Payless Under Review; Extendicare Improves Financials

Payless ShoeSource's Ba2 senior bank loan rating has been placed under review due to lower sales and aggressive markdowns. These factors are likely to negatively impact the company's third quarter earnings, according to Moody's Investors Service. Payless reported negative comparable same-store sales during the critical back-to-school shopping season with its August sales coming in at 2.5% less and September at 1.1% less. In addition, aggressive inventory clearance markdowns create the potential for impacting margins.

Moody's is concerned that Payless' profitability and revenue will not be able to recover in the near-term. Consequently, there is also less likelihood that the company's financial metrics will rebound as quickly as anticipated. Another factor that continues to impact the credit is the company's efforts to maintain market share in the face of competition, particularly from other discount shops. Payless has a $150 million revolver after paying down its $200 million term loan with the proceeds from a new note issue over the summer. Calls to Ullrich Porzig, Payless' senior v.p., cfo and treasurer, were not returned.

*Standard & Poor's has raised the senior loan rating for Extendicare Health Services from BB- to BB. Improving financial results and the expectation that the company will be able to sustain that trend support this move. The long-term care company has about $398 million of debt outstanding and the senior bank loan is rated two notches above the company's corporate credit rating because of the likelihood that lenders will receive a full principal recovery plus interest in the event of default, explains S&P.

Going forward, Extendicare will have to deal with the volatile reimbursement and increasing insurance environment that has affected the industry as a whole. Between reimbursements for Medicare and Medicaid, more than 75% of Extendicare's revenues come from the government. But S&P notes that the company has withdrawn from Florida and Texas--two states with high patient liability costs--in an effort to counteract these trends. The company has also increased its care of Medicare patients, which have higher per diem rates than Medicaid and private pay patients, to 15% of its total in 2003. Calls to Mark Durishan, the company's v.p., cfo and treasurer, were not returned.