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Rating Action:

MOODY'S ASSIGNS B1 TO ENVIRODYNE'S SENIOR SECURED NOTES

12 Dec 1996
MOODY'S ASSIGNS B1 TO ENVIRODYNE'S SENIOR SECURED NOTES New York, 12-12-96 -- Moody's Investors Service assigned a B1 rating to the $160 million senior secured notes of Envirodyne Industries, Inc. At the same time, the B3 senior unsecured notes rating was confirmed. The outlook is positive.
The ratings reflect the intensely competitive global environment, the company's substantial leverage and lack of tangible equity, its low returns, cumulative losses, and the vulnerability to raw material price swings. These risks are mitigated by the company's good market position in its core product lines, and the fairly stable nature of the demand for these products. The ratings also reflect the holding company structure of both notes, as well as the relative ranking of the issues within the debt structure, recognizing the secured notes' collateral protection and effective seniority to the senior unsecured notes.
The positive outlook was assigned in anticipation of a potential increase in cash flow from the company's pending litigation against American National Can Company (ANC) over a patent infringement on Viskase's multi-layer barrier film patents. A jury in the lower court (Federal District Court #7) has decided in favor of Envirodyne, awarding it damages of $102 million. ANC was granted a stay of enforcement by posting a $108 million bond, thereby precluding Envirodyne from taking a lien on ANC's assets. However, as of December 23, 1996, ANC is enjoined from producing the infringing product. Envirodyne, by post-trial motion, is also seeking recovery of $30+ million in interest and other ancillary costs, and may even be awarded up to treble damages. Likewise, ANC has filed post-trial motions to set aside or reduce the amount of the judgment. On January 23, 1997, the court is expected to rule on all motions. While the possibility of an appeal by ANC exists, Moody's believes the turn of events and the sizable amounts involved make an out of court settlement a realistic option.
Envirodyne continues to face margin compression especially within its core casings business due to the intensifying competitive environment. The entry of Viscofan of Spain into the U.S. market in 1995 has been a major contributing factor to the tough competitive landscape. Pricing pressure does not appear to subside anytime soon. Meanwhile, the Sandusky subsidiary continues to underperform due to the inability to replace volume from the loss of Scott's wipes business in 1993, as well as softness in major product lines, particularly containers for the dairy industry.
The company, with the issuance of the secured notes as part of the June 1995 refinancing package, has also alleviated its near-term liquidity situation. However, interest coverage has declined modestly due to the higher interest costs associated with the refinancing. EBITDA to interest coverage of roughly 1.7 times for the first nine months of 1996 is moderated by the large capital requirements.
The senior secured notes have two components: a 12% $151 million fixed rate notes and a $8.5 million floating rate notes, both due 2000. The notes are guaranteed by all material domestic subsidiaries, and secured by substantially all domestic assets as well as a pledge of 100% of the capital stock of its domestic subsidiaries and 65% of the capital stock of a material foreign subsidiary. The guarantee and security are generally shared, on a pari passu basis, with the $20 million revolving line of credit and a $28 million letter of credit facility, which were all part of the June 1995 refinancing. However, the security interest of the obligations under the letter of credit facility has priority over other liens.
There remains some uncertainty over Zapata Corp.'s intent with regards to its investment in Envirodyne. Zapata, which is controlled by Malcolm Glazer, has increased its equity holdings to 40.6%. Envirodyne does have a rights plan that will be triggered at 41%.
Envirodyne Industries, Inc., based in Oak Brook, Illinois, is a major producer of cellulosic casings and specialty films used in the preparation and packaging of processed meat and poultry. In addition, the company manufactures PVC films, disposable plastic cutlery, drinking straws, and thermoformed and injection molded containers.
No Related Data.
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