Covenant Compliance Issues Lead To Downgrades

  • 07 Jul 2002
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The bank debt of Encompass Services was lowered from B1 to B2 as Moody's Investors Service fears that deterioration in non-residential construction, which has already damaged profitability, will put a strain on the company's covenant compliance efforts. The credit facility comprises a $300 million revolver, a $130 million "A" term loan and a $170 million "B" term loan.

The prolonged slowdown in commercial construction continues to affect the Houston company, which provides mechanical, electrical and cleaning services to commercial buildings. Indeed, Encompass Services has lowered both its revenue and EBITDA guidance. This move will hurt the company's weakened credit profile going forward by impacting two of its key ratios, namely total debt-to-EBITDA and EBITDA-to-interest coverage, which the rating agency uses to evaluate a credit.

In exchange for a second waiver, the company has pledged $31 million in proceeds from a potential $35 million equity injection by Apollo Investments to paying down bank debt. If Encompass Services does not close the Apollo deal by October 15, it will be in default under its bank agreement. Moody's is unsure how much more wiggle room the company's banks will give it if more covenant issues arise. Calls to Darren Miller, cfo, were not returned by press time

* Due to the uncertainty around Allegiance Telecom's compliance with its bank covenants, Fitch Ratings has downgraded its $500 million secured credit facility from B+ to CCC. The rating agency also has downgraded the company's 127/ 8% senior notes and its senior discount notes from B to CCC. Both the bank debt and the notes currently are rated the same because the recovery value of the assets securing the loan is unclear. "The recovery value of telecom assets has been so low we felt that it was prudent not to make that distinction," said Rachael Rennert, Fitch analyst.

Although the company's recent purchase of WorldCom's equipment provisioning and maintenance businesses allowed Allegiance to remain in covenant compliance, Fitch is concerned with its ability to generate growth in core businesses and comply with its covenants going forward. If the company violates its covenants and is forced to pay back the $350 million outstanding on its credit facility, it will have insufficient funds to make that payment. Calls to Thomas Lord, cfo of Allegiance, were not returned by press time.

* Moody's also has downgraded Venture Holdings' $425 million credit line from B2 to B1 after four of the company's German directors claimed that its Peguform operations are insolvent. The rating agency expects that Venture Holdings will be impaired in the near- to intermediate term because of these events, and the company remains on review due to the uncertainty surrounding future determinations of the German courts regarding this insolvency.

The bank debt is secured by first-priority security interests in all of the assets of Venture and its domestic subsidiaries and also is guaranteed by the domestic subsidiaries. The limitations of the company's collateral and guarantee package are reflected in the B2 rating. Calls to Michael Alexander, company cfo, were not returned by press time.

  • 07 Jul 2002

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2 Citi 6,449 21 10.96
3 BNP Paribas 5,093 18 8.66
4 Barclays 4,040 11 6.87
5 Lloyds Bank 3,615 14 6.15

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