DS Waters Enterprises, a joint-venture of Groupe Danone and Suntory created last November, may break its leverage covenant in the third quarter, according to Moody's Investors Service. DS Waters has an undrawn $150 million revolver and $390 million of term loans led by Citigroup and J.P. Morgan. The leverage test hurdle is 3.4 times, but in the opinion of Moody's, leverage is expected to be in excess of four times for the remainder of fiscal 2004. Moody's has downgraded the bank debt from B1 to B3 and the ratings outlook is negative.
The "B" loan is currently quoted at 94 1/2-96 by Mark-It Partners/LoanX and the revolver is in the 91 1/2-92 3/4 range. The name dropped from the 99 context at the start of last month. Dan Redfern, cfo, did not return calls.
"Both the competitive landscape and the internal issues of integration are certainly playing a role in the credit deterioration," noted Kendra Smith, v.p., senior credit officer with Moody's. Despite some leveling of performance--albeit still soft--during the second quarter 2004 after posting poor first quarter results, business challenges and integration costs remain severe and EBIT is negative.
But Smith also comments there are factors that support the credit. "DS Waters' strength is that they are a very significant player in the industry and they have a sizeable amount of brands. They have a new management team, but they appear to have gotten their hands around the issues. One of the strongest positives is that the issues have been identified and now it's an execution story," she concluded.