ns 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
search2 Cheap Szh 7
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).
42
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.
43
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.
44
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%