Moody's Investors Service downgraded the $300 million unsecured revolving credit of Jo-Anne Stores, Inc. to B1 from Ba3. Moody's said the downgrade reflects revised expectations about Jo-Anne's ability to achieve previous profitability and leverage targets during 2001 and 2002. In addition, the Jo-Anne Etc. superstores have not performed to expectations. The ratings reflect Moody's belief that leverage and debt protection measures will not improve for the next 12-18 months and that profitability will remain challenged due to inventory rebalancing centered around the Etc. superstores. In the wake of the downgrade, the ratings outlook is stable as the company's management focuses on cash flow and conservative financial strategies in the face of disappointing operations. Moody's believes Jo-Ann's financial condition is unlikely to deteriorate further, although profitability and balance sheet measures are expected to change in the short-term.
* Tower Records, Inc. was hit with a downgrade by Moody's on its $125 million senior secured credit facility due this year. Moody's cited the company's limited financial flexibility to withstand market volatility regarding the timing of new product releases as a main driver behind the agency's decision to issue the downgrade. In addition, there is an expectation for high leverage and modest debt coverage to remain near recent historical levels. Moody's expects--at best--that the company will end its fiscal year with no more debt than last year. Even though the company has implemented measures to generate more cash flow the fruits of these changes are not expected to have meaningful impact on cash flow until 2002 from Moody's perspective. As part of the broader picture, Moody's also sees large electronic superstores as responding more sensitively to competition from new retail formats and changing technology than their mail-based counterparts.
* Car rental company, Budget Group, Inc.'s $550 million secured revolving credit facility was downgraded to Caa1 from B2 as the company suffered substantial losses for the fourth quarter and the year ending 2001. According to Moody's, there has been a continuation of losses since 1997 and a complete erosion of shareholder's equity and decreased financial flexibility. The current revolver is used primarily for letters of credit and the company is currently in discussions with lenders to reestablish a short-term borrowing line for $350 million in the next few weeks. Even though the company is confident about upcoming financings, Moody's believes enough uncertainity exists to warrant it's negative outlook.