Moody's cuts Avnet to junk

Moody's Investors Service downgraded Avent, Inc. to junk, cutting its senior unsecured debt to Ba2 from Baa3. The outlook is negative. The action ends a review begun in June.

Moody's said the action reflects its expectations that Avnet's revenue and earnings will not show sufficient improvement over the intermediate term to materially improve currently weak debt protection measures despite an improvement in the outlook for technology industry spending.

The negative outlook considers the limitations to alternative sources of liquidity the company has to address its scheduled debt maturities over the next 18 months.

While the company has generated substantial cash from working capital reduction during the severe industry downturn, free cash flow generation is likely to be tempered by overall growth going forward.

The rating action also addresses concerns regarding the company's ability to demonstrate improved and differentiated returns resulting from its primarily debt-financed acquisitions of fiscal 1999 through fiscal 2001. With the cyclical downturn, improved returns have not materialized, dampening expectations of achieving sustained returns similar to levels prior to the company's acquisition activity.

While Avnet has made significant reductions of debt since its peak leverage in December 2000, further meaningful debt reduction over the intermediate term is unlikely. The company reduced total debt to $1.5 billion as of June 30, 2003 from $3.1 billion in December 2000; however, debt to trailing 12 months EBITDA has risen from 4.5 times to 7.0 times over the same period.

Fitch rates AmBev notes BBB-

Fitch Ratings assigned a preliminary rating of BBB- to the proposed $300 million issuance of political risk insured notes by Companhia Brasileira de Bebidas, a wholly-owned subsidiary of Companhia De Bebidas Das Americas (AmBev). Fitch also confirmed AmBev's senior unsecured foreign currency at B and Companhia Brasileira de Bebidas's existing $500 million notes due 2011 at BBB-. The outlook is stable.

Fitch said the rating for the proposed notes exceeds its B rating of the Brazilian government due to the underlying corporate credit quality of AmBev and structural enhancements for the notes that mitigate certain political risks. These enhancements include a six-month offshore cash reserve account or letter of credit and a political risk insurance policy, which would total up to 24 months of interest payments during a political risk event. These risks include the expropriation of funds and transfer or convertibility risk. The 18-month political risk insurance policy would be issued by Steadfast Insurance Co., a wholly-owned subsidiary of Zurich American Insurance.

The investment-grade local currency rating of the company is supported by the company's excellent business profile and strong financial position. During 2002, AmBev was the largest brewer in Brazil, with a market share estimated to be 68.4%. The brewing division underpins the company's credit strength, accounting for approximately 90% of AmBev's EBITDA.

AmBev's outstanding beer business is augmented with a good soft drink business. In soft drinks, the company is the owner of the most popular guarana brand in Brazil, Guarana Antarctica. This gives the company a firm foundation from which to grow its soft drink business, as guarana is the second-most popular flavor in Brazil, Fitch noted. Guarana-flavored beverages account for approximately 28% of all soft drink sales in Brazil, trailing the cola flavor. AmBev is also well-positioned in colas as the sole bottler and distributor of PepsiCo Inc. products in the country.

With capital expenditures during 2003 expected to total BRL1 billion, taxes estimated to be BRL300 million and interest expenses projected to be BRL450 million, AmBev should generate about BRL1.7 billion of free cash flow that it can use for dividends, share repurchase or the decrease of net debt, Fitch said. Fitch expects AmBev's interest coverage ratio, as measured by EBITDA-to-interest expense, for 2003 to be approximately 7.7x and its net debt-to-EBITDA ratio to be about 0.7x.

Moody's lowers Tom's Foods outlook

Moody's Investors Service lowered its outlook on Tom's Foods, Inc. to negative from stable and confirmed its ratings including its 10½% senior secured notes due 2004 at B3.

Moody's said the outlook changed reflects weaker expected earnings in 2003 than 2002, combined with the need for the company to refinance all of its debt in 2004 (its $60 million of senior notes are due Nov.1, 2004, and its revolving credit facility matures in August 2004).

If earnings weakness persists and refinancing debt on similar terms becomes challenging, Tom's ratings could be downgraded, Moody's warned.

Tom's ratings are constrained by its small size ($202 million trailing 12 months revenues), history of losses, high leverage, and weak balance sheet (negative net worth). The ratings also reflect the company's exposure to actions taken by larger, better capitalized competitors (such as Frito Lay) in the highly competitive snack food category in which it participates.

In addition, the ratings take into account only modest levels of free cash flow after capital spending (which has averaged about half of EBITDA), despite improvement in operating cash flow during the 1998-2002 period. The ratings also incorporate some reliance on co-pack volumes to help support fixed costs. Co-pack business can be vulnerable to some volatility depending on customer sales trends and product strategies, and loss of co-pack volumes this year (as in 1998) negatively impacted earnings and cash flow.

The ratings gain support from Tom's recognized brand name in its core Southeastern and Southwestern U.S. markets and its focus on the single-serve portion of the business commonly sold through small retail outlets, convenience stores, and vending machines (rather than relying primarily on the more competitive retail grocery and mass merchandise channels). The ratings also reflect steady sales and earnings from Tom's core branded business.

Second quarter 2003 leverage was high ($67 million of debt, including seasonal revolver drawings, represented 4.5x trailing 12 months EBITDA), and interest coverage was weak (0.7x trailing 12 months EBIT/interest). Liquidity was limited at June 14, 2003, with $3 million available under the revolver, $1.3 million of cash balances, and the need to refinance the senior notes and revolver ahead of their 2004 maturities, although revolver availability and cash balances should seasonally improve in the third and fourth quarters, Moody's said.

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