already requires that consumers receive a clean title after payment of the loan, without regard to whether a third-party assignee holds a security interest in the auto.
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Szh MsearchO Lendersmortgagepayments Ysearch¯ Lendersmortgagepayments E Szh KYsearchC Deals E Deals I Forex Lendersmortgagepayments U Szh LO Lendersmortgagepayments
7 MARCH 2011
CREDIT IN DEPTH
Detailed analysis of an important topic
High-Yield Covenant Update: Sponsored Bond Deals Dominate, Retailers In Particular Alexander Dill Vice President-Head of Covenant Research + 1.212.553.1338 alexander.dill@moodys.com
Sponsored deals have dominated the high-yield market in the last two weeks ¨C including issuance by four retailers (all rated in the Caa category). These deals have offered either ¡°moderately loose¡± private-equity structures or even stronger-than-general market structural protections when compared to other recent sponsored deals. In only a few instances have we found carve-outs (restricted payments, investments and debt) to significantly exceed the 2010 market norm.25 This recent sponsored issuance is regionally broad-based: in the US, Europe and South Africa. In addition, ¡°covenant-lite¡±26 issuers are continuing to make their presence felt. Hyperlinks in the issuer names below are to our covenant quality pre-sale snapshots, published shortly after a bond¡¯s roadshow launch. As warranted, we provide brief covenant highlights of issuance currently in the market or which have just priced if we believe it to be of market interest.
Retailers abound Two new Caa1-rated LBOs, with substantially the same covenant packages, have the least protective structures of the four retailers but are not aggressive outliers when compared to other recent sponsored deals. Both deals, J. Crew Group, Inc. (sponsors: TPG and Leonard Green) and Jo-Ann Stores (sponsor: Leonard Green), are senior unsecured, mature in 2019, are rated Caa1 and amount to $400 million and $450m, respectively. J. Crew¡¯s and Jo-Ann¡¯s EBITDA add-backs are quite aggressive, incorporating a carve-out for net cost savings and synergies projected in good faith (capped at greater of $25 million and 10% LTM EBITDA). Claire¡¯s Stores, Inc. (Apollo: $400 million of second lien notes) and, in particular, Burlington Coat Factory Warehouse Corp. (Bain Capital: $400 million of senior unsecured notes), provide protection superior to that of the J. Crew and Jo-Ann deals. Burlington and Claire¡¯s are 2006 and 2007 LBOs, respectively. Typical of sponsored deals in general, the retail issuers (with the exception of Burlington) use their considerable goodwill and intangibles to their advantage by using total-asset based carve-outs (assets of questionable value that nevertheless inflate restricted payments and debt incurrence carve-outs). All four use soft lien caps that impose long-term, open-ended liens dilution/subordination risk by allowing liens incurrence if a leverage ratio test is met. Investors in the new issuances by J. Crew, Claire¡¯s, and Jo-Ann will immediately be subject to a high degree of liens subordination. Benchmarking the amount of secured debt as a ratio of secured debt to consolidated net tangible assets (¡°CNTA¡±), J. Crew (1.44x), Claire¡¯s (1.27x27) and Jo-Ann (0.7x) have significant secured debt/CNTA ratios. CNTA, based on PP&E or other tangible assets, can serve as a useful guide for a bond¡¯s recovery prospects for unsecured or second-lien holders in a bankruptcy scenario. The table below compares the four retailers across several key variables. Each issuer¡¯s restricted payments, permitted investment and debt incurrence carve-outs are to be compared to the 2010 market medians, which were 5.4%, 5.2% and 16.9%, respectively. Figures are in US$ millions. 25
26 27
This observation does not pertain to Edcon (Proprietary) Ltd., whose bond we did not assess in a covenant quality snapshot. Either or both a restricted payments and debt incurrence covenant are absent. Numerator includes only 1st lien debt (senior to the 2nd lien note issuance).
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
CREDIT IN DEPTH
Detailed analysis of an important topic
Issuer
Notes Rating
Security
RP Carveouts
Perm. Invest. Carveouts
Debt Incur. Carveouts
GW + Intangibles / Cons. Total Assets
Use of Total Assets-Based Carve-outs
Cred. Fac. Headroom Under Carve-out
Headroom Under Soft Liens Cap
Secured Debt / Con. Net Tang. Assets
EBITDA Addbacks
Burlington Coat Factory Claire's Stores J. Crew Jo-Ann Stores
Caa1 Caa3 Caa1 Caa1
Unsecured 2nd lien Unsecured Unsecured
3.8% 11.4% 8.4% 10.7%
2.9% 9.1% 7.0% 7.0%
6.1% 11.7% 17.3% 21.6%
10.3% 76.0% 77.2% 52.1%
Very limited Extensive Extensive Extensive
0 0 350 250
4 0 23 61
0.44 1.27 1.4 0.7
Moderate Moderate Aggressive Aggressive
Europe and South African sponsored issuance In Europe, Palace Entertainment Holdings, LLC sold $430 million of (P)B2-rated senior secured notes due 2017 with an above-average level of protection for a sponsored deal (sponsors: Candover Partners Ltd. and OB Partnership). Total carve-outs in all three categories are close to the 2010 median for the high-yield market. The package includes a soft liens cap (secured debt ratio of 4.5x) and minimal limitations on sale/leasebacks. Unlike most recent sponsored transactions, most of Palace¡¯s carve-outs are tied to hard, dollar caps rather than a total-assets growth basket. Hard $/€based caps are an above-market structure in the sponsored space. In South Africa, FoodCorp (Proprietary) Limited (sponsors: BlueBay and Capitau) offered EUR 415 million of senior secured notes due 2018 and Edcon (Proprietary) Limited (Bain Capital) sold EUR 317 million and US$ 250 million senior secured notes due 2018. We assigned prospective (P)B2 ratings to each. FoodCorp¡¯s covenant package offers superior protection when benchmarked against recent US sponsored issuance.
Covenant-lite issuance Two weeks ago, we assessed a covenant-lite bond in the US by Wyndham Worldwide Corporation, which went to market with $250 million of senior unsecured notes due 2021 (Ba1). UK issuer Virgin Media Secured Finance PLC, a finance subsidiary of Virgin Media, Inc., sold a £957 million crossover bond (rated (P) Baa3, and thus not technically covenant-lite). These were first-priority secured notes. In an interesting twist, Virgin Media¡¯s high-yield package was suspended out of the box since Moody¡¯s and one other rating agency gave it investment-grade ratings at issuance. However, the highyield covenants are reinstated if either agency downgrades the bonds below investment grade.
A stable sponsored structure could be evolving Other than a concentration in one sector (retail) the only other trend that may be emerging in the last few weeks¡¯ issuance is financial sponsors¡¯ hewing to a somewhat ¡°conventional¡± sponsored high-yield structure. Many new LBOs have the weak structural features exemplified by the J. Crew and Jo-Ann deals. Nevertheless, we contrast the current transactions with the outlier structure of Aleris International, Inc.¡¯s $500 million 7.625% senior notes due 2018 (B1), which came to market in early February of this year. Aleris¡¯ package offers little protection against future debt-financed dividends. While additional outliers in 2011 will no doubt come to market, our principal focus will be to identify emerging trends in the high-yield market.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES Corporates Alcoa, Inc.
Significant rating actions taken the week ending 4 March 2011
Outlook Change 30 March 10 2 March 11 Baa3 P-3 Stable Baa3 P-3 Negative
Senior Unsecured Rating Short-Term Rating Outlook
The stable outlook reflects our expectation that performance in the alumina segment will show acceptable growth in 2011 on global increases in aluminum production, and that performance in the primary metals segment will also advance, albeit modestly on strengthening demand and hence production profiles. It also reflects how the flat rolled and engineering products and solutions segments will also benefit from improving end-market demand, particularly in aerospace, automotive and packaging. Aluminum demand and price levels will likely remain supportive of improving performance trends, although we expect the road to full recovery to be gradual. We also expect Alcoa to continue to manage debt in a disciplined fashion. Caesars Entertainment Corporation 4 June 10 Corporate Family Rating Outlook Caa3 Positive
Upgrade 1 March 11 Caa2 Stable
The upgrade reflects our expectation that EBITDA will rise moderately in 2011 given signs of modest improvement in demand trends across the majority of markets in which CET operates. The upgrade also reflects CET's good liquidity profile and the absence of any material debt maturities until 2014. We also upgraded CET's speculative-grade liquidity rating to SGL-2 from SGL-3, reflecting our view that EBITDA will begin to stabilize and that CET has sufficient cash on hand and revolver ability to manage its cash needs over the next several years. Freescale Semiconductor, Inc. 23 Dec 09 Corporate Family Rating Outlook Caa1 Stable
Upgrade 28 Feb 11 B3 Positive
The upgrade of Freescale's CFR to B3 reflects the company's strong revenue growth and EBITDA expansion following the robust 2010 recovery in global demand for embedded processing semiconductors across the company's addressable end markets (i.e., automotive, industrial, networking and consumer). It also incorporates our expectation for continued improvement operating performance, financial leverage metrics, and free cash flow generation over the succeeding 12 months.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES Isle of Capri Casinos, Inc.
Significant rating actions taken the week ending 4 March 2011
Review for Upgrade 7 Dec 10 1 March 11 B3 Review for Upgrade B3 Stable
Corporate Family Rating Outlook
The review will conside the proposed debt offering and if it will be structured in a manner that alleviates our concerns regarding Isle's ability to maintain compliance with its financial covenants over the longer-term; and provides the company with a more relaxed debt maturity profile. The review also acknowledges Isle's fiscal third quarter earnings results that benefited from a more stable operating environment than in previous quarters, along with a lower cost structure. As a result, we expect Isle will achieve and sustain debt/EBITDA of six times in the next 18 months, the target leverage Isle needs to obtain a B2 corporate family rating. Jebel Ali Free Zone FZE 8 Dec 09 Corporate Family Rating Outlook B1 Review for Downgrade
Downgrade 3 March 11 B2 Negative
The downgrade was driven by the high uncertainties over the near- to medium-term evolution of the company's capital structure that we consider highly leveraged, with adjusted debt to EBITDA at 8.6 times (as per the 12-month period ending June 2010), and as unsustainable given the company's cash flow profile. Moreover, it is likely that the company's capital structure will remain constrained. These factors have prompted us to reposition the company's baseline credit assessment to 16 (equivalent to B3 on our global scale) from 14 (B1 equivalent), hence the downgrade. MGM Resorts International 26 Oct 10 Corporate Family Rating Outlook Caa1 Positive
Upgrade 2 March 11 B3 Stable
The upgrade reflects signs of modest improvement in demand trends in Las Vegas, improvement in debt repayment during 2010 from the proceeds of equity issuances, and completion of a new multiyear financing package for CityCenter (MGM's 50% owned project on the Las Vegas Strip.) We believe MGM's credit metrics will begin to improve modestly due to the improved operating outlook. Additionally, we estimate that MGM has sufficient revolver capacity and cash on hand to support its debt maturities through mid-year 2013. Nevertheless, MGM's Caa1 probability of default rating reflects the company's high leverage -- debt/EBITDA is over 11 times -- and significant refinancing risk over the medium-term.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES Vulcan Materials Company
Significant rating actions taken the week ending 4 March 2011
Downgrade 17 Dec 10 4 March 11 Ba1 Stable Baa3 Review for Downgrade
Corporate Family Rating Outlook
The downgrade was driven by our expectation that Vulcan's operating earnings, cash flow, and EBITDA will remain weak over the intermediate term as it grapples with soft pricing in several key markets, low demand from private construction, and, ultimately, a conclusion to federal stimulus spending. In our view, Vulcan will be unable to