Ratings Actions
May 9, 2008
S&P Responds to Best Buy Acquisition Plans
Standard & Poor's Ratings Services placed ratings of Best Buy, including its 'BBB' corporate credit rating, on CreditWatch with negative implications.
S&P said its action follows the Richfield, Minn.-based consumer electronics retailer’s plans to acquire 50% of a joint venture that will own U.K.-based Carphone Warehouse Group's European and US retail interest for $2.1 billion, or about 8 times its share of Carphone's retail EBITDA.
Carphone's fixed-line telecom business is not part of the transaction. Best Buy will be financing the acquisition through a combination of cash on hand, existing bank lines, and other new borrowings. "The transaction is transformational for Best Buy because it will add 2,400 stores in Europe, thereby increasing its international presence, and also help the company grow its retail cellular phone market," according to S&P. Nevertheless, the potential credit rating implications could be negative due to increased leverage and the challenges of integrating two different corporate cultures, according to the rating agency.
Moody’s Cuts Outlook for Collective Brands
Moody’s Investors Service last week revised its rating outlook for Collective Brands to negative from stable. All other ratings of Collective Brands were affirmed.
Based in Topeka, Kansas, Collective Brands operates 4,552 retail stores in 15 countries and territories under the Payless Shoe Source brand. In August 2007 the company acquired Stride Rite, a marketer of children's footwear as well as casual and athletic footwear for adults through wholesale accounts and owned retail locations. The company reported revenue of about $3 billion in its fiscal year ending Feb. 2, 2008.
“The negative outlook reflects uncertainties resulting from the announcement that a jury verdict of approximately $305 million was rendered against Collective Brands," Moody's said.
The jury verdict relates to a lawsuit filed by Adidas Americas in connection with alleged trademark infringement. Collective Brands said it will ask the court to set aside the verdict and, if it is not granted, intends to take all necessary steps to overturn this decision. The negative outlook also reflects that this uncertainty is arising in a more challenging macro economic environment and follows after the recent increase in leverage to finance the acquisition of Stride Rite, which closed in August 2007.
Moody’s Cuts PharmaNet Rating, Changes Outlook
Moody's lowered the speculative grade liquidity, or SGL, rating of PharmaNet Development Group to SGL-3 from SGL-2 and changed the ratings outlook to stable from positive.
The change in the SGL rating reflects the deterioration in liquidity following an unusually high level of contract cancellations in late 2007 and early 2008. PharmaNet, based in Princeton, NJ, provides Phase I through Phase IV clinical development services, bio-analytical laboratory services, and specialized drug development services to pharmaceutical, biotechnology and generic pharmaceutical companies.
PharmaNet generated direct revenues of approximately $365 million for the 12 months ended March 31, according to Moody’s.
The loss of late-stage contract revenues, combined with weak sample volumes in the early stage business, resulted in free cash flow generation that was meaningfully lower than Moody's had expected. Liquidity continues to be supported by the company's cash position which was roughly $64 million at March 31. Although the company has not recently used the revolver, PharmaNet was no longer able to access its $45 million revolver facility due to the reduction in trailing 12-month consolidated EBITDA and resulting covenant restrictions. If PharmaNet does not demonstrate significant improvement in cash flow generation in upcoming quarters, there could be further pressure on the company's SGL rating.
The change in outlook to stable from positive reflects the magnitude of the recent contract cancellations as well as increased uncertainty regarding the company's ability to meet potential cash needs in August 2009 when bond holders may require the company to repurchase 100% of the principal value, roughly $144 million, of PharmaNet's convertible senior notes, the rating agency says. Moody’s says it believes there is increased uncertainty given the recent reduction in the company's liquidity, the difficult current credit environment and the significant decline in the value of the company's equity in recent months. The stable outlook is based on the assumptions that the significant level of contract cancellations in recent months does not mark the beginning of an ongoing trend and that financial performance will improve in the next quarter.
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