S&P cuts Aearo, rates loan B+, notes B-

Standard & Poor's downgraded Aearo Corp. including cutting its senior secured bank loan rating to B+ from BB- and subordinated debt to B- from B and removed it from CreditWatch negative. The outlook is stable.

S&P also assigned a B+ rating to Aearo's proposed $175 million credit facilities due 2011 and a recovery rating of '3' indicating expected meaningful recovery in the event of a default and a B- rating to its planned $175 million senior subordinated notes due 2012.

S&P said the downgrade is in response to the pending buyout of the company by Bear Stearns Merchant Banking for $385 million, including the assumption of debt and excluding fees.

Pro forma for the buyout, total debt/EBITDA is about 5x, compared to about 4x prior to the transaction.

The ratings reflect Aearo's below average financial profile with a relatively heavy debt burden and modest financial flexibility, S&P said.

Despite the economic weakness, sales in fiscal 2003 ended September, were up about 10% from the year earlier, primarily from acquisitions, foreign currency translation and modest internal growth of 2%, S&P noted. The Safety Products business showed good organic growth of 6%, partially offsetting declines in the Safety Prescription Eyewear and Specialty Composites segments.

Debt leverage is now somewhat higher, owing to the recap, but financial flexibility improves somewhat since near-term maturities have been eliminated and there is some capacity to make modest size, debt-financed acquisitions, S&P said. The rating agency expects Aearo to maintain total debt to EBITDA around 4x-5x and EBITDA interest coverage to average about 2.5x-3x over the business cycle. In addition, funds from operations to total debt is expected to average in the 10%-15% range over time.

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