Moody's cuts J. Crew

Moody's Investors Service downgraded J. Crew Group and its operating subsidiary, J. Crew Operating Corp. including cutting J. Crew's 13.125% senior discount notes due 2008 to Ca from Caa3 and J. Crew Operating's 10.375% senior subordinated notes due 2007 to Caa3 from Caa1. The outlook remains negative.

Moody's said the downgrade follows J. Crew's announcement that it will reduce previously reported net income by $9 million to write down the value of inventory.

The ratings also reflect the expectation of a successful exchange offer for the 13.125% senior notes of J. Crew Group, on which the company is required to make its first cash interest payment in April 2003. The company has offered to exchange the notes for 16% discount notes with the same maturity date.

The company's immediate liquidity situation will benefit from reducing the level of cash interest in the near term, but lengthening the interest accrual period will increase the amount of the ultimate obligation, Moody's said.

The ratings continue to reflect very high leverage at both the operating company and holding company levels; the expectation that top line performance and operating profitability will remain weak for the coming months; and a low level of financial flexibility due to constrained liquidity and increasing debt balances, Moody's added. The ratings also reflect the near term risks of implementing a turnaround strategy which could benefit the company in later years, and the high seasonality and volatility associated with J. Crew's apparel business.

The ratings are supported by a recent capital infusion of $20 million to the operating company in the form of subordinated notes by incoming CEO Micky Drexler and Texas Pacific Group, the company's equity sponsor, which was partly used to finance severance payments for prior management; demonstrated financial discipline which allowed the company to conserve cash by reducing operating expenses and inventory levels during the last year, and which also improved J. Crew's cash and borrowing levels versus in the early part of fiscal 2003; and continued recognition of the name and concept among targeted customers despite merchandising and quality issues. Moody's believes that the new CEO, who oversaw the growth of The Gap's franchises, will bring a needed merchandising sensibility to J. Crew.

The continuing negative outlook reflects J. Crew's limited flexibility to absorb unexpected events, Moody's said. The turnaround carries both operating and financial risk as well as opportunity, since the resources needed and the customers' response to a new strategy cannot be predicted.

S&P cuts Sweetheart

Standard & Poor's downgraded Sweetheart Holdings Inc. including cutting its corporate credit to SD from CC and Sweetheart Cup Co. Inc.'s $110 million subordinated notes due 2003 to D from C. Fonda Group Inc.'s $120 million subordinated notes due 2007 remain at CCC- and continue on CreditWatch with positive implications.

S&P said the actions follow completion of Sweetheart Cup's offer to exchange its 12% senior subordinated notes due 2003 for new senior notes due July 2004. The amount of the notes tendered and exchanged equals $93.375 million, or approximately 85% of the aggregate principal amount of notes outstanding.

S&P said it deemed the exchange distressed, tantamount to a default. S&P added that it will not maintain a rating on the $16.625 million of 2003 notes that were not tendered and exchanged.

S&P also said it expects to assign new corporate credit ratings and a senior unsecured debt rating to the new notes within the next month. Even though the new notes are senior notes, they will be rated two notches below the new corporate credit rating, reflecting their structural subordination to a significant amount of secured debt and operating leases.

The Fonda notes will likely be rated the same or slightly higher than currently and the new Sweetheart notes are expected to have the same rating.

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