As the $565 million "B" loan for Corrections Corporation of America (CCA) breaks into the secondary market, Moody's Investors Service has upgraded the rating to B1 from B2. The successful Lehman Brothers led-refinancing is a key factor in the upgrade, as much of the CCA debt was maturing at the end of this year, and there was refinancing risk. With this done, CCA will have amortization increasing from $15 million to $27 million over the next four years, and will have no significant payments before 2008, thus providing the company with a more laddered debt maturity schedule, according to Moody's.
The upgrade is also based on the strengthened ability of CCA to maintain its leadership position in the corrections business. The long-term trend of the privatization of prisons and the continuing demand for detention space are also solid factors. But, there are still concerns, such as the inherent volatility of operating in a specialty sub-sector where demand for space is derived from local, state and federal contracts, and the correction facilities offer no realistic alternative uses. Irving Lingo, executive v.p. and cfo, did not return calls.
* Moody's has also changed the rating outlook for The Pep Boys-Manny, Moe and Jack from stable to positive due to the turnaround in merchandise comparable store sales and consolidated profitability following the completion of the company's profit enhancement plan. The senior implied rating is at B1 and the senior unsecured is B2. Pep Boys has a $225 million senior secured revolver and $90 million in term loans. Pep Boys launched its plan in late 2000. The company closed two distribution centers and 38 unprofitable stores, reduced store hours, eliminated its unprofitable special order program, cut 1,000 stock-keeping units, and ended commercial delivery in 51 stores. Annual benefits from these initiatives are now estimated at over $84 million; original expectation was only about $70 million. Spokesman Bill Furtkevic, did not return calls.
* Moody's has lowered the ratings of Gateway's senior unsecured debt to Ba3 from Ba1. This reflects the challenges Gateway faces to expand revenues and market share while at the same time reducing its cost structure so it can return to profitability on a sustainable basis in the intensely competitive U.S. personal computer market. Moody's predicts losses over the near term, but the rating outlook is stable, driven by the view that financial risk over the next year is minimal, given its debt free balance sheet and cash of $1.2 billion. While Moody's expects liquidity will remain strong over the near term, it is possible that continued operating losses could consume some cash. The company needs to sell personal computers in order to sell more profitable "Beyond the box" products and services (software, peripherals, Internet access, warranty, training services, and financing). Ashley Wood, a Gateway spokeswoman, said "The debt ratings downgrade is irrelevant to the growth strategy, as we have no long-term debt. Gateway will operate at a loss over the next few quarters to gain market share."