Moody's Investors Service has downgraded Key3Media Group's $100 million senior secured credit from B3 to Caa1 due, in part, to the company's unlikely ability to meet imminent bank covenants. The Los Angeles trade show and conference management company has a severe liquidity problem that could lead to covenant violations and a likely default on bond interest payments, explained Christina Padgett, senior credit officer at Moody's.
Key3Media's debt-to-EBITDA ratio is greater than 12 times and its present EBITDA of $30 million is insufficient to cover interest expenses. Along with a steep $370 million debt pile, Moody's doubts that the company will be able to raise revenues in the near term. The company's revenue has fallen from $115.7 million in the second quarter of 2001 to $38.8 million in 2002, and Moody's sees limited prospects for recovery, considering the rapid deterioration of technology spending.
The outlook remains negative, as the downturn in the technology sector has greatly affected the success of the company. However, Moody's believes that, if the company successfully executes its financial restructuring initiatives, it can buoy its risk of default and generate enough cash flow to support its credit facility. Key3Media was unable to provide a formal response by press time.
* Moody's also placed Dole Food's senior unsecured bank facility, rated Ba1, on review for a possible downgrade, following word of CEO David Murdock's offer to acquire the 76% of the company that he does not already own for $29.50 per share. The outcome of the review weighs on whether or not the buyout takes place and, if it does, on the restructuring implemented to handle the increased leverage resulting from the transaction.
The ratings already consider Dole's recently volatile earnings and cash flow numbers, reflecting the difficult food industry in which the Westlake Village, Calif., company competes. Factors such as unstable commodity prices, trade restrictions and weather and disease threats force Dole to repeatedly restructure its operations to adapt to constantly changing industry conditions. However, Moody's credits the company with a strong market presence and a diverse product portfolio.
* Lastly, Fitch Ratings lowered its ratings on Staples' $600 million revolver from BBB+ to BBB due to the company's increased financial leverage and added risks resulting from a planned $814 million acquisition of French mail-order business Guilbert. The downgrade follows a negative watch issued last month (LMW, 9/1).
Fitch acknowledges the Framingham, Mass., company's more aggressive acquisition strategy and the additional management demands this creates during a tough time in the U.S. retail market. "The acquisition pushed up financial leverage and more exposure to Europe at a time when retail business is soft," said Fitch analystPhilip Zahn.
Fitch did credit Staples' response to weakened sales with modified inventories and reduced chain expansion and its solid delivery business, which improved the company's operating margin from 4.8% as of August 2001 to 5.2% as of August 2002. The company's recently announced $325 million equity offering, which will back the Guilbert acquisition, also should help to de-lever its pro-forma multiples from 3.5 times to 3.2 times. "I think it's a stable situation, assuming they do that equity offering," Zahn said.