S&P cuts Adelphia ratings

Standard & Poor's lowered its corporate credit rating on Adelphia Communications Corp. to CCC- from CCC+. S&P also cut the senior unsecured debt to CC from CCC, subordinated debt to C from CCC- and preferred stock to C from CC.

S&P also revised the watch implications to negative from developing.

The downgrade was based on developments that significantly increased the likelihood of covenant violations, S&P said.

On Wednesday, Adelphia suspended the ongoing audit of the company by Deloitte & Touche, pending completion of an investigation into issues raised in connection with Adelphia's yet-to-be-filed 10K. Adelphia has hired high-profile attorney David Boise of Boise, Schiller & Flexner in connection with this investigation.

Because an investigation is likely to take a considerable amount of time, it is increasingly doubtful that the company can avoid at least a technical default, S&P said.

Moreover, S&P added, liquidity may be jeopardized by these developments. In addition to the suspension of the audit, Adelphia announced the resignation of John Rigas as chairman, president, CEO and founder.

S&P has twice lowered ratings since the company disclosed co-borrowings by Adelphia subsidiaries and certain companies affiliated with the Rigas Family. These co-borrowings, which have not been consolidated on Adelphia's balance sheet, totaled almost $2.3 billion at Dec. 31.

Moody's cuts Adelphia ratings

Moody's again downgraded the ratings for Adelphia Communications Corp. and subsidiaries, and left the company's ratings under review for possible further downgrade. The senior secured bank debt was cut to B1 from Ba3, senior unsecured notes to Caa1 from B3, convertible subordinated notes to Caa2 from Caa1 and convertible and exchangeable preferred stock to Caa3 from Caa2.

"The downgrade reflects our belief that we may not be fully aware of all potential issues surrounding the company's financial affairs, as suggested by the press release issued by the company today and specifically the commencement of an internal investigation into the circumstances surrounding the delayed filing of its requisite 10-K," Moody's said.

"We had previously suggested in our last press release that the company's liquidity position was extremely tight given its technical default under various bank credit facilities and potential delisting by the NASDAQ, the corresponding result of which was an inability to make additional draws under remaining available bank lines and the prospect of a large put of certain junior debt obligations back to the company in advance of their scheduled maturities," Moody's said.

"It had been our prior understanding based on extensive discussions with management on multiple occasions that the company would overcome its near-term hurdles by satisfying any and all of its reporting requirements and thereby averting an immediate liquidity crisis," Moody's said.

"In the absence of resolving these seemingly logistical hurdles we had also indicated in our last press release when the ratings were lowered by just one notch earlier this month that the ratings would likely be lowered again under an assumed event of default scenario.

"The downgrade represents our belief that we may in fact be in more than just a technical default situation today, that the situation may have deteriorated further, and that there is now little time left to remedy the same," Moody's said.

The revised ratings subsequently represent a new respective rating ceilings as currently anticipated.

While Mooyd's said it believes that the banks are likely to again waive the reporting requirement for some interim period of time, albeit continue to deny access to new monies, and that it would not necessarily be in the best interest of convertible subordinated noteholders to actually put their securities back to the company, in the absence of gaining renewed access to existing bank lines and/or some alternative source of liquidity on a large scale the company will likely run out of cash very soon, perhaps as early as today if and when its $50 million interest payment is made, Moody's said.

When coupled with the growing list of potential default triggers, and all of the cross-default and cross-acceleration language universally embedded in the various governing documents for the financial instruments that we rate, Moody's said it now believes that the prospect of a potential bankruptcy filing is more likely and may ultimately be unavoidable.

S&P rates Pep Boys convert at BB-

Standard & Poor's assigned a BB- rating to The Pep Boys - Manny Moe & Jack's planned $125 million convertible senior unsecured note due 2007. The BB- corporate credit rating was also affirmed.

The rating reflects risks of operating in a highly competitive and consolidating auto parts retail segment, high leverage and significant debt maturities. These risks are mitigated, somewhat, by the company's leading market position in the industry and improved operating performance in 2001.

Slower growth trends in recent years have led to consolidation in the do-it-yourself segment of the market. This, coupled with aggressive store expansion by Pep Boys in previous years, led to declining performance from 1997 to 2000.

In the latter part of 2000, the company implemented its profit enhancement plan in which it closed 38 underperforming stores and reduced certain field, distribution, and store support functions. The company also substantially reduced growth as it opened only one store in 2001 and plans to open two stores in 2002.

Pep Boys has been shifting its sales mix away from the do-it-yourself market in favor of the do-it-for-me market. By having service bays and larger stores than competitors such as AutoZone Inc., S&P believes the company holds a significant advantage in leveraging its national store base to grow its service business, which now represents about 56% of sales.

Lease-adjusted operating margins improved to 11% in 2001 from about 9% in 2000 as the company realized benefits from profit enhancement initiatives implemented the year before. Same-store sales were positive 1% in the first quarter of 2002 after a decline of about 6% in 2001. EBITDA coverage of interest improved to 3.0 times in 2001 from 2.4 times in 2000.

The convertible note is expected to be used to repay debt maturities in 2002. However, Pep Boys will continue to face significant debt maturities beyond 2002, requiring the company to continue to generate positive free cash flow and maintain sufficient availability under its bank facilities.

The company generated $144 million of free cash flow in 2001. S&P believes Pep Boys will generate free operating cash flow in the future, as the company has improved operating efficiencies and is not expected to open a significant number of new stores. As of May 4, the company had about $140 million of availability under its lines of credit.

The company's improved operating performance and slower growth strategy provide support for the ratings. However, significant debt maturities beyond 2002 and continued challenges in shifting the company's strategic focus to service and installation limit the upside potential for the ratings over the next two years.

Moody's rates Pep Boys convert at B1

Moody's assigned a B1 rating to the new convertible senior unsecured notes due 2007 to be issued by The Pep Boys - Manny, Moe & Jack.

The rating reflects the company's national franchise and service capabilities as well as the operating and financial challenges faced in the past two years, its relatively high adjusted leverage and the intense competition in its heavily fragmented industry.

The rating outlook is positive, based on the turnaround in merchandise comparable store sales and consolidated profitability following the completion of the company's profit enhancement plan. Should these improvements be sustained and enhanced, Pep Boys' ratings could experience upward pressure.

The new convertible is unsecured but, unlike existing public debt, is guaranteed by material operating subsidiaries. The subsidiaries account for the majority of consolidated sales and profits, giving the new Notes a meaningful structural advantage over existing senior unsecured creditors.

Moody's noted, however, that significant consolidated assets have been pledged to support unrated non-public debt facilities totaling $288.7 million. Pep Boys' $225 million senior revolving credit agreement, expiring in September 2004, is secured by inventory and accounts receivable, and its $63.7 million senior term loans are secured by certain equipment and real estate.

Moody's anticipates that a significant portion of the proceeds from this new issue will be applied to reduction in senior unsecured debt. Given the slim asset coverage for unsecured creditors, should Pep Boys in the future replace significant additional amounts of unsecured and unguaranteed senior debt with guaranteed senior unsecured debt, the B1 rating on these new Notes could be lowered to B2.

Moody's confirms Quantum ratings

Moody's confirmed the ratings of Quantum Corp., including the 7% convertible subordinated notes due 2004 at B2, completing a review due to the merger of its hard disk drive group with Maxtor Corp. The outlook is stable.

The ratings take into account the 23% revenue decline to $1.1 billion in Quantum's fiscal year ended March 31 from $1.4 billion in fiscal 2001, when the business was operated as Quantum's DLT & Storage Systems Group.

Operating income, adjusted for transition expenses associated with the sale of the hard disk drive group to Maxtor and various restructuring charges, decreased to $40 million, or 3.7% of revenues, from $261 million, or 19% of revenues, one year earlier.

An operating loss of $13 million incurred in fiscal fourth quarter and an anticipated loss in fiscal first quarter would indicate that the restructuring activities undertaken during fiscal 2002 did not fully gauge the decline in demand.

However, the risk to the company's free cash flow is mitigated by the company's low 1.6 times debt to EBITDA (2.4 times debt to EBITA). This ratio reflects Maxtor's contractual obligation to reimburse Quantum for the hard disk drive group's pro rata share of interest and principal on the notes.

Additionally, Quantum's balance sheet is only moderately leveraged, with its respective share of the convertibles comprising only 25% of capitalization, pro forma for the optional redemption in April by the original holders of the $41 million notes assumed in the 2001 acquisition of M4 Data Ltd.

The stable outlook reflects the company's solid liquidity position, with cash and investments totaling $344 million on March 31 and an unsecured senior credit facility due 2003, which was fully available.

S&P puts Key Energy on positive watch

Standard & Poor's placed its ratings on Key Energy Services Inc. on watch with positive implications following the announcement that Key has entered into merger agreement with Q Services Inc.

S&P says Sierra Pacific earnings have no immediate impact

Standard & Poor's said Sierra Pacific Resources' loss has no immediate ratings consequences, as the agency already incorporated into the current ratings the cause of the loss as well as the tight liquidity position.

On April 23, S&P lowered its corporate credit ratings on Sierra Pacific and subsidiaries to B+ from BB and put the ratings on negative watch.

"The key ratings determinant in the short term is the progress by Sierra Pacific in its current negotiations with power suppliers to achieve extended payment terms for its above-market contracts for this summer," S&P said.

Nevada Power's base tariff energy rate (BTER), effectively the commodity portion of rates, is $52 per megawatt-hour, above current spot prices and current forward prices for the summer, the rating agency said.

"Any agreement on an extended payment scheme that requires Sierra Pacific to pay rates that are closer to the BTER for this summer could significantly ameliorate the otherwise dire liquidity situation and limit the need to access the capital markets," S&P added.

"However, suppliers must also agree to waive their respective right to collateral under the contracts, which, on a total marked-to-market basis, is several hundreds of millions of dollars. If Sierra Pacific is not able to reach such an agreement, the ratings will be downgraded further."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.