Moody's puts Wackenhut on review

Moody's Investors Service put Wackenhut Corrections Corp. on review for possible downgrade including its senior secured line of credit at Ba3.

Moody's said the review was prompted by its concerns about Wackenhut's announcement that it would undertake a substantial leveraged equity repurchase transaction with its majority shareholder, Group 4 Falck A/S.

Wackenhut has agreed to buy back all 12 million shares of common stock held by Group 4 Falck for $132 million ($11.00/share), thereby eliminating Group 4 Falck's 57% stake in Wackenhut.

Moody's rates Playtex's loan Ba3, lowers outlook

Moody's Investors Service rated Playtex Products, Inc.'s $450 million senior secured term loan C due 2009 at Ba3, lowered the company's the outlook to negative from stable and confirmed its existing ratings including its $125 million senior secured revolver due 2007 at Ba3 and $350 million 9.375% senior subordinated notes due 2011 at B2.

"The rating confirmation reflects the liquidity and borrowing cost improvements from Playtex's refinanced term loan, as well as the company's resilient operating platform. The outlook revision, however, recognizes the negative rating pressures present from heightened competition and challenging economic conditions, which if translated into sustained profitability and cash flow decline, could restrict the company's ability to further reduce its high debt levels," Moody's said.

Playtex used its term loan C to repay the existing term loan A and B loans, therefore, ratings on the repaid tranches were withdrawn. By obtaining the C loan, the company extended maturities by one to two years, lowered near-term amortization payments, and reduced interest rates by 50 to 75 basis points.

For the first quarter of 2003, Playtex reported a decline in sales of 8% and a decline in EBITDA of 30%. For the full fiscal year 2003, Moody's expects around 15% year-over-year deterioration in Playex's EBITDA and an increase in taxes and capital expenditures, but still believes the company will be able to reduce debt by around $40 million.

S&P lowers Vertis outlook

Standard & Poor's lowered its outlook on Vertis Holdings Inc. and confirmed its ratings including its corporate credit at B+.

S&P said the actions follow the company's recently announced first quarter earnings results, which were weaker than anticipated.

For the first quarter of 2003, Vertis generated $371 million in revenues and $34 million in EBITDA. This represented 7.7% and 29% respective declines over the same period in 2002. EBITDA margins for the quarter were significantly lower than anticipated at 9% versus 12% in the first quarter of 2002.

The drop in profitability was primarily attributable to increased pricing pressure as a result of the continued weak economic environment, higher maintenance costs, and a customer shift towards simpler products in direct mail, S&P said.

At the end of March 31, 2003, Vertis had approximately $1.3 billion in debt (including the company's accounts receivable backed notes and mezzanine debt at the holding company level). As a result, the company's consolidated trailing 12-month operating lease-adjusted debt to EBITDA was in the low-6x area and EBITDA coverage of interest was in the high-1x area. Operating company total debt to EBITDA is below 6x and EBITDA coverage of interest more than 2x, S&P said.

Moody's rates Interline notes Caa1, loan B2

Moody's Investors Service assigned a Caa1 rating to Interline Brands, Inc.'s proposed $200 million senior subordinated notes due 2011 and a B2 to its the proposed $65 million senior secured revolving credit facility due 2008 and $140 million senior secured term loan B due 2010. The outlook is stable.

Moody's said the ratings reflect Interline's significant financial leverage, weak free cash flow generation, its modest size in the large and highly competitive maintenance, repair and operations distribution industry, sizable customer concentration, and a short operating track record in its current formation.

These risks are moderated by the company's good niche position in the facilities maintenance market, relatively stable revenue base, and good profit margins by the standards of the distribution industry.

The company targets primarily the multi-family housing, educational, lodging and health care market segments, and also sells to professional contractors and other smaller wholesalers. This market focus has allowed the company to be less impacted by negative cyclical economic trends that affect the more volatile industrial and new construction markets, Moody's said. As a result, the rating agency expects Interline's revenue base to experience less fluctuation through a business cycle.

However, the company is still vulnerable to macroeconomic trends such as increased vacancies in the residential rental housing market and lower home improvement spending by consumers. In addition, consolidation in the REITs market - a key customer segment - has resulted in sizable customer concentration at Interline, with the largest customer accounting for 4.4% of 2002 sales and the largest 10 8.3%.

Interline is highly leveraged. Pro forma for the refinancing, on-balance debt will be approximately $340 million at closing, or 4.6 times EBITDA for the 12 months to March 2003. Adjusted for operating leases at 8x rent, total debt would be approximately $435, or 5.1 times last 12 months EBITDAR. Last 12 months EBITDA would cover pro forma interest expense of about $38 million 1.9 times. Including lease payments, last 12 months EBITDAR cover would be about 1.7 times. The company's balance sheet is also weak. Goodwill accounts for approximately 36% of total assets, and tangible book equity is a deficit of $85 million, Moody's said. Accordingly, the company's tangible asset base provides low coverage for the bank facility and minimal coverage for the notes.

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