Levi Strauss bank debt falls by 2 points on changed guidance, ratings downgrades

By Sara Rosenberg

New York, Nov. 13 - Levi Strauss & Co. was one of the bigger movers in the secondary bank loan market Thursday, heading lower by about two points following a change in financial guidance for 2003, downgrades by two rating agencies and being placed on CreditWatch negative by a third rating agency.

Both the fixed rate and the floating rate bank debt were quoted in the context of 102 bid, 103 offered by the end of the day, according to a trader.

The company's bonds apparently took a much bigger hit in reaction to the influx of negative news, heading lower by about eight points, the trader added.

Levi's issued revised financial guidance for the full-year 2003, lowering full-year net sales expectations to down 6% to 7% from the prior year versus previous guidance of flat, plus or minus 2%, lowering full-year gross margin excluding restructuring-related expenses expectations to about 39% of sales, rather than 40% to 42%, and lowering the operating margin excluding restructuring charges, net of reversals, and restructuring-related expenses expectations to 7% to 8% of sales, rather than 8% to 10% as previously indicated. The company also increased net debt at year-end guidance to between $2.1 billion and $2.2 billion, as compared to previous guidance of about $2.1 billion.

"We came out of September expecting to achieve essentially flat sales for the year," said Phil Marineau, chief executive officer, in a company news release. "Our plans for October and November included higher shipments to most of our U.S. retailers because of consumer sell-through increases the previous three months and low retail inventories.

"However, retailers have continued to be very cautious about an apparel market recovery, with most of them experiencing a disappointing October. They are keeping their inventory levels exceptionally low, and our shipments have been much less than we expected.

"Additionally, intense price deflation worldwide is compounding the downward pressure on our performance," Marineau said in the release. "The average out-the-door selling price for jeans and casual pants continues to decline. We took wholesale price reductions earlier this year to remain competitive and have taken additional actions to move inventory and support retailers' margins this quarter.

"These steps directly affect our margins and profitability. When you add a weak European market into this retail picture, it's clear that our company's sales and margins will not meet our expectations for the year.

"We're aggressively taking steps to improve our business. We are swiftly restructuring our U.S. and European businesses, with the goal of taking significant costs and complexity out of the organization," Marineau added.

Moody's Investors Service downgraded Levi's $500 million senior secured term loan facility due 2009 to Caa2 from Caa1 and confirmed the approximately $1.6 billion of senior unsecured notes maturing through 2012 at Ca. Furthermore, the rating outlook was changed to negative from stable.

"The downgrade was triggered by the company's announcement today of a downward revision in estimated year-end performance particularly in the areas of sales, and cash generation, which would cause inventory and debt to be higher than Moody's expectations," the rating agency explained.

The Ca rating on the senior notes continues to reflect the effective subordination of the notes to about $1.25 billion of secured debt and structural subordination to $400 million of third-party liabilities of the subsidiaries. The rating implies limited recovery in a distressed scenario due to the effective and structural subordination of the senior unsecured notes to about $1.6 billion in combined secured debt and current liabilities, Moody's said.

Fitch Ratings downgraded Levi's $1.7 billion senior unsecured debt to B- from B, $650 million asset-backed loan to BB- from BB and $500 million term loan to B+ from BB- Furthermore, the rating outlook remains negative.

"Weaker sales, coupled with persistent cost pressures, are expected to result in operating profit that is down dramatically from prior expectations. Though debt levels at year-end are forecasted to remain unchanged, credit measures will weaken significantly due to poorer operating performance. Leverage (total debt/EBITDA) is now expected to be above 6.0x versus 5.3x in the latest 12 months ended Aug. 24, 2003 and interest coverage is projected to weaken to below 1.5x," Fitch explained.

Lastly, Standard & Poor's, although opting not to downgrade the company's ratings immediately following the guidance announcement, placed Levi's ratings on CreditWatch with negative implications, including the senior secured debt rating of BB- and the senior unsecured debt rating of B.

"Although this announcement is not expected to adversely affect the company's liquidity position relative to its bank facility, Standard & Poor's finds the timing of this latest announcement especially troublesome, given the series of controversial events with the company in recent months. This development represents another in a series of challenges for the company as it seeks to execute a turnaround. Standard & Poor's will closely monitor the company's progress, and continue to evaluate the company's relationship with its secured lenders.

"Resolution of the CreditWatch listing is expected by Dec. 19, 2003. However, any further announcements in the interim period will prompt an immediate review for a downgrade. Furthermore, any additional surprises or a lack of a prompt resolution of the company's tax audit review will also result in a rating review and/or downgrade," S&P said.

Levi Strauss is a San Francisco-based branded apparel company.

Meanwhile, Collins & Aikman's bank debt was uninspired by the company's third-quarter earnings numbers. The debt remained unchanged at levels of 99 bid, 99½ offered, according to a trader, who added that there was not a lot of activity in the name on Thursday.

For the quarter, the company reported net sales of $902 million compared to $923 million in the third quarter of 2002, a 2% decline that mainly reflected reduced North American customer build volumes. The company also reported a loss of 38 cents per share from continuing operations versus a loss of 54 cents per share in the same period in 2002. EBITDA was $41.9 million for the third quarter of 2003 as compared to $21.8 million for the third quarter of 2002. Results included after-tax charges for restructuring and long-lived asset impairments of $16 million in 2003 and $21.4 million in 2002.

"Aside from the restructuring charges, we had a solid third quarter, which is the first inning of C&A's rebound in financial performance. Plant level operations in both Europe and North America were much stronger this quarter than last year's comparable period," said David Stockman, chairman and chief executive officer, in a company news release.

For the nine months ended Sept. 30, the company reported sales of $2.97 billion compared to $2.92 billion in the same period of 2002 and a net loss available to common shareholders from continuing operations of $47.6 million or 57 cents per share, compared to a net loss of $84.5 million or $1.15 per share for the same period in 2002. Results included $33.1 million of after-tax charges for restructuring and long-lived asset impairments.

For 2003, the company expects net sales of $3.9 billion to $4 billion, operating income in the $115 million to $125 million range, EBITDA in the $245 million to $260 million range, loss per common share of 60 cents to 70 cents range and capital spending in the $155 million to $165 million range. All estimates are after the impact of full-year pre-tax restructuring and impairment charges of $62 million, increased from the company's prior estimate of $42 million.

Collins & Aikman is a Troy, Mich., designer, engineer and manufacturer of automotive interior components.

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