S&P cuts O'Sullivan

Standard & Poor's downgraded O'Sullivan Industries Holdings Inc. and assigned a negative outlook. Ratings lowered include O'Sullivan Industries Holdings' $15 million senior discount notes due 2009, cut to CCC+ from B-, and O'Sullivan Industries Inc.'s $100 million term loan due 2007, $35 million term loan due 2005 and $40 million revolving credit facility due 2005, cut to B from B+, and $100 million 13.375% senior subordinated notes due 2009, cut to CCC+ from B-.

S&P said the downgrade reflects challenging industry conditions in the ready-to-assemble furniture market and expectations for weaker cash flow at the company, which does business as O'Sullivan Furniture. If cash flow statistics decline, the ratings could be lowered.

S&P said it expects the market for ready-to-assemble furniture to contract and competition to intensify. Shipments are expected to decline about 10% in 2003.

While O'Sullivan Furniture has defended its market share against major competition, products from Southeast Asia are gaining consumer acceptance, S&P added. These products now account for about 20% of shipments - market share that has been gained only in the past few years. Further intensifying competition are the bankruptcies of retailers such as Kmart Corp. and Service Merchandise.

With the threat of war in Iraq and high consumer debt, S&P said it expects a soft market for the rest of 2003 that will likely result in a further reduction in company sales and cash flow.

Debt leverage, as measured by funds from operations to total debt, was negative for the 12 months ended Dec. 31, 2002, compared with a five-year average of about 25%, S&P said. While EBITDA coverage was 2.1x for the 12 months ended Dec. 31, 2002, Standard & Poor's is concerned that credit measures may weaken given the current adverse market conditions.

S&P raises M/I Schottenstein outlook

Standard & Poor's raised its outlook on M/I Schottenstein Homes, Inc. to positive from stable and confirmed its ratings including its corporate credit rating at BB-.

S&P said it raised M/I Schottenstein's outlook because of the company's consistent performance and above-average financial measures.

The rating is supported by M/I's good market position, conservative business profile, solid margins, and consistently conservative financial profile. Sales and profitability remain concentrated in the Midwest, primarily Ohio; management, however, has prudently grown the company beyond its largest market and profitability has become more dispersed, S&P noted.

M/I's financial profile is very strong for the rating, S&P said. Higher average home prices, operating efficiencies, and stable overhead as a percent of revenues combine to produce solid overall homebuilding gross margins of 24% and operating margins of 11%. At year-end, debt-to-book capital was slightly more than 20%, and debt-to-EBITDA was less than 1x. Leverage benefited from modest line usage throughout 2002 and a growing equity base due to strong retained earnings.

S&P lowers Grohe outlook

Standard & Poor's lowered its outlook on Grohe Holding GmbH to negative from positive and confirmed its ratings including its senior unsecured debt at B.

S&P said the revision is in reponse to the projected €200 million debt-financed repayment of part of existing shareholder loans by Grohe for which the company is seeking the approval of a majority of the holders of its high-yield notes.

The revision reflects the substantial increase in leverage that the projected repayment would generate and the expectation that credit measures would likely be weak for the rating category in the near term, compared with the strong level of credit measures achieved in 2002, S&P said.

S&P added that it assumes Grohe will likely consistently improve credit quality in the future, which mitigates the negative impact of the proposed transaction.

The projected repayment of €200 million out of €305 million in shareholder loans outstanding at year-end 2002, according to management estimates, through secured bank facilities, will directly increase the group's net indebtedness by €226 million, including the financing of heavy transaction costs (€26 million), S&P said. The rating agency added that it will also treat the remaining €105 million in shareholder loans as having increased debt-like characteristics (rather than equity) and thus further increase leverage.

Moody's confirms Grohe

Moody's Investors Service confirmed Grohe Holding GmbH and maintained its positive outlook - although the rating agency said it will likely change the outlook to stable after the company's proposed transaction is completed. Ratings confirmed include Grohe's €200 million 11.5% senior notes due 2010 at B2, €148 million senior secured credit facilities at Grohe Beteiligungs GmbH at Ba3 and €238.1 million in senior secured credit facilities at Friedrich Grohe AG at Ba2. Mooyd's also assigned a prospective Ba3 rating to the proposed €370 million senior secured credit facilities at Grohe Beteiligungs GmbH and a prospective Ba2 rating to the proposed €180 million senior secured credit facilities at Friedrich Grohe AG.

Moody's said its action follows Grohe's announcement of a consent solicitation from bondholders to effect a €200 million payment to shareholders.

Under current expectations, and pro forma for the expected re-leveraging of the business, financial covenants should provide adequate flexibility to the business going forward, Moody's said.

In addition, the mandatory amortization schedule under the new credit facilities should allow comfortable headroom in the company's cash flows.

Moody's also noted that the new facilities have been structured to survive a potential initial public offering by the company; subject to a 2.5x net debt/EBITDA ratio, an IPO would also lead to a collateral release under the facilities. Pro forma for the transaction, Grohe's net cash-pay debt/EBITDA ratio is expected to remain above 3.0x for the next 12-18 months at least.

Moody's said it confirmed Grohe's ratings because of its continued strong operating progress to date, in line with Moody's expectations, and the successful de-leveraging track record established by Grohe since the initial ratings assignment in October 2000.

In the context of difficult domestic market conditions, Grohe has been so far successful in expanding its market share and geographical footprint (notably into the U.S.), while significantly improving its internal cash flow generation ability.

While the proposed transaction will lead to a material re-leveraging of the business from current levels, the company's cash flow generation ability should allow it to sustain the new capital structure at the current ratings, Moody's added.

Moody's raises Northland outlook

Moody's Investors Service raised its outlook on Northland Cable Television, Inc. to stable from negative and confirmed its ratings including its $100 million 10.25% senior subordinated notes due 2007 at Caa3.

Moody's said the outlook change is predominantly in response to Northland's recently announced sale of its Aiken, S.C. systems for approximately $40.2 million, which follows the earlier and smaller announced sale of the company's Port Angeles, Wash. system through which net proceeds approximating $10.4 million are expected to be received.

Taken together, Moody's said it believes the asset sales should allow for a sufficient reduction in bank debt outstandings under the company's unrated senior secured bank credit facilities to permit Northland to remain in compliance with stepped down financial leverage maintenance covenants at the end of this year, which otherwise were expected to have been violated.

The sales also give the company more time to address the operating challenges facing it, including the need to stem further erosion of its subscriber base to competing direct broadcast satellite operators, although this may be difficult to achieve in the absence of gaining alternative sources of liquidity which Moody's believes will be necessary to fund further system upgrades, accelerate the rollout and marketing of new ancillary services, and thereby enhance the value proposition for subscribers, while ultimately growing internally generated cash flow.

S&P cuts DDi

Standard & Poor's downgraded DDi Corp. including cutting its $100 million 5.25% convertible subordinated notes due 2008 to D from CCC-, $100 million 6.25% convertible subordinated notes due 2007 to C from CCC- and $300 million credit facility due 2003 to CCC- from CCC+ and Details Capital Corp.'s $60.054 million 12.5% senior discount notes due 2007 to C from CCC-. Ratings not lowered to D were put on CreditWatch with negative implications.

S&P said the actions follow DDi's failure to make the interest payment on its 5.25% convertible subordinated note due on March 1.

Weak financial performance in the 2002 fourth quarter resulted in covenant violations under DDi's senior credit facility, S&P noted. DDi failed to meet the bank debt covenant for minimum EBITDA in the fourth quarter of 2002, thereby restricting its ability to make the subordinated debt interest payments on the 5.25% notes, which were due on March 1, and the 6.25% notes scheduled in April 2003.

The rating on the 6.25% notes will be lowered to D in April if the payment is missed, as anticipated.

Moody's rates Standard Pacific notes Ba2

Moody's Investors Service assigned a Ba2 rating to Standard Pacific Corp.'s new $125 million senior notes and confirmed its existing ratings including its senior notes at Ba2 and senior subordinated notes at Ba3. The outlook is stable.

Moody's said the ratings reflect the strength of Standard Pacific's major markets in California, moderate homebuilder debt leverage and successful efforts to diversify geographically. However, the ratings consider the risks of having a regional concentration in California, integration challenges from acquisitions, the stock buyback program, and the cyclical nature of the homebuilding industry.

Although Standard Pacific derived 42% of its home closings in 2002 from California (down from 51% in 2001 and 79% in 1996), its profits from California constituted a significantly greater proportion of its homebuilding total, Moody's noted. Fortunately for the company, California as a whole has been extremely strong for a number of years, and even the Northern California market, which suffered a sharp contraction in 2000, has shown some selected signs of strength.

Going forward, the relative profit contribution from California is projected to decline, from rapid growth in several other markets and from entry into new markets.

Homebuilding debt leverage has held pretty steady for the past four years, with homebuilding debt/capitalization ending 2002 at 45.3%, versus 48.8% at year-end 2001, and homebuilding debt/EBITDA coming in at 2.9x (vs. 2.6x), Moody's said. After adjusting the balance sheet for the company's off-balance sheet joint venture indebtedness, homebuilding debt/capitalization would increase by several percentage points.

Moody's upgrades Sovereign Bancorp

Moody's Investors Service upgraded Sovereign Bancorp including raising its senior debt to Ba1 from Ba2, Sovereign Bank's senior obligations to Baa2 from Baa3, Sovereign Capital Trust I, II, and III's preferred stock to Ba2 from Ba3 and Sovereign Real Estate Investment Trust's preferred stock to Ba1 from Ba2. Moody's assigned a Baa3 rating to Sovereign Bank's new subordinated debt. The action concludes a review for possible upgrade begun on Feb. 26.

Moody's said Sovereign Bancorp's long-term debt ratings were upgraded because the company successfully executed two initiatives that should improve the liquidity and reduce the double leverage of Sovereign Bancorp and enhance the financial flexibility of its operating thrift, Sovereign Bank.

The two initiatives were Sovereign Bank issuing $500 million of subordinated debt that will qualify as regulatory capital, and Sovereign Bancorp - the holding company - buying back approximately $300 million of its 2004 debt.

The thrift's issuance of subordinated debt - which qualifies as regulatory capital - allows the thrift to make a large dividend to the holding company and still meet "well capitalized" regulatory capital levels. With the dividend proceeds, the holding company will pay off its Bank of Scotland loan that helped finance Sovereign Bancorp's buy back of much of its debt maturing in 2004, Moody's said.

In upgrading the ratings of Sovereign Bancorp, Moody's said the initiatives improve the liquidity profile of the holding company while reducing the holding company's double leverage. Secondly, they lessen the future need for the thrift to make dividend payments to the holding company, thus improving its financial flexibility. Finally, the initiatives improve the ongoing profitability of Sovereign Bancorp because high-cost parent company debt is virtually replaced by lower-cost subordinated debt issued by the thrift, said Moody's.

Fitch cuts Provident

Fitch Ratings downgraded Provident Financial Group, Inc.'s senior debt to BBB- from BBB, subordinated debt to BB+ from BBB- and preferred stock and trust preferred stock to BB+ from BBB-. The ratings were removed from Rating Watch Negative. The outlook is stable.

Fitch said the downgrade follow Provident Financial's announcement of the restatement of earnings for years 1997 through 2002, and lowered earnings guidance for 2003.

Fitch had previously assigned a negative outlook to Provident Financial on Jan. 21, noting concerns regarding continued high levels of problem assets and exposures to higher risk lending areas combined with a smaller reserve for loan losses.

The restatements reduce historical levels of profitability by an aggregate of $70.3 million over the six years 1997 to 2002, as a previous accounting error underrepresented operating lease expense on nine auto lease financing transactions originated between 1997 and 1999. Provident Financial has also determined that the auto lease financing transactions should not have been accounted for as operating leases off balance sheet and has restated the balance sheet to include these transactions. A reduction in 2003 operating earnings is also expected, as the year had previously included higher earnings from these transactions. In addition, the restatements slightly weakened capital and capital ratios.

Partially offsetting these concerns, management has been taking steps to reduce the risk level in Provident Financial's business mix, Fitch noted. In addition to reducing exposures in certain higher-risk lending areas, management has an increased focus on strengthening Provident Financial's retail franchise.

Moody's rates Hexcel notes B3, raises outlook

Moody's Investors Service assigned a B3 rating to Hexcel Corp.'s planned $125 million senior secured notes due 2008 and confirmed its existing ratings including its $339 million 9¾% senior subordinated notes due 2009 at Caa2 and $26 million 7% convertible subordinated debentures due 2011 at Caa3. Moody's raised the outlook to stable from negative.

Moody's said the new stable outlook recognizes Hexcel's improved financial flexibility owing to the new capital structure, which Moody's believes will be critical to the company's ability to operate at lower risk of financial distress through a prolonged industry downturn.

The rating reflects the highly levered capital structure of the company, although at improved levels and terms due to Hexcel's recently announced financial restructuring program, which includes a $125 million issue of convertible preferred shares, coinciding with continued weakness in the commercial aerospace sector in which the company operates, Moody's added.

Following the proposed restructuring transactions, under which Hexcel intends to replace $180 million of existing senior bank debt and $47 million of convertible subordinated notes due August 2003, overall leverage remains high despite a general reduction in total debt by about $100 million, Moody's said. Leverage will reduce somewhat, as debt will fall from 5.7x actual 2002 EBITDA to 4.8x pro forma 2002 EBITDA.

Additionally, free cash flow available to repay debt is a concern. Although pro forma 2002

free cash flow was approximately 14% of post-transaction debt, Moody's noted that much of the free cash generated was aided by historically low levels of capex and decreases to working capital, owing largely to the company's planned reduction in cost structure in anticipation of depressed commercial aerospace business levels, commenced in 2001. Moody's said it believes that, without such anomalies, free cash flow will more likely represent less than 10% of total debt in the near- to medium-term.

S&P cuts AES Drax

Fitch Ratings downgraded AES Drax Energy Ltd.'s senior notes to D from C, and removed the rating from Rating Watch Negative. In addition, Fitch maintained the Rating Watch Negative on the CC rating of the senior secured bonds issued by AES Drax Holdings Ltd. and the DD senior secured bank loan rating of its related company, Inpower Ltd.

Fitch said the action follows the non-payment of interest on the Drax Energy notes, which was due Feb. 28. The non-payment of interest will constitute an event of default after a 15-day cure period, and Fitch does not expect the default to be cured within that time.

However, the intercreditor agreement includes provisions preventing Drax Energy noteholders enforcing their security for a period of 90 days following a default. Last December, the senior creditors to the project, which include lenders to Inpower and Drax Holdings bondholders, entered into a standstill agreement which expires on May 31. Drax Energy noteholders will not be able to enforce their security before the end of the standstill agreement.

The downgrade also reflects Fitch's expectation of a low recovery rate for the Drax Energy's noteholders. As part of the standstill agreement, Drax must present a restructuring proposal to the creditors by March 15, which will help clarify recovery potential for all creditors.

S&P says CNH unchanged

Standard & Poor's said CNH Global NV's ratings are unchanged including its corporate credit rating of BB with a stable outlook on news that it will issue $2 billion of convertible preferred shares to parent company Fiat SpA (BB+/negative) to repay $2 billion owed in intercompany loans to Fiat.

CNH will not pay dividends on the preferred shares until 2005 and will save about $100 million in interest expense in 2003 and 2004.

S&P said the transaction is further evidence of Fiat's strong commitment to CNH Global, an important determinant in the ratings on CNH Global. As a stand-alone entity, ratings on CNH Global would likely be significantly lower.

S&P raises Hovnanian outlook

Standard & Poor's raised its outlook on Hovnanian Enterprises to positive from stable and confirmed its ratings including its $400 million senior unsecured notes at BB- and $150 million subordinated notes at B.

The ratings and outlook acknowledge Hovnanian's enhanced geographic diversity, successful integration of acquired companies, and consistent improvement to its financial risk profile, S&P said.

The company maintains a solid position in the Northeast (27% of revenues), as one of the largest builders in New Jersey and eastern Pennsylvania. However, during the past several years, Hovnanian has also pursued selective geographic expansion and currently maintains operations in North Carolina, Washington, D.C., Southern California, and Texas.

Growth has been dramatic during the past few years, with homebuilding revenues reaching $2.5 billion in fiscal year 2002, as the company successfully completed select builder acquisitions, while achieving good organic growth, S&P noted. In addition to strong volume gains (deliveries more than doubled during the past two years), Hovnanian has been able to steadily increase prices, as demand for homes has remained particularly strong in more highly regulated markets such as the Northeast and Washington, D.C., where Hovnanian maintains very attractive land positions.

The company's financial measures have been consistently strong and improving, S&P said. The company's homebuilding gross margin for the first quarter 2003, excluding land sales, was up 400 basis points from first quarter 2002, to a solid 24.7% due mainly to higher home prices and improved operating efficiencies. This led to material EBITDA growth (up 90%), and solid coverage, with EBITDA covering interest incurred at 5.8x. Leverage at quarter end stood at 53% debt-to-book capitalization (or 50% net of cash balances), with debt to EBITDA hovering in the 2.0x to 3.0x range (closer to 2.0x).

Moody's upgrades KB Home senior implied

Moody's Investors Service upgraded KB Home's senior implied rating to Ba1 from Ba2 and confirmed its issuer rating and senior notes at Ba2 and its senior subordinated notes at Ba3. The outlook was changed to stable from positive.

The upgrade reflects KB Home's improving financial results and profile, success at reducing its earnings concentration in California, leading share position in many of the markets that it serves, successful track record both in de novo expansions and in integrating acquisitions, strong liquidity, and long history, Moody's said. At the same time, the ratings consider the financial and integration risks that accompany an aggressive expansion strategy, the still-sizable concentration of land inventory values and profits in California, and the large, ongoing share repurchase program.

The upgrade was limited to KB Home's senior implied rating because the company's bank credit facility and term loan are structurally senior to its publicly-rated senior notes and senior subordinated notes, Moody's said.

Going forward, consideration for an upgrade of the company's publicly-rated notes will rest on elimination of their structural subordination to the bank debt, the rating agency added. Consideration for further improvement in the company's senior implied rating will depend on the company's continuing to improve its financial results while further deleveraging the balance sheet.

Moody's rates Dole notes B2, loan Ba3

Moody's Investors Service assigned a prospective B2 rating to Dole Food Co., Inc.'s planned $375 million senior unsecured notes and a prospective Ba3 rating to its new senior secured bank credit facilities. The existing ratings remain on review for downgrade including Dole's senior unsecured debt at Ba1.

Proceeds from the bank credit facilities and public notes will be used to partially fund the leveraged buyout of Dole by its chairman David Murdock. Should the proposed transaction close as presently structured, Dole's senior implied rating will be downgraded by three notches to B1 from Ba1, and other Dole ratings will be adjusted accordingly, Moody's said.

Dole's ratings are constrained by its earnings sensitivity to uncontrollable factors such as swings in commodity prices and weather, the complex and highly-competitive industry in which it operates, as well as the company's high adjusted leverage, Moody's said. The leveraged buyout will result in $1.47 billion in incremental debt being added to Dole's capital structure, in comparison to $125 million in cash equity being contributed.

Dole's ratings are supported by its strong brand and market strength, the diversity of its product portfolio and sourcing locations, strong global logistics capabilities, and an increasing portion of revenues and earnings derived from value-added products, Moody's said.

Ratings also consider a requirement in the bank facilities for Dole to repay debt either with at least $150 million in asset sales or excess cash flow over the next 33 months in order to repay debt, as well as a requirement for David Murdock to contribute up to $50 million in cash equity if certain leverage or asset sale covenants are not met.

The stable outlook on these newly assigned prospective ratings reflects Moody's expectation that Dole will work to reduce leverage and improve its financial flexibility in the years following the transaction. If Dole is successful in reducing its debt and improving its debt protection measures more quickly than anticipated, its ratings could be upgraded. Alternatively, ratings could be pressured if debt reduction slows, or if Dole pursues acquisitions which increase leverage.

© 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.