MOODY’S ASSIGNS RATINGS FOR EAGLEPICHER’S PROPOSED DEBT REFINANCING (B3 FOR SR. UNSEC NOTES; B2 FOR SR. SEC. BANK DEBT)
Moody’s Investors Service took the rating actions below in conjunction with the proposed refinancing of EaglePicher Incorporated’s (“EaglePicher” or “the company”) debt obligations. EaglePicher’s rating outlook remains stable.
The refinancing transactions are aimed at ensuring EaglePicher’s ongoing liquidity and increasing the company’s operating flexibility. They will also preclude any cash distributions to parent EaglePicher Holdings, Inc. (“EP Holdings”) for the purpose of either paying cash dividends or satisfying redemption requirements under the holding company’s preferred stock while consolidated pro forma financial leverage remains above 3.5x.
- Assignment of B3 rating for EaglePicher’s proposed $220 million guaranteed senior
unsecured notes due 2013, to be initially issued under Rule 144 with registration rights;
- Assignment of a B2 rating for EaglePicher’s proposed $275 million guaranteed
senior secured bank credit facilities, consisting of:
- $125 million revolving credit facility due 2008;
- $150 million term loan B due 2009;
- Confirmation of the Ca rating of EP Holdings $141.9 million current balance
of 11 3/4% cumulative redeemable exchangeable preferred stock mandatorily
redeemable during March 2008 (“redeemable preferred stock”);
- Confirmation of EaglePicher’s B2 senior implied rating;
- Confirmation of EP Holdings’ Caa2 senior unsecured issuer rating
EaglePicher will additionally amend and restate its existing off-balance sheet accounts receivable securitization facility. The commitment will be reduced to $55 million to more closely match the company's current receivables base, and the maturity will be extended to 90 days prior to the maturity of the new senior secured credit agreement. This facility will not be rated by Moody’s.
The following existing ratings will be withdrawn upon completion of the proposed refinancing transactions:
- B2 ratings for EaglePicher's approximately $228 million of aggregate remaining
guaranteed senior secured bank credit facilities, consisting of:
- $220 million revolving credit facility maturing February 2004;
- $8.5 million remaining term loan A facility maturing November 2003;
- Caa1 rating for EaglePicher's $220 million of 9.375% guaranteed senior
subordinated unsecured notes due March 2008
EaglePicher tendered its existing $220 million of guaranteed senior subordinated unsecured notes due 2008 in exchange for $220 million of new guaranteed senior unsecured notes due 2013. In addition, EaglePicher seeks to refinance its existing guaranteed senior secured credit facilities which mature in February 2004 with a new guaranteed senior secured credit agreement. The maturity of the proposed new credit agreement would shorten in the unlikely event that the notes exchange cannot be completed.
The ratings reflect EaglePicher’s weak historical LTM credit protection measures which remain consistent with existing ratings, most notably with regard to the company’s high leverage in terms of both EBITDA and total capitalization. EaglePicher additionally operates in highly competitive markets; remains dependent upon cyclical general economic conditions, and most significantly upon automotive production levels; continues to be susceptible to OEM price compression within Hillsdale, the company’s largest division; and has greater exposure to the potentially adverse effect of government contract provisions and audits within EaglePicher’s technology division. While EaglePicher’s new management team has achieved a measurable degree of success to date in transforming EaglePicher, Moody’s has some concern regarding the company’s ability to implement change effectively at the pace projected. Moody’s additionally notes that while the proposed refinancing transaction limits the ability for EP Holdings to pay contractual cash preferred dividends (totaling more than $16 million p.a.) prior to redemption, and also to defer EP Holdings’ ability to redeem the preferred shares prior to the maturity of EaglePicher’s new senior unsecured notes maturing 2013 in the absence of a substantial reduction in leverage, the amendments to the preferred stock certificate of designations had to be addressed through provisions which required only majority vote, rather than a 100% vote.
The ratings and stable outlook more favorably reflect that EaglePicher’s proposed refinancing will enhance liquidity by virtue of extended debt maturities, approximately $26 million of additional senior secured commitments, and slightly loosened covenant requirements which should provide EaglePicher with effective access to nearly the full commitment over the tenor of the new credit agreement. The extension of the company’s accounts receivable securitization maturity to 90 days prior to the new revolving credit maturity also solidifies the company’s financial flexibility and ability to implement various initiatives while economic conditions remain uncertain. The terms of the proposed refinancing are also intended to limit the ability of the company to support EP Holdings’ preferred stock while any of the company’s debt obligations remain in effect and consolidated leverage remains high.
The ratings also reflect that EaglePicher’s cash flow performance should steadily improve as the company’s comprehensive 2002 restructuring program takes hold and anticipated levels of annualized savings are realized. Margin improvement has already been evident during the last few reported quarters. While EaglePicher’s 2003 revenues are likely to decline slightly year-over-year due to a combination of divestitures, weak automotive market conditions, and the phase-out of the Hillsdale transmission pump contract, operating returns are expected to materially improve. The company is identifying and developing new value-added business opportunities and technologies within most of its operating segments in an effort to reduce the impact of price compression and also steadily expand the customer base and the end markets served. EaglePicher's defense-related battery business also stands to benefit from the war on terrorism. Management is focused on controlling capital expenditures at amounts well below 2001 levels, and additionally on identifying opportunities to increase utilization rates for existing capacity. The company had $88 million of net operating loss carryforwards available at fiscal year end November 30, 2002, and is therefore not expected to be a federal US taxpayer for several more years. EaglePicher’s pension plan is notably fully funded. The company’s goodwill was determined to be unimpaired during fiscal 2002.
EaglePicher’s ratings or outlook could potentially be upgraded once there is evidence of sustainable improvement in the company’s credit protection measures, incremental debt reduction is achieved, and/or the company continues to generate profitable new business awards which incorporate increased diversification of its customer base and product lines.
EaglePicher’s ratings or outlook could potentially be downgraded in the event of revenue decline or margin deterioration versus planned levels, material uninsured product liability issues, and/or evidence that the provisions designed to defer cash payment for both preferred stock dividends and redemption absent material leverage reduction are ineffective.
The B2 ratings of the proposed $275 million guaranteed senior secured bank credit facilities reflect the benefits and limitations of the collateral and guarantee package under the credit agreement. Collateral security will consist of a first priority interest in substantially all assets of EP Holdings, EaglePicher, and substantially all domestic subsidiaries, but excluding certain accounts receivable permitted to be sold under the domestic accounts receivable financing program. Also included in the collateral package are first priority pledges of 100% of the capital stock of EaglePicher and its domestic subsidiaries, and up to 65% of the capital stock of EaglePicher’s first tier foreign subsidiaries. EP Holdings and EaglePicher’s domestic subsidiaries will be guarantors. The revolving credit and term loan B will mature upon the earlier of (i) five and six years, respectively, or in each case, if earlier, (ii) 120 days prior to the maturity of the existing 9.375% senior subordinated notes to the extent not exchanged, or (iii) 120 days prior to the maturity of EP Holdings’ redeemable preferred stock.
Financial covenant tests under the new guaranteed senior secured credit agreement will include a gross leverage ratio, interest coverage ratio, and fixed charge ratio. The credit agreement ratios will capture usage under the accounts receivable securitization as debt, but will exclude the preferred stock and present value of operating leases as debt. EaglePicher and its subsidiaries will notably be precluded under the new senior credit agreement from paying dividends or distributions to EP Holdings to either pay cash preferred dividends or redeem the preferred stock at any time when the consolidated gross debt/EBITDA leverage ratio is 3.0x or more. A change of control will be redefined to include, among other things, the failure by Granaria Holdings B.V. or any of its affiliates (“Granaria”) to possess voting control of more than 50% of the company’s common equity and also more than 75% of the redeemable preferred stock. Granaria presently controls 62.5% of EP Holdings’ common stock and approximately 78.6% of the redeemable preferred stock.
The B3 rating of the proposed $220 million guaranteed senior unsecured notes reflects their effective subordination to the senior secured credit agreement and the accounts receivable securitization facility. The notes obligations will be guaranteed on a senior unsecured basis by substantially all of the domestic entities that guarantee the senior secured credit agreement. The notes will contain a five-year non-call provision and a change of control provision. EaglePicher and its subsidiaries will notably be precluded under the notes indenture from paying dividends or distributions to EP Holdings at any time when the consolidated leverage ratio is 3.5x or more.
EaglePicher has already obtained consent from the required 75% consent from holders of the existing 9.375% guaranteed senior subordinated notes to eliminate all significant negative covenants and all change of control provisions within the existing indenture. At least 95% on the holders of these notes have already irrevocably agreed to consummate the exchange offer.
An amendment to the certificate of designations governing the redeemable preferred stock of EP Holdings is a condition precedent to the consummation of the new guaranteed senior secured credit agreement. Most notably, the redeemable preferred stock documentation will contain a provision to look toward restrictions within the proposed senior secured credit agreement and then the senior unsecured notes (once the credit agreement has expired) requiring that consolidated leverage fall below 3.0x and 3.5x, respectively before EaglePicher would be expected to upstream dividends or distributions to EP Holdings to either pay cash dividends or redemptions of the preferred stock which are otherwise contractually due. EP Holdings’ preferred stockholders do not have any capacity to trigger defaults under EaglePicher’s debt agreements. In addition, Granaria already controls EP Holdings’ board of directors by virtue of majority control of the common stock. The option of holders of at least 25% of the redeemable preferred stock to demand early redemption due to non-payment of cash preferred dividends is also ineffective due to Granaria’s controlling interest, as well as the new agreement that upstream distributions from the company will not be required while consolidated leverage remains high. The company will therefore most likely be precluded from redeeming a material amount of the preferred stock principal and PIK dividends prior to the maturity of the proposed new guaranteed senior unsecured notes due 2013, despite the stated March 1, 2008 preferred stock redemption date.
For the last-twelve months ended May 31, 2003, EaglePicher’s EBIT coverage of cash interest was fair at about 1.2x. The company's EBIT return on assets was improved at about 7.1%. Leverage as measured by total debt/EBITDA was approximately 4.0x and 5.3x, respectively, before and after including the present value of operating leases and preferred stock as debt. Both leverage calculations capture off-balance sheet accounts receivable facility usage as debt. EBIT and EBITDA were adjusted for about $2.7 million of non-recurring charges. Pro forma results overlaying the new capital structure would be consistent with historical results, since existing debt obligations are just being refinanced.
EaglePicher, headquartered in Phoenix, Arizona, is a diversified manufacturer of products for automotive, defense and aerospace applications, in addition to other industrial arenas. The company is organized into three strategic business units, or reportable business segments. These are the Automotive Segment, the Technologies Segment, and the Filtration and Minerals Segment. Annual revenues approximate $700 million.
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