Ratings Actions & Outlooks
November 21, 2008
Moody's Downgrades GMAC Unsecured Debt
Moody's downgraded the senior unsecured debt of GMAC LLC to C from Caa1, following GMAC's launch of debt exchange offerings for debt in face amount totaling $38 billion. In a related action, Moody's downgraded ResCap's senior unsecured rating to C from Ca.
The downgrade of GMAC's ratings is based on Moody's view that the offering is a distressed exchange, as it results in a diminished financial obligation for GMAC. Distressed exchanges are included in Moody's definition of default.
Holders of GMAC bonds eligible for exchange may receive a combination of new senior notes guaranteed by certain GMAC subsidiaries, subordinated debt, preferred shares, and cash.
Bondholders exchanging GMAC debt and participating in the cash option could receive notional value in the exchange that represents a potentially meaningful discount to the original par value of the exchanged debt. Additionally, while the maturity and interest rate of the new senior notes will closely match those of the old notes, the newly issued preferred shares will have both indefinite maturity and lower priority compared with the old notes.
Also, investors with eligible debt that don't participate in the exchange and holders of approximately $38 billion of non-eligible debt will be structurally subordinated to the new senior notes, as the old notes will not benefit from the GMAC subsidiary guarantees.
S&P Puts Harley-Davidson On Credit Watch
Standard & Poor's placed its long-term ratings for Harley-Davidson, including the 'A' corporate credit rating, on CreditWatch with negative implications.
"The CreditWatch listing is based on the deteriorating outlook for the motorcycle market, weaker operating performance, and concerns regarding the cost and availability of retail motorcycle financing," S&P said.
Revenues declined 7.7% in the third quarter ended Sept. 28, while S&P estimates that EBITDA fell about 26% due to less efficient absorption of overhead.
There is now a considerable and growing used motorcycle market competing with sales of new bikes, the rating agency warned, saying it is concerned that the near-term economic outlook portends a continuation of these operating and financial trends.
Milwaukee, Wis.-based Harley-Davidson is the only major US-based motorcycle manufacturer. Total debt was roughly $3.2 billion as of Sept. 28.
Moody's Downgrades Aleris's Ratings
Moody's downgraded Aleris International Inc.'s corporate family rating and its probability of default rating to Caa1 from B2.
At the same time, Moody's downgraded the ratings on the senior secured term loans at Aleris and Aleris Deutschland Holding GMBH to Caa1 from B2, the rating on Aleris's 9% senior unsecured notes due 2014 to Caa2 from B3 and the rating on its 10% senior subordinated notes due 2016 to Caa3 from Caa1.
The rating outlook is stable.
The downgrade reflects the company's weakened financial position and considers the difficult operating environment facing the company in light of extremely weak end-market conditions in its major markets. Automotive and building and construction represent roughly 45% of revenues.
As market conditions have deteriorated, Aleris's performance reflects a downward trend in earnings and minimal debt protection coverage ratios.This trend was particularly magnified in the third quarter of 2008 and Moody's does not anticipate any meaningful improvement in market conditions in 2009.
Aleris, Bechwood, Ohio, produces aluminum rolled and extruded products and participates in the aluminum recycling and alloy products markets.
S&P Cuts Best Buy
S&P lowered its ratings on Richfield , Minn. electronics retailer Best Buy, including the corporate credit rating to 'BBB-' from 'BBB'. The outlook is stable.
"The rating change reflects our belief that the company will be more challenged than previously expected by the current weak economic environment in the US," said S&P. "Credit metrics will deteriorate more than we had originally projected as a result of a deepening spending pull-back by consumers."
Best Buy recently announced worse-than-expected same-store sales for October. The retailer said sales were down 7.6%. "We now expect same-store sales to be down in the high single digits for the fourth quarter of 2008," according to S&P.
Endurance Business Media Cut By Moody's
Moody's downgraded the ratings of Endurance Business Media Inc. and placed the ratings on review for possible further downgrade.
The corporate family rating and probability of default rating were lowered to Caa1 from B2, the first lien senior secured credit facility rating was lowered to B3 from B1 and the second lien senior secured term loan rating was lowered to Caa3 from Caa1.
The Caa1 CFR incorporates the company's weak liquidity profile, small scale, very high financial leverage and the precipitous decline in end market demand.
The ratings downgrade was prompted by a significantly greater decline in year-to-date September revenue and operating results than Moody's previously expected.
Negative headwinds in the sector contributed to a material drop in advertising pages in the company's publications, including its flagship 'Homes & Land' brand.
Despite cost-cutting initiatives, EBITDA has declined approximately 33% year-to-date as compared to the prior year. This steep deterioration in EBITDA, combined with a scheduled step-down in the maximum leverage covenant to 5.75 times at September 30, led to a covenant default on both the first- and second-lien loans.
Endurance Business is based in Tallahassee, Fla. It publishes free circulation real estate guides and provides commercial printing services. For the 12 months ended Sept. 30, revenues were $78 million.
Level3 Cut by S&P
S&P lowered its corporate credit rating on Broomfield, Colo.-based Level 3 Communications to 'CC' from 'B-'.
The agency also lowered the issue-level ratings on the company's 6% convertible subordinated notes due 2009, the 6% convertible subordinated notes due 2010, and the 2.875% convertible senior notes due 2010 to 'C' from 'CCC'.
S&P placed these ratings on CreditWatch with negative implications following Level 3's announcement of below par cash tender offers for the three debt issues.
Upon successful completion of the tender offers, S&P said it would lower the affected note ratings to 'D'.
"We would also initially lower the corporate credit rating to 'SD' for selective default, before assigning a new corporate credit rating of 'B-' to the company," the rating agency said.
S&P Cuts Salem
S&P lowered its corporate credit rating on Camarillo, Calif.–based radio broadcasting company Salem Communications Corp. to 'B' from 'B+'. The rating outlook is negative.
In addition, S&P lowered the issue-level rating on Salem Communications Holding Corp.'s $100 million 7.75% senior subordinated notes to 'CCC+'. The recovery rating on this debt remains unchanged at '6', indicating S&P's expectation of negligible, 0% to 10%, recovery in the event of a payment default.
"The ratings downgrade reflects the company's narrow margin of covenant compliance, as well as risks linked to its intermediate-term need for comprehensive refinancing," said S&P.
Although the company is working to reduce its operating expenses and complete asset sales, S&P said Salem will be challenged to comply with the first-quarter step-down given currently weak advertising demand.
In addition, the company will need to address roughly $334 million of 2010 maturities, which pose risks in the current credit environment and could bring a meaningful increase in pricing from currently attractive rates.
S&P Cuts Harrah's
S&P lowered its corporate credit rating on Las Vegas-based Harrah's Entertainment Inc. and its wholly owned subsidiary, Harrah's Operating Co. Inc. to 'CC' from 'B'.
At the same time, S&P lowered the issue-level rating on the company's secured loan to 'B+' from 'BB-'. In addition, S&P lowered the rating on each of the company's senior unsecured and subordinated debt issues to 'C'.
All ratings remain on creditwatch with negative implications.
These actions follow the company's announcement that it is offering to exchange up to $2.1 billion of proposed new second-lien senior secured notes for a portion of each of the outstanding senior unsecured and subordinated notes in the capital structure. In some cases, an exchange for the new notes would represent a substantial discount to the par amount of the outstanding issue.
"We view the exchanges as being tantamount to default given the distressed financial condition of the company and our concerns around Harrah's ability to service its current capital structure over the intermediate term absent this exchange offer," said S&P.
S&P Cuts Hollywood Theaters
S&P lowered its corporate credit and issue-level ratings on Portland, Ore.-based Hollywood Theaters Inc. by one notch and removed them from CreditWatch, where they were placed with negative implications on June 13, 2008. The rating outlook is negative.
"The ratings downgrade reflects our uncertainty regarding Hollywood 's ability to maintain compliance with covenants as they tighten in the fourth quarter and twice in 2009," said S&P. "We also believe that the company could face difficulty in refinancing its debt when its first-lien term loan and revolving credit facility mature in July 2009."
As of Sept. 30, the company had a 1% EBITDA cushion against its first-lien leverage covenant. This covenant stepped down an additional quarter turn on Oct. 1. Hollywood will need to increase EBITDA by roughly 25% in the fourth quarter in order to maintain compliance, which S&P views as unlikely if the box office underperforms in December. The company's leverage covenants tighten two additional times in 2009.
Revenue and EBITDA in the quarter ended Sept. 30, were down 13% and 17% year over year, respectively. The declines were due to an industrywide decline in attendance, increased competitive pressure on five of Hollywood 's theatres, and the impact of fewer theatres in 2008 due to closures.
Moody's Cuts Gastar
Moody's cut Gastar Exploration USA, Inc's senior secured note rating to Caa3 from Caa2. Moody's also downgraded the company's probability of default rating to Caa3 from Caa2 and its corporate family rating to Caa3 from Caa2.
In addition, Moody's lowered Gastar's speculative grade liquidity (SGL) rating to SGL-4 from SGL-3.
The downgrade was prompted by Moody's concern that at the end of the fourth quarter of 2008 the company may not be able to comply with its current ratio financial covenant per its bank credit facility.
The current market conditions amplify the uncertainty surrounding the company's ability to negotiate a waiver of the covenant or obtain alternate liquidity. Additionally, Gastar's liquidity profile is constrained by the company's internal funding shortfall over the next 15 months of potentially $110 million, as estimated by Moody's.
Over the next five quarters, external funding will be needed to help cover working capital, planned capital expenditures of $116 million, $33 million of debt maturities during 2009, and the October 2009 maturity of its $19.4 million credit facility, which Moody's expects to be fully drawn by the end of 2008.
The downgrade of the speculative grade liquidity rating reflects weak liquidity, in part, due to the near-term covenant compliance concerns.
Gastar is an independent E&P company headquartered in Houston.
Moody's Lowers Gateway Casinos' Ratings
Moody's lowered the ratings of Gateway Casinos and Entertainment because of lower than expected earnings and substantial leverage. A negative rating outlook was assigned.
Gateway's actual results continue to be lower than Moody's expectations. As a result, debt/annualized EBITDA for the latest 12-month period ended September 30 was significant, at over 10 times.
The company's earnings have been pressured by weakened economic conditions, a strong Canadian dollar, heightened competition among existing casino operators, and a smoking ban that went into effect earlier this year in British Columbia.
The B3 corporate family rating acknowledges Gateway's recent announcement that its equity sponsors will contribute approximately $20 million of additional equity to support planned development projects. It also incorporates several recently announced cost saving initiatives as well as the opening of new casino developments through the first half of 2010 that will contribute additional earnings.
The negative rating outlook reflects Moody's expectation that the difficult economic environment along with continued intense competition and existing smoking ban in British Columbia will make it difficult for the Gateway to reduce leverage in the foreseeable future. Moody's also believes that these factors will continue to challenge the company's ability with respect to meeting the minimum EBITDA requirement contained in its bank covenants, as well as the total debt/EBITDA test that begins in March 2010.
Gateway Casinos owns and operates nine casinos throughout Canada.
Moody's Cuts Masonite
Moody's lowered Masonite Corp.'s corporate family rating to Ca from Caa3 and affirmed its probability of default rating at Ca. The ratings outlook remains negative.
The downgrade of the company's corporate family rating to Ca reflects ongoing operating difficulties, covenant violations, and missed interest payment on its senior subordinated unsecured notes.
Due to uncured covenant violations, the company's banks continue to block payment on its senior unsecured bonds due 2015. As a result, the company failed to cure the interest payment default under the notes by the end of the 30 day grace period.
The downgrade considers the company's announcement that it has entered into a forbearance agreement through December 31, with a majority of the holders of the senior subordinated note due 2015.
The company's speculative grade liquidity rating remains at SGL-4 and indicates weak liquidity for the next 12 months, and takes into consideration limited internal liquidity, lack of external liquidity, covenant violations, and encumbrance of key assets. The company fully drew down on its revolver before the tripping its covenants.
Masonite is based in Ontario, Canada, and manufactures doors and door components with customers in over 70 countries. Revenues for the trailing 12 month period ended June 30 were approximately $1.9 billion.
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