Capital Markets

Weak Outlook for Durable Goods Companies

They have weathered the credit crunch so far, but if consumer spending continue to slide, these companies' debt ratings could follow suit.
Stephen TaubJanuary 23, 2008

A continued drop in consumer spending could cause especially weak financial performance for most companies in the consumer-durables sector, Moody’s Investors Service warned. That could mean there will be more negative debt ratings than positive one for such companies over the next year.

On the brighter side, Moody’s said that while a few speculative-grade companies are particularly vulnerable to covenant violations, most companies could see a 5 percent to 10 percent decrease in profitability and still comply with covenants.

“Consumer-durables companies have withstood the subprime-driven credit crunch, so far,” Moody’s said in a new report. “But the first quarter of 2008 will be an important test for the sector, especially if discretionary consumer spending continues to soften.”

Moody’s said a review of 38 rated consumer-durables companies shows that five have debt maturities through 2009. Three of those — Brunswick, Whirlpool, and Dixie Group — have more cash available from revolving credit facilities than the amounts due. But two others, Human Touch and Waterford Wedgwood, both rated Caa1, could be vulnerable.

Human Touch has a 2008 maturity that is close to double the current amount available under its revolver, and the same is true for Waterford Wedgwood in, Moody’s noted.

Among the remaining 33 companies, most appear to have enough cash on their balance sheets or availability under their credit facilities to meet maturities, working-capital needs, and capital expenditures over the next couple of years, provided that current projections of cash flow from operations hold up, the rating company said.

But it added, “That said, we are concerned about how long the credit tightness will last and about its effect on speculative-grade consumer-durables companies, which face the highest liquidity risk.”

Consumer-durables issuers with minimal covenant cushions that may require amendments to their facilities include Gibson, Hillman, and Directed Electronics.

“If credit facilities need to be renegotiated, we believe that banks would be less forgiving than they have been in the recent past, especially if a company has breached loan covenants,” Moody’s said.

Moody’s ranked consumer-durables industries from least vulnerable to a consumer spending slowdown — mattress companies — to the to most vulnerable — recreational-product companies.