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Rating Action:

MOODY"S DOWNGRADED CROWN CENTRAL PETROLEUM'S SENIOR UNSECURED NOTES RATING TO Caa3 FROM Caa1; OUTLOOK REMAINS NEGATIVE

26 Sep 2003
MOODY"S DOWNGRADED CROWN CENTRAL PETROLEUM'S SENIOR UNSECURED NOTES RATING TO Caa3 FROM Caa1; OUTLOOK REMAINS NEGATIVE

Approximately $125 million of debt securities affected

New York, September 26, 2003 -- Moody's downgraded Crown Central Petroleum Corporation's ("Crown") ratings. The outlook remains negative. The downgrade reflects Crown's continued weak financial performance, highlighted by recurring consolidated operating losses despite mid-cycle conditions for 1H 2003; the overall decline in the value of Crown's assets relative to debt; already tight liquidity and limited capital resources burdened by heavy working capital needs, especially during high commodity prices; heavy Tier II capital spending requirements; high leverage; and significant pension liabilities. The ratings benefit from the support from Rosemore, a privately held company owned by the family of Henry Rosenberg which owns 100%; and the diversity of earnings from Crown's retail network.

Moody's ratings actions for Crown are as follows:

i) Downgraded to Caa2 from B3 - Crown's senior implied rating.

ii) Downgraded to Caa3 from Caa1 - Crown's $125 million 10.875% senior unsecured notes due 2005

iii) Downgraded to Caa3 from Caa1- Crown's senior unsecured issuer rating

The outlook reflects Crown's liquidity. Though having been aided by some asset sales, liquidity is still very tight during periods of the working capital cycle. The company has a $125 million secured revolver in place, but is limited to $50 million of cash borrowings by the note indenture. During the crude purchase period, the company tends to draw down almost the entire $50 million allowed under the revolver and utilize borrowings from the parent in the form of unsecured, uncommitted facilities. Given the recurring operating losses and the inherent volatility of cash flows, Moody's believe the availability of the revolver could be critical for Crown to meet the next six months of interest expense (approximately $ 9 million), including the $7 million bond coupon in February, $1 million per month of planned capital expenditures, and working capital needs which continue to be high given commodity prices. Further, the revolver matures in January 2004, a couple of weeks before the next bond coupon due date. Though the facility was previously extended in June 2003 to January 2004, Moody's believes another extension will likely depend on significant progress of asset sales by that time. Crown's ratings would be pressured if the facility is not extended or if asset sales have not materially progressed.

The negative outlook also considers the uncertainty surrounding the sale of the company or its assets. Crown had previously attempted to sell only its refineries and retain the retail operations. However, since no deal for its two Texas refineries could be reached, the entire company (or its assets) is for sale. Through the first six months of 2003, the company sold 18 retail units and its Virginia products terminal for approximately $5.8 million of net proceeds and has additional assets under contract for sale that could generate approximately $20 to $30 million of additional proceeds during the third and fourth quarters of 2003. However, the sales process is still ongoing with no certainty as to the exact timing of sales and amount of proceeds, which Moody's believes will be the primary source of debt repayment absent significant shareholder support.

The ratings reflect the company's continued deterioration of its financial condition and ongoing weak operating results. Crown's recurring operating losses combined with a $65 million write-down of its Pasadena refinery in 2002, resulted in the company reporting a negative net worth of $75.6 million as of 6/30/03. Operating losses stem from already high operating costs exacerbated by high natural gas costs. Despite solid refining margins in 1H'03, the lack of sufficient liquidity and capital prevented the company from being able to run the refinery at full capacity, continuing to weigh on earnings and cash flow. The company entered into a 65,000 barrels per day (bpd) processing agreement with Statoil (expires at end of September), which enabled the Crown to generate fee income without the working capital burden of crude procurement. However, not having more of its own product to sell in a mid-cycle environment that has extended through Q3'03, is a lost opportunity to generate significantly better earnings and cash flow for debt service and repayment.

The ratings are also restrained by the declining value of the company's assets relative to the existing debt as evidenced by the FYE 12/31/02 $65.5 million write-down of its Pasadena refinery and the lack of a sale of the two refineries. If the refineries are not sold, they face being shut down by 2005 if the capital spending required to bring the refineries into compliance with regulation is not made. Although the company has only two small refineries, it does not qualify for small refiner status due to the scale of its retail operations and therefore cannot defer this capital spending. Given the current lack of financial resources, Moody's estimates that Crown is not likely to be in position to make those expenditures by the required time without support from its shareholder, resulting in further asset write-downs and facing significant costs associated with closing the refineries.

The ratings also consider the company's significantly underfunded defined pension plans, which at 12/31/02 was $67 million. While this may be higher than the required funding amount, in terms of priority of claims, any defined pension obligations would rank pari passu with senior unsecured bondholders and impact the overall asset coverage of the bonds.

The ratings are supported by Rosemore's 100% ownership of Crown and the support that it has provided to Crown in the form of working capital lines and performance guarantees that enable Crown to obtain its crude oil for its refineries.

The ratings also benefit from the retail business which has generated modest returns and provides the bulk of the asset value for bond holders. At 6/30/03, the company had about 300 retail outlets, the sales of which Moody's believes will provide the main source of cash for note repayment.

Due to higher refining and retail margins, Crown reported revenues of $368 million for the three months ended June 30, 2003 compared to $372 million for the same period in 2002 and $418 million in the first quarter of 2003. However despite mid-cycle conditions, Crown still reported an operating loss of $15 million for the quarter. Leverage (based on annualized EBITDA/debt) for the quarter was high at 6.5x, while its interest coverage was 1.5x and approximately 1.0x when factoring in capex.

The senior unsecured notes are not guaranteed by subsidiaries, thus are notched from the senior implied rating to reflect the effective and structural subordination to Crown's $125 million senior credit facility and capital leases ($8 million as of 6/30/03).

Crown Central Petroleum, headquartered in Baltimore, Maryland, owns and operates two refineries in Texas, and markets and distributes products through company-owned gas stations and convenience stores.

New York
Alexandra S. Parker
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kenneth Austin
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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