Moody's cuts Applica ratings

Moody's Investors Service downgraded the debt ratings of Applica Inc., following the company's release of deteriorated third-quarter operating results, which reflect material ongoing pricing pressures in many of its product categories. The ratings outlook is negative.

The ratings downgraded included the company's $205 million senior secured revolving credit facility due 2005, to Ba3 from Ba2; $100 million 10% guaranteed senior subordinated notes due 2008, to B3 from B2; and senior unsecured issuer rating, to B2 from B1.

Moody's said the downgrade and negative outlook reflect Applica's persistent challenges to grow sales and profits, given the increasing bargaining power of a consolidating retail distribution base, which is using direct sourcing, auctions and store brands to extract pricing concessions. Concurrently, many small appliance manufacturers and marketers have been unsuccessful in sustaining long-term product differentiation or brand relevance with consumers.

Applica historically has navigated successfully through this environment with a focus on cost control, working capital management, and debt reduction. Nonetheless, the material erosion in third-quarter operating results and the company's announcement of further operating restructuring plans reflect an acceleration of industry pricing pressures.

Despite expectations for substantial debt reduction in fiscal year 2003 (largely funded by more than $50 million in cash proceeds from the sale of a joint venture), credit protection measures are expected to weaken substantially due to severe profit declines, Moody's said. For fiscal 2003 (ending December 2003), Moody's now projects around $28 million of adjusted EBITDA (normalized for restructuring costs) and minimal funds from operations less capex, compared to $68 million and $27 million, respectively, in fiscal; 2002.

This suggests a year-over-year decline in EBITDA less capex interest coverage to 0.7x from 2.8x and an increase in leverage to 4.8x from 2.9x.

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