loan Ba3; notes B2

Moody's Investors Service rated NCI Building Systems Inc.'s $100 million secured revolver due 2007 at Ba3, $125 million secured term loan B due 2008 at Ba3, $125 million 9.25% senior subordinated notes due 2009 at B2 and $50 million add-on to 9.25% senior subordinated notes due 2009 at B2. The company's issuer rating of B1 and senior implied rating of Ba3 were confirmed. The outlook is stable.

Proceeds from the credit facility will be used to refinance outstanding debt. Security for the loan is all domestic accounts receivable, inventory and equipment.

Negative factors influencing the ratings include competitiveness of the sector, continuing weakness in non-residential construction, cyclical nature of the sector, reliance on steel whose prices have been volatile, negative tangible worth and an active acquisition strategy, Moody's said.

Positive factors influencing the ratings include strong free cash flow generation, prudent management of its balance sheet, leading industry position, geographic and product diversity, non-union employee base and mix of new construction, repair, retrofit and other end markets, Moody's said.

For the fiscal year ended Oct. 31, 2001, sales declined 6.2%, to $955 million, net income before a $2.8 million restructuring charge decreased 58.8%, to $18.3 million, and EBITDA fell 29.2%, to $104.2 million. Total debt/capitalization improved by 500 basis points, to 52.7%, debt/EBITDA rose to 3.5 times, from 2.8 times and EBITDA interest coverage was 3.1 times, vs. 3.8 times in the prior year.

Moody's rates Gerresheimer notes B3, loan B1

Moody's Investors Service assigned a B3 rating to Gerresheimer Holdings GmbH & Co. KG 's planned €150 million of senior subordinated notes due 2011 and a B1 rating to its €280 million senior secured credit facilities.

Moody's said the rating reflects Gerresheimer's highly leveraged capital structure, with limited expected free cash flow generation over the next few years, continued execution risk relating to the recent re-positioning of the business on higher-growth pharmaceutical end-markets (which are expected to largely drive top-line performance going forward), and the need for Gerresheimer to extract margin improvements from its ongoing cost rationalization program, expected to yield substantial margin benefits in 2H02, the challenges faced by Gerresheimer in gaining market share in a highly concentrated market, and residual integration risk associated with the company's highly acquisitive history.

Positives include the general non-cyclical nature of Gerresheimer's business, characterized by a lengthy product development process in conjunction with customers, minimal historical pricing pressure, and approximately 74.0% revenue exposure (in 2001) to the pharmaceutical industry, the company's advantageous market positioning, including strong management focus on high-growth niche market areas and a technologically advanced asset base, established long-term customer relationships with high switching costs (due in part to regulatory requirements on drug manufacturers), low customer concentration, and high barriers to entry, management's significant tenure with the business and success in re-positioning the company from a food and beverage focused business to a value-added specialty packaging company for the pharmaceutical industry.

Moody's noted that some expected year-end 2002 credit ratios look relatively favorably, such as the 3.8x net debt/EBITDA and 3.0x EBITDA/Cash Interest but added that it expects substantial capital expenditure requirements will likely hinder free cash flow generation in the early years.

As a result, Moody's said it anticipates (EBITDA - Capex)/Cash Interest to be approximately 1.0x for the full-year 2002.

However, by the end of 2002 the company is expected to have completed a major furnace repair cycle and will benefit from substantially reduced furnace age and significantly lower furnace capex over the following years, Moody's said.

S&P rates NCI notes B, loan BB-

Standard & Poor's assigned a B rating to NCI Building Systems Inc.'s planned $50 million add-on to its $125 million 9.25% subordinated notes due 2009 and a BB- rating to its new $225 million senior secured credit facility. Existing ratings were confirmed. The outlook is stable.

Proceeds from the bank facility and new notes are expected to be used to repay NCI's existing bank facility, which matures in July 2003. Total debt outstanding at the end of May was about $330 million, S&P noted.

S&P said NCI's ratings reflect its leading market shares and competitive cost position, offset by cyclical demand for the company's products, volatile raw material costs, and an aggressive financial risk profile.

With annual sales of almost $1 billion, NCI is a leading U.S. manufacturer of metal products used in nonresidential construction, S&P said.

While the metal construction industry overall has favorable long-term prospects, commercial construction activity remains lackluster due to the weak economy, S&P added. Nonetheless, the company has a strong competitive position in metal building components, which is less cyclical than building systems.

In addition, market share gains have allowed NCI to fare somewhat better than competitors in this challenging environment, S&P said.

However, the company's operating margins (before depreciation and amortization) have fallen somewhat from the mid-teens percentage area, primarily due to lower volumes and intense price competition in components, the rating agency said.

Although NCI has reduced debt by $100 million over the past year, its capital structure remains aggressive, with debt to EBITDA of 3.4 times, S&P noted.

The company's focus on cost reductions and modest capital spending needs, along with working capital improvements, should enable it to continue to generate discretionary cash flow for debt reduction. As a result, debt to EBITDA and funds from operations to debt should range between 3x and 3.5x and 15% to 20%, respectively over the intermediate term, S&P said.

Moody's rates SPX's loan Ba2

Moody's Investors Service rated SPX Corp.'s proposed $450 million senior secured term loan B due 2009 and $750 million senior secured term loan C due 2010 at Ba2. Furthermore, Moody's confirmed the company's $600 million senior secured revolver due 2004 and $331 million senior secured term loan A due 2004 at Ba2, $847 million liquid yield option notes due 2021 at Ba3, senior implied at Ba2 and senior unsecured at Ba3. The outlook is positive.

Following the closing of the new term loan B and C, the Ba2 rating on the existing $488 million term B and $809 million term C will be withdrawn. Security for the new loans is a first priority lien on basically all assets and stock of the company and its direct and indirect subsidiaries.

The ratings reflect SPX's strong market position and increasing diversification, good track record of executing large-scale acquisitions, solid performance during the recent economic downturn, relatively stable and growing cash flow generation, and strong management, Moody's said. However, the ratings also reflect its moderate debt leverage, substantial goodwill and negative tangible net worth, acquisitive growth strategy and associated integration challenges, and uncertainty in its future acquisition finance structure.

The positive outlook reflects the expectation of continued operational and cost structure improvements and a more favorable operating environment in the medium-term, Moody's said.

After the refinancing, for the 12 months ended March 2002, total debt of $2.5 billion would be 3.4 times EBITDA of $745 million, or 4 times EBITA of $632 million. Adjusted EBITDA and EBITA would cover interest expenses approximately 5.1 times and 4.3 times.

Moody's rates Oriental Trading Ba2

Moody's Investors Service assigned a Ba2 rating to Oriental Trading Co., Inc.'s new $180 million senior secured credit facilities. The outlook is stable.

Moody's said the ratings reflect the demonstrated low volatility of Oriental Trading's demand despite the discretionary nature of its products, the benefits of diversification from a large and fragmented customer base which has shown consistent growth as the company seeks out new categories of customers, low inventory risk, as a result of high gross margins, low obsolescence risk, and low cost of introducing new products, the ability to generate sufficient free cash flow from operations to internally finance growth and operating needs as well as amortize debt since its leveraged buyout, and a leading position in the U.S. market for retail novelty products, which gives it the benefit of good name recognition and low cost of growth.

Oriental Trading is also able to leverage some operating costs as it continues to grow existing business lines, offset in part by the need to increase catalog costs in line with customer acquisitions and the need to increase warehousing and distribution infrastructure in the medium term if growth meets expectations, Moody's said.

However Oriental Trading still has high leverage and has achieved modest levels of debt reduction following its LBO in 2000, Moody's said. While OTC has generated excess cash flow, it has until recently retained cash on its balance sheet which has been used to finance seasonal working capital needs, rather than to reduce long term debt balances.

About half of the debt reduction contemplated in this transaction is taking place by reducing cash balances, which will likely require seasonal revolver borrowings during the remainder of this year and could therefore raise average debt balances, Moody's said.

The ratings also consider recent and upcoming changes to the management team; short term risks to profitability as a result of anticipated changes in operational processes; exposure to exogenous shocks, such as increases in paper and postage costs and political risks affecting its vendors in Asian markets; and high seasonality focused around the calendar 4th quarter, Moody's added.

Moody's rates MetoKote's loan B1

Moody's Investors Service rated MetoKote Corp.'s $30 million senior secured revolver due 2005 at B1, $88.4 million senior secured tranche B-1 term loan due 2005 at B1, $50 million senior secured tranche B-2 term loan due 2005 at B1, senior implied at B1 and senior unsecured at B2. The rating outlook is stable.

The credit facility is expected to be committed through the amendment and restatement of the current agreement, under which Wachovia Bank will take over as administrative agent from Bank One. The loans are secured by substantially all assets of the company and its existing, after-acquired or after-organized domestic subsidiaries. Excluded from the collateral package is equipment located at the company's annex plant locations owned by the company's customers.

Ratings reflect vulnerability as a relatively small supplier, high ratio of debt to revenues, slower-than-anticipated growth, limited historical success with growth through acquisition, significant projected ongoing capital requirements, high fixed cost base, roughly 50% concentration with its top 10 customers and cyclicality of the industry, Moody's said.

The ratings assignments and stable outlook more positively reflect that MetoKote effectively limited deterioration of its fiscal 2001 operating margins through implementation of cost-cutting programs; restricted discretionary capital expenditures during an extended period of extremely weak demand; and instituted new sales efforts and other programs aimed at better utilizing MetoKote's lower-margin general purpose plants, Moody's said.

For the twelve months ended June 30, total debt to EBITDA was about 3.5 times and debt to revenues was around 90%. EBIT coverage of cash interest was about 1.3 times in fiscal 2001.

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