Moody's cuts Unifi

Moody's Investors Service downgraded Unifi Inc. including cutting its $250 million 6.5% senior unsecured notes due 2008 to B3 from B1 and maintained a negative outlook.

Moody's said the downgrade reflects the company's deterioration in profitability over the last three quarters because of industry-wide declines in price and volumes associated with over-capacity and shrinking market size; potential cash requirements because of a possible investment in China, the 2005 purchase option with the DuPont Alliance, and a potential arbitration settlement with DuPont; a weak alternate liquidity profile as detailed below; as well risks of further restructuring charges in light of the insufficient EBIT returns on assets.

The ratings are supported by the company's improved cash position which benefited from a lower capital investment requirement as the company closed or consolidated its operating assets and from a working capital contraction.

The outlook remains negative. Potential cash outlays related to an investment in China or any payments related to the DuPont Alliance, or a further weakening of the company's cash generation or prospective earnings, particularly in advance of the 2006 maturity on the credit facility, could lead to a negative rating action, Moody's said. Alternatively, improved access to alternate liquidity combined with improved margins and cash generation could lead to a positive outlook.

The company continues to face great challenges as it navigates a fiercely competitive environment in a shrinking domestic market, Moody's said. Negative trends in price, volume and margins continue because of excess domestic manufacturing capacity, higher raw material prices, increasing volumes of lower cost imports and margin pressures faced by the company's end-users which limit price improvements and therefore the ability to pass on increases in costs.

While total debt declined by about $23 million from June 30, 2002 to Dec. 28, 2003, leverage increased due to weaker earnings. As such leverage measured by total debt plus eight times rent over EBITDAR increased from 3.4 times at fiscal year end June 30, 2002 to 4.2 times for fiscal year end June 29, 2003 and to 6.0 times for the last 12 months ended Dec. 28, 2003, Moody's added.

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