The Mexican government's decision to impose a 20% value added tax onto high frustose corn syrup, a key market for Corn Products International, prompted Moody's Investors Service to put the company's senior unsecured debt rating of Baa3 under review for a possible downgrade. Weaker operating performance, added leveraged, and the instability in Argentina--a key market for the company-- are also factors in the review. "It hasn't been a great time if you are a producer of high fructose corn syrup," saidPeter Abdill, analyst at Moody's, noting over capacity in the industry, high net corn costs, and high energy costs as other negatives. On a positive note, contracts with beverage companies might increase the price of high frustose corn syrup, which could boost demand. "Will it be enough to offset issues in Latin America and corporate performance?" It's still a tough question according to Abdill.
Cheryl Beebe, v.p. and treasurer at Corn Products, is confident the company will prevail in this credit review and retain its investment-grade rating. "I think we will be fine," she said, backing up her statement with the recent Standard & Poor's bulletin that maintained the company's comparable BBB- rating. Regarding the Mexican tax, Beebe referred to the tariff as a short-term obstacle rather than a long-term problem. In response, the company has shut down the high fructose corn syrup line in that location, and has gone to Washington, D.C., to protest what it believes is a violation of the NAFTA agreement. "It was premature to make a ratings change based on Mexico," Beebee said. She believes Moody's "jumped the gun," echoing an uneasiness that has followed the Enron downgrade.
*Standard & Poor's, questioning Formica Corporation's near-term liquidy and its ability to meet its debt obligations without any additional flexibility from its bank group, has downgraded the company's senior secured bank loan rating to CCC from B-. The company filed for a waiver to existing bank covenant violations in August of 2001 and now has an extension to Feb. 9. With financial constraints including a fully drawn $120 credit revolver and bond payments due March 1, Formica may have to extend the waiver or reach an agreement on an amendment. Otherwise, the group could demand accelerated maturity on the loan, causing Formica to default on its bond payments. "The biggest concern is that they have a really heavy debt burden without a permanent solution," Pamela Rice, S&P analyst, explained. Although S&P believes that Formica is in the midst of negotiating an amendment of its financial covenants, the company may opt to restructure and file for bankruptcy if no agreement can be reached. Calls made to Formica were not returned.
* Moody's recently upgraded Rural Cellular Corporation's senior secured credit rating to Ba3 from B1, and the outlook for any further rating action is stable. Consistent cash flows, low working capital and reduction of bank debt are the reasons Moody's cites for the improved rating. "Basically, the rating of the entire company hasn't moved but you have less of it in bank debt," explained Marcus Jones, analyst at Moody's. Although high leverage, extensive industry competition and the uncertainty surrounding a maturing rural market are some of the challenges Rural Cellular faces, there is no expectation of any rate changing events in the near-term.