Gimme Credit begins high yield research service, urges caution on Collins & Aikman

By Paul Deckelman

New York, October 14 - Gimme Credit Publications Inc., known for its independent and, at times, feisty and iconoclastic research on investment-grade corporate bond issuers, is seeking a new world to conquer - high yield.

The company announced Tuesday the launch of Gimme Credit High Yield, a companion research product to its established investment grade offerings - and in its debut report, took a wary stance on a credit recently very much in the news, Collins & Aikman Products Co., which has lately been reeling in the wake

of reports that its largest customer, DaimlerChrysler, is dissatisfied with it and might consider soliciting other bids for the more than $1 billion of supply contracts it has with the Troy, Mich.-based automotive components supplier.

Gimme Credit high yield automotive analyst Shelly Lombard wrote that even with Friday's announcement by Collins & Aikman that Ford Motor Co. had picked it to supply interior components to Ford's new Futura sedan model, Collins & Aikman bondholders who "have been holding their breath for a while now, worried about a management shuffle and strained relationships with suppliers . . . shouldn't breathe a sigh of relief just yet."

Lombard acknowledged that the Ford contract "helps boost Collins' reputation," which suffered when news stories about the possible loss of the Chrysler contracts anonymously quoted unflattering assessments about the parts supplier by several of the automaker's executives, and she noted that the initial Ford contract "could pave the way for future business," since it will be the platform on which the Number-Two U.S. carmaker may build as many as 10 new models in the coming years.

But she also pointed out that production on the Futura won't begin until 2005 and "at the outset, the contract won't create as much revenue as the Chrysler business does now."

Lombard cautioned that even with expected profits from the Ford contract and from headcount reduction, Collins & Aikman "will be hard-pressed to grow annual EBITDA" to its target of $400 million from the $285 million projected for 2003 if it loses its Chrysler revenues - and further warned that if it is unable to increase EBITDA to cover its debt obligations, the company "is a restructuring waiting to happen."

Those obligations include $384 million of bank debt maturing in 2005 and $400 million of 11½% senior subordinated notes maturing in 2006, as well as further down the road $500 million of 10¾% senior notes maturing in 2011.

Of the possible outcomes, the Gimme Credit analyst sees as most likely a middle-of-the road outcome under which Collins & Aikman will retain some of the Chrysler business by giving additional price concessions to the carmaker - which in turn will not want to disrupt production of its popular Durango and Pacifica models by casting around for a new supplier.

She paints a picture of a company that faces many challenges, even apart from its Chrysler troubles, including that fact that it is dependent on the struggling U.S. auto industry for 77% of its sales, has limited revolving credit availability and tight bank covenant requirements - although the analyst says the banks, rather than provoke a liquidity crisis, "are likely to waive covenant violations and provide more revolver access" - and faces the looming debt maturities next year and in 2005. While the company may be able to refinance the bank debt next year, Lombard warns that the maturing subordinated bonds "could force a restructuring" in 2006.

Even in a restructuring mode, with bondholder recoveries possibly impaired by trade payables and other liabilities, "the senior bonds are likely worth par." However, she added, "investors should earn at least a 20% return" to compensate them for all of the various risk factors and likely price volatility the bonds are likely to face - meaning that Gimme Credit "might consider the senior notes if the price fell back to the high 70s," (traders quoted the 103/4s bid in an 85-87 context on Friday), but "would not be buyers of the subordinated bonds."

Lombard, a former portfolio manager and senior credit analyst at Barclays Bank, Chase Manhattan and ING Capital, is one of four Gimme Credit analysts whose research will be solely devoted to high yield issues. The junk bond research group will be headed by Kimberly Noland, a former managing director and head of bankruptcy research at Bear Stearns & Co. and director of high yield trading for Merrill Lynch & Co., who will in turn report to the company's overall director of research, Carol Levenson, and to its managing editor for Gimme Credit High Yield, Ezra Palmer.

Besides Noland and Lombard, the junk bond analysts will be June Giroux, most recently a vice president and investment analyst with Liberty Funds Group, and Evan Mann, formerly with Delaware Investments and with Banc America Securities, where he was a managing director in the high yield group.

Mann - who will watch retailing issues, as well as the transportation and lodging sectors - on Tuesday issued a research piece on Winn-Dixie Stores Inc. He wrote that while Gimme Credit hadn't been "looking for strong results from Winn-Dixie for the first quarter . . . we were hoping for at least some sign that the southeastern supermarket chain can beat back rising competition."

But there was no such sign forthcoming, with sales and net earnings for the fiscal first quarter far below year-ago results.

With the Jacksonville, Fla.-based regional supermarket operator "being pressured from below by Wal-Mart, warehouse clubs, dollar stores and drug stores, and from above by traditional supermarket rivals like Publix," and with sales expected to continue to decline and interest-coverage measures likely to also keep worsening over the next several quarters, "Winn-Dixie's financial flexibility has started to deteriorate," Mann wrote.

The analyst warned that there is "no evidence yet that stepped-up promotional activity and price reductions will preserve market share. Competition is likely to get worse before it gets better, leading to consolidation or forcing weaker retailers out of the market. Until there is evidence that Winn-Dixie's earnings have at least stabilized, we recommend investors sell the [8 7/8% '08] senior notes."

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