Moody’s lifts DFC Finance notes

Moody's Investors Service said it upgraded the senior secured rating of DFC Finance Corp.'s 10˝% senior secured notes to Caa3 from Ca and affirmed the corporate family rating of parent company Sterling Mid-Holdings Ltd. at Caa3.

The outlook is stable.

The action follows the downgrade of the senior secured rating of DFC Finance to Ca from Caa1 and the corporate family rating of Sterling Mid-Holdings to Caa3 from Caa1 in June after the company announced its note exchange offer, Moody’s said.

The transaction was viewed as a distressed exchange and a default, the agency said.

The upgrade of the senior secured rating on the senior notes follows the expiration of the note exchange offer Aug. 17, through which the company received commitments to exchange 93.1% of the $800 million notes into new 12% payment-in-kind toggle notes, Moody’s explained.

The transaction significantly reduces the amount of the company's cash interest-bearing debt and eliminated a substantial portion of its cash-interest expense in the next two years, which lowers the probability of default on its obligations during that time period, the agency said.

The ratings also reflect the company’s weak financial performance as evidenced by continuing financial losses, negative operating cash flows, high leverage and the resulting weak debt-servicing metrics, Moody’s said.

While the note exchange will significantly reduce Sterling's amount of cash interest expense, the resulting improvement in the company's liquidity is temporary, the agency said.

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