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Global Credit Research - 08 Jan 2009
Moody's Covenant Office comments on potential risks in Jones Apparel Group, Inc.'s liens covenant for its bonds and recent grant of security under its credit agreement
New York, January 08, 2009 -- Moody's commented on December 30, 2008 in a covenant quality
assessment report covering all of Jones Apparel Group, Inc.'s
("Jones Apparel") outstanding bonds - including the
4.250% Senior Notes due 2009, the 5.125%
Senior Notes due 2014 and the 6.125% Senior Notes due 2034
- that ambiguous language in the indenture's liens covenant
raises issues concerning the extent of bondholder protection. The
continuing deterioration in the credit environment has led many bank lenders
to seek liens in their borrowers' most valuable collateral,
so the specific language of the liens covenant -- both the scope
of liens restrictions and exceptions -- have become a crucial area
of market scrutiny.
Moody's covenant quality assessment service ranks eight key covenants,
including liens covenants, on a three-point scale of "strong",
"moderate" and "minimal" in covenant quality.
Although Jones Apparel's liens covenant scored in the "minimal"
category due to the size of its quantitative carve-outs,
an atypical feature of its bonds is the inclusion of several subsidiaries
as co-obligors on the bonds, that mitigates the risk of the
bonds' potential structural subordination to subsidiary debt.
Nevertheless, according to Moody's senior covenant analyst
Lulu Cheng, "the key risk of Jones Apparel's liens covenant
concerns the types of assets for which investors would get equal treatment,
on a first lien basis, with any bank lenders." The
covenant restricts the issuers' and their significant subsidiaries'
ability to create liens on "principal properties", defined
as "any property owned or leased" by them and whose net book
value exceeds 1% of consolidated net tangible assets. However,
the term "property", as used in the definition of "principal
property", is undefined.
Without a clear definition of the term "property", a
risk remains that the liens covenant (as it applies only to "principal
property") could be interpreted to exclude certain valuable assets
from its scope. For example, according to Jones Apparel's
most recent consolidated balance sheet for the period ended October 4,
2008, the issuers' accounts receivable and inventories comprise
a significant portion (approximately 17.9%) of the issuers'
total assets.
In connection with the foregoing, Moody's notes that Jones
Apparel recently granted a security interest in accounts receivable and
inventories under an amended credit facility dated as of January 5,
2009, but that it would not be required to equally and ratably secure
its notes. As a result of this amendment, on January 8,
2009 Moody's lowered its rating on Jones Apparel's unsecured
notes to Ba3 from Ba2 reflecting Moody's expectations of diminished
recovery prospects for the unsecured noteholders. The ambiguity
in the definition of "principal property" remains unclarified
in the security agreement and it is therefore uncertain whether future
secured borrowing would be capped by the 20% "stockholders'
equity" basket in the indenture or by the definition described above.
Although Jones Apparel's unsecured notes are currently rated Ba3,
the unsecured notes were rated investment grade (Baa2) at the time of
issuance, as reflected by its covenant package. The indenture's
other covenants -- including the merger restrictions covenant,
the asset sales covenant and the sale/leaseback covenant -- also
fall within Moody's "minimal" category of covenant protection.
These are typical scores for an investment-grade indenture.
For more details on Moody's covenant research service and the issuers
included in the Covenant Quality Assessment (CQA) library, please
visit Moody's covenant homepage at www.Moodys.com/Covenants.
New York
Scott Tuhy
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Lulu Cheng
Vice President - Senior Analyst
Covenant Office
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
No Related Data.
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