Capital Markets

Parched: Liquidity Issues Spur Flurry of Downgrades

Rating agencies react to an increasingly common cash-poor state of affairs.
Stephen TaubFebruary 3, 2009

A growing number of companies are being downgraded by the credit-rating agencies, which are concerned about a potential liquidity squeeze. This week alone, a half dozen or so non-financial companies saw their ratings cut, in large part for that reason.

Standard & Poor’s lowered Ferro Corp.’s credit rating to B-minus from B-plus, and placed its ratings on CreditWatch with negative implications. S&P analyst Liley Mehta cited Ferro’s liquidity position following its weaker earnings guidance for the fourth quarter of 2008, caused falling sales in several of its segments.

While the operating weakness is widespread across Ferro’s industry — it makes ceramic glaze, porcelain enamel coatings, electronic materials, and inorganic pigments and colorants — Mehta expressed concern that the company may soon violate the leverage covenant of its credit agreement.

Standard & Poor’s also lowered both the corporate credit rating of Fairchild Semiconductor International and its senior secured rating on subsidiary Fairchild Semiconductor Corp. to BB-minus from BB.

That action “reflects the company’s challenging operating environment and the prospect for sharply weaker credit protection measures over the near term,” wrote analyst Lucy Patricola. The rating agency added that headroom under the performance covenants in the company’s bank agreement, including a minimum debt to EBITDA test, is likely to diminish significantly, though it does not expect the threshold to be breached.

Moody’s Investors Service downgraded Gannett Co.’s senior unsecured rating to Baa3 from Baa2, and commercial paper rating to Prime-3 from Prime-2. The agency also said the ratings remain on review for further possible downgrade.

The downgrade and continued review were prompted by deepening declines in Gannett’s revenue and Moody’s expectation that 2009 will be even more challenging for the company’s newspaper and broadcast operations. “Gannett’s free cash flow, while still positive, is deteriorating rapidly from very strong historical levels despite revenue-enhancement initiatives and cost reduction efforts,” Moody’s wrote. And Gannett’s traditional ability to mitigate pressure on leverage through debt reduction is diminishing as it faces the maturity of its entire debt capital structure by April 2012, the ratings agency added.

S&P lowered its corporate credit and issue-level ratings on CMP Susquehanna Radio Holdings Corp. deeper into junk territory and placed them on CreditWatch with negative implications. The changes reflect the difficulty the company faces to reduce debt and increase EBITDA sufficiently to maintain covenant compliance in 2009, when its leverage covenant is scheduled to stop down three times, according to analyst Jeanne Mathewson.

“The company’s negative operating performance trend and somewhat weak discretionary cash flow make dramatic debt reduction unlikely, Mathewson wrote. “In addition, we are concerned that CMP’s very high leverage and continuing tight credit market conditions have reduced the probability that the company will be able to obtain bank covenant relief, if needed, to amend its credit facility in the face of its tightening leverage covenant.”

S&P also lowered its long-term counterparty credit rating on Advanta Corp., noting that “increasing losses in Advanta’s revolving securitization trust could also trigger cash trapping mechanisms and ultimately hinder the company’s ability to fund itself via the asset-backed securities market over the longer-term.”

Further, S&P lowered its long-term counterparty credit rating on AmeriCredit Corp., citing, among other things, AmeriCredit’s liquidity position, “given numerous possible cash calls that we expect to affect liquidity over the 2009 calendar year.”

“AmeriCredit’s reliance on the asset-backed securities (ABS) markets for long-term funding is also a limiting ratings factor, given continued difficult credit market conditions and the limitations this is placing on AmeriCredit’s financial flexibility,” S&P added.

Finally, Moody’s downgraded the corporate family rating and probability of default rating for WII Components Inc. to Caa1 from B2, and the ratings on its senior unsecured notes due 2012 to B3 from B1, as a result of declining operating performance and a weakened liquidity profile. “While cash flows have historically been positive, Moody’s believes that recent operating declines and existing interest requirements will weaken the company’s liquidity profile in 2009,” Moody’s wrote.