Weekly Downgrade Wrap-Up

4 September 2009

As usual, we have a week’s worth of ratings actions on the debt of LBO-backed companies from ratings agencies Standard & Poor’s Ratings Services and Moody’s Investor Services. As has been the trend toward the end of summer, the number of downgrades has significantly fallen off. I noted yesterday that even the number of private equity-backed companies on S&P’s “Weakest Links” list seems to have dwindled. The list represents companies which are most likely to default, and part of the reason it’s shrunk may be because many of the companies have already defaulted.

Company: Builders FirstSource, Inc.
Sponsor: JLL Partners Inc. and Warburg Pincus LLC
Action: Moody’s lowered the company’s probability of default rating of to Caa3 from Caa1.
Highlight: The downgrade reflects the company’s recent announcement that affiliates of JLL Partners and Warburg Pincus, which own approximately 50% of BLDR’s outstanding shares, offered to recapitalize the company. Moody’s view the situation, as proposed, to be a distressed exchange and the Caa3 PDR anticipates these events.

Company: Graceway Pharmaceuticals, LLC
Sponsor: GTCR Golder Rauner LLC
Action: Moody’s lowered the companys’ corporate family rating to B3 from B2 and the probability of default rating to B3 from B2.
Highlight: The downgrade of the CFR and PDR primarily reflects the uncertainty related to whether Graceway’s life cycle management plans for Aldara will be successful and the significant reduction in financial flexibility that would occur if a generic product is launched in the near term. With

Company: United Components Inc.

Sponsor: Carlyle Group
Action: Standard & Poor’s raised its issue rating on United Components Inc.’s $230 million, 9.375% senior subordinated notes to ‘B-‘ (the same as the company’s corporate credit rating) from ‘CCC’.
Highlight: The rating action follows the maturity of UCI’s $75 million revolving credit facility due 2009. Because our simulated defaults assume full utilization of revolving credit facilities at the point of default, the expiration of this facility reduces priority claims.

Company: Mitel Networks Corporation
Sponsor: Francisco Partners
Action: Moody’s lowered the company’s corporate family rating and probability of default rating to Caa1 from B3 while also revising the company’s outlook to negative from stable.
Highlight: The combination of Mitel’s history of poor free cash generation, very limited earnings visibility as North American general economic activity continues to be weak, and the company’s recent write-down of the carrying value of its acquired InterTel business, serve to substantiate the view that Mitel may struggle to generate meaningful free cash over the next six to eight quarters, and in turn, that leverage and coverage metrics are likely to be quite weak.

Company: Vertrue Inc.
Sponsor: Rho Ventures and One Equity Partners
Action: S&P revised the recovery rating on Vertrue’s first-lien credit facilities to ‘3’ from ‘2’, and lowered the issue-level rating to ‘B’ from ‘B+’. The ‘B’ corporate credit rating was affirmed.
Highlight: The negative rating outlook reflects S&P’s concerns about Vertrue’s deteriorating earnings and aggressive covenant step-down schedule. According to Standard & Poor’s credit analyst Jeanne Mathewson: “The company’s good market position in niche consumer discount membership programs and its good recurring revenue stream from renewals do not offset these factors.”

Previous Weeks:

Weekly Downgrade Wrap-Up 26

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