Credit analyst says Cendant credit reduction plan would reverse recent spread widening

By Ronda Fears

Nashville, March 7 - Cendant Corp. has replaced older debt issues with lower-coupon debt but hasn't really cut its debtload, noted CreditSights analyst Frank Lee. That would help, he added, as Cendant spreads have widened in recent weeks due to risks at the company.

On Thursday, Cendant (Baa1/BBB) sold $600 million of new debt it two parts: $350 million of 6.25% senior notes due 2010 and $250 million of 7.125% senior notes due 2015. And in January the company sold $2 billion of senior notes.

Net-net, Lee said in a report Friday, Cendant has made no material debt reduction but has covered maturities for 2003 and replaced some older debt with new, lower-coupon debt.

Risks reflected in the spreads, however, would be mitigated by a lower debtload, he added.

"A few weeks ago the company's recent 7.375s of '13 had tightened to as much as +295 bp," but the spreads widened on risks associated with the war and poor consumer confidence that could impact Cendant's business, Lee said in the report.

Still, he said the two new issues appear to have been fairly priced at spreads of 320 and 350 basis points over Treasuries.

"We believe the widening in spreads reflects this risk," Lee said.

"Nevertheless, we believe if Cendant can fulfill its debt reduction strategy, the company's balance sheet and liquidity profile will improve significantly."

Cendant has said it plans to use 50% of projected free cash flow to retire debt this year.

Obligations for 2003 include $966 million of 7.75% notes and the potential $860 million put in May on the 0% convertible due May 2021.

With the new debt proceeds, Cendant also repaid $600 million outstanding on its credit revolver that had been drawn to fund the Budget acquisition and has bought back other debt outstanding, including some of the 11% senior subordinated notes assumed in the Avis acquisition.

Lee said Cendant still has about $500 million of the 11% notes outstanding and $420 million of 0% convertible notes due February 2021.

Cendant projects 2003 EPS of $1.46 and EBITDA of $3.2 billion to $3.4 billion, a 22% increase over 2002. Revenue is forecast at $17.7 billion to $18.5 billion, a 29% increase.

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