Moody's cuts AmeriQual to SGL-3

Moody's Investors Service said it downgraded AmeriQual Group LLC's speculative grade liquidity rating to SGL-3 from SGL-2, reflecting the recent weakening in the company's cash position owing to substantial cash outflows in 2006 and the degree to which the company is relying on its revolving credit facility to cover the cash short-falls.

The agency said it affirmed the company's other ratings because it believes that the balance of the credit fundamentals remain strong enough to support the current B1 corporate family rating and B2 senior notes rating.

The outlook remains stable.

Moody's said AmeriQual maintains only a small cash balance; it had essentially no cash as of September and only $3 million one year prior. Free cash flow was negative $15 million over the last 12 months ended in September when the company undertook heavy expenditures on working capital ($21 million) and capex ($8 million) to support business growth - revenues increased by over 30% over this period. The company also paid $17 million of material dividends to its equity holders over this period, resulting in the exhaustion of internal sources of liquidity to cover its operating requirements.

The agency said it expects free cash flows to improve over the next 12 months, as capex and working capital levels are likely to moderate, and assuming a modest degree of revenue growth associated with new military supply contracts while operating margins are maintained. Also, with the majority of the company's debt represented by the $105 million senior notes due 2012 and a $35 million senior secured revolving credit facility due 2010, the company will not face significant debt repayment requirements over the next few years.

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