Weekly Downgrade Wrap-Up

On Monday we posted a beefed-up version of the LBO-backed bankruptcy list for 2009. (There have been three more since then, by the way.) Today I’ve got a week’s worth of Moody’s and S&P downgrades on PE-backed companies. There are eight of ‘em to date.

Carlyle Group’s Synagro Technologies Inc. was downgraded to ‘CCC+’ from ‘B-’ on weaker liquidity by Standard & Poor’s.

The downgrade reflects Synagro’s tightened liquidity position as covenant step downs and weaker operating results are likely to constrain the company’s ability to borrow on its revolving credit facility without violating financial covenants in its credit agreement. Furthermore, a challenging economic environment has impacted municipalities, which account for more than 85% of the company’s revenues. We are concerned that this environment could lead to further weakness in volumes and pricing and will leave little room for operational disappointments.

Freescale Semiconductor, backed by Blackstone Group, Carlyle Group, HarbourVest and TPG, was lowered to ‘CC’ by Standard & Poor’s. It’s senior unsecured and sub debt ratings were lowered to ‘C.’

These actions follow the company’s announcement that it is inviting holders of its senior unsecured and subordinated notes to participate as a lender in a new, senior secured first-lien incremental term loan of up to $1 billion. In our view, the transaction is an exchange offer that is tantamount to default, given that the participation in the new term loan would represent a substantial discount to the par amount of the outstanding issue.

Harry & David, backed by Highfields Capital Management, saw Moody’s downgrade its CFR to Caa3 with a negative outlook.

The negative outlook reflects our expectation that liquidity will continue to be negatively impacted by weak consumer and business spending over the intermediate term, and our view that the company’s capital structure is unsustainable at current levels of operating performance. As a result, Harry & David could be forced to pursue a more comprehensive financial restructuring over the intermediate term, which could result in a default under its debt securities.

Jobson Medical Information, backed by Wicks Group, saw its corporate family rating downgraded to Caa1 and placed on review for possible further downgrade by Moody’s.

End market demand for healthcare-related advertising and marketing services had remained fairly resilient to macroeconomic pressures through the third quarter of 2008, but experienced considerable weakness in the fourth quarter. Furthermore, as of February 4, 2009, Jobson no longer has access to its $15 million revolver.

Mark IV, backed by Sun Capital, saw its corporate family raiting downgraded to Caa3 from B3 with a negative outlook by Moody’s.

Reduced spending by municipal agencies also is expected to negatively impact the company’s transportation technologies segment. For the LTM period ended November 30, 2008, the company’s EBIT/interest coverage approximated 0.2x.

Sbarro Inc., backed by MidOcean Parters, saw its probability of default and corporate family ratings downgraded to Ca from Caa2 by Moody’s.

On Feb 6th, 2009, Sbarro disclosed that it does not anticipate being in compliance with certain financial covenants under its bank credit agreement and is currently in discussions with its bank agent regarding covenant amendments.

Oriental Trading Company, backed by Carlyle Group, saw its probability of default and corporate family ratings downgraded to Caa3 from Caa2 by Moody’s.

In OTC’s fiscal quarter ending December 27, 2008, the company’s revenues declined in the low teen percentage range and EBITDA declined in the low 20% range. As a result of the weaker performance, the company failed to meet the maximum leverage covenant in its bank credit facilities as of December 27, 2008. OTC has obtained a temporary waiver from its lenders for up to 45 days, subject to fulfillment of certain conditions.

Educate, Inc., backed by Apollo Management, Citigroup Private Equity and Sterling Group LP, saw its corporate family and probability-of-default
ratings downgraded to B2 from B1. It’s first lien senior secured and second lien term loan were unaffected.

…Decreasing cash balance and covenant step-downs, increase the company’s vulnerability to a potential financial covenant violation. Notwithstanding these concerns, the rating considers the additional debt reduction that has occurred since the large paydown associated with the sale of the Catapult Learning business in March 2008 that has prevented a deterioration in credit metrics. Additionally, Sylvan enrollments and European segment sales continue to hold up well.

Downgrades to “D” on Chapter 11 Filings:
Pliant Corp, backed by CCMP Capital Advisors
Muzac Holdings, backed by ABRY Partners

The third Chapter 11 is TPG’s Aleris, which peHUB reported on (via Debtwire) last week. You can read the background of that deal and the performance of TPG’s funds here: Only a Matter of Time for TPG’s Aleris.

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