Moody's Investors Service downgraded the senior unsecured debt ratings of Phelps Dodge to Baa3 from Baa2, reflecting the constraints of the company's operating performance and financial flexibility. In light of this, the ability of the company to meaningfully reduce debt levels, improve coverage ratios and restore its balance sheet to historic strengths will be stretched out over a longer time frame. Headquartered in Phoenix, Ariz., Phelps Dodge is the world's second largest copper producer. Calls to Ramiro Peru, cfo, were not returned.
Moody's notes that short-term market fundamentals for copper have weakened during the year and inventories have continued to grow. Given the impact on the U.S. and worldwide economies following the tragedy of Sept. 11, and further softening in consumer, automotive and housing markets, the outlook for copper remains negative and a surplus position continues to grow in the absence of any producer cutbacks.
Supporting the rating is the company's good reserve position, quality ore bodies and good operational capabilities that are expected to allow the company to return to strong earnings performance over the medium term.
* Moody's downgraded the rating of Sleepmaster's $40 million revolving credit and original issue term loans totaling $132.5 million to Caa3 from B1 due to the company's deteriorated gross margin. In its most recently released SEC filing, the company indicated that it was out of compliance on four of its amended and restated financial covenants, suggesting material problems in its ability to service its debt and invest in its business. Sleepmaster, headquartered in Riviera Beach, Fla., is a manufacturer and distributor of a full line of Serta brand conventional bedding mattresses and box springs. Calls to John Czajkowski, controller, were not returned.
The debt service and ongoing expense pressure is particularly meaningful given the company's current non-compliance with its credit facilities and the fact that a current interest payment of $8 million on its senior subordinated notes is coming due on Nov. 15. The company's ability to service debt has been most recently challenged by large acquisition debt incurred in 2000, recent economic trends, trends in its industry and the deterioration of EBITDA performance from approximately $14.8 million for the six months ending in June of 2000 to $11.7 million a year later.
* Stryker's $1 billion in bank financing was upgraded to Baa2 from Baa3 due to improvement in the company's operating performance and financial flexibility. As Moody's notes, other strengths include the company's strong market position in hip and knee implants, positive industry growth trends, and geographically diverse product lines. In addition, the company's product pipeline should help sustain growth. David Simpson, cfo, said, "We're pleased that Moody's reflected the strength in our company by improving our rating."
Risks facing Stryker include strong competition in each of its product lines, and the potential for renewed pricing pressure, particularly in contracts with large group purchasing organizations.