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12 Jan 2005
MOODY'S DOWNGRADES THE RATINGS FOR EAGLEPICHER; OUTLOOK LOWERED TO NEGATIVE
Approximately $685 Million Of Debt Obligations Affected
New York, January 12, 2005 -- Moody's Investors Service downgraded the ratings for both EaglePicher
Incorporated ("EaglePicher" or "the company") and parent EaglePicher
Holdings, Inc. ("EP Holdings") in connection
with the company's December 27, 2004 announcement that it is once
again revising downward earnings guidance for fiscal year 2004.
EaglePicher additionally stated that in the event that actual performance
falls at the low end of the company's revised EBITDA range, potential
now exists for non-compliance with certain financial covenants
under its credit agreement and accounts receivable securitization facilities
by as early as the quarter ended November 30, 2004. Moody's
also revised the outlooks for both rated entities to negative, from
EaglePicher's latest revised guidance was announced only days after the
December 13, 2004 execution of amendments to its credit agreement
and accounts receivable securitization facility which materially modified
the financial covenants in those agreements for the quarter ended November
30, 2004 and subsequent quarters through the maturity of those agreements.
These amendments were expected to ensure EaglePicher's ongoing liquidity
and increase the company's operating flexibility.
The following specific rating actions were taken:
- Downgrade to Caa1, from B3, of the rating for EaglePicher's
$250 million of 9.75% guaranteed senior unsecured
notes due September 2013;
- Downgrade to B3, from B2, of the ratings for EaglePicher's
$275 million of guaranteed senior secured bank credit facilities,
- $125 million revolving credit facility due August 2008;
- $150 million ($142.8 million remaining)
term loan B due August 2009;
- Downgrade to C, from Ca, of the rating of EP Holdings'
$166.9 million current balance (including dividend accretion)
of 11 3/4% cumulative redeemable exchangeable preferred stock mandatorily
redeemable during March 2008 ("redeemable preferred stock");
- Downgrade to B3, from B2, of EP Holdings' senior
- Downgrade to Caa3, from Caa2, of EP Holdings'
senior unsecured issuer rating
According to EaglePicher's December 27, 2004 revised guidance,
the company expects to report revenues for the year ending November 30,
2004 of $705-to-$712 million, adjusted
EBITDA of $70-to-$77 million, and credit
agreement EBITDA (as defined) of $80-to-$87
million. EaglePicher's total debt, including the investment
in its accounts receivable program, is expected to be $426.3
The sudden downward adjustment to the company's 2004 performance expectations
was primarily a byproduct of information voids caused by U.S.
Defense Security Service imposed restrictions on EaglePicher headquarters
management's access to financial and operational details within the company's
Defense and Space Power unit (which currently generates in excess of 20%
of consolidated revenues). As a result of the restrictions,
headquarters management only recently learned about reduced margin booking
rates for two long-term contracts accounted for under the percentage
of completion method in this unit within EaglePicher's Power Group Segment
caused by increased foreign exchange rates and reduced productivity performance
and assumptions. The reduced forecasted ranges are also due to
several lot acceptance test failures on battery programs, an inventory
adjustment, additional vacation and severance accruals and other
miscellaneous items, all within the Defense and Space Power unit.
For the past several months, EaglePicher has been in negotiation
with the U.S. Defense Security Service with regard to obtaining
permanent headquarters access to the Defense and Space Power unit but
no long-term resolution has been achieved to this point.
Upon identification of various matters of concern, certain members
of management at EaglePicher's headquarters were granted immediate temporary
access to more detailed Defense and Space Power information and are in
the process of reviewing such information with the recently appointed
chief financial officer of the unit.
As a result of the lowered guidance almost immediately following execution
of a significant loosening of the financial covenants within the senior
secured credit agreements, EaglePicher's effective availability
under the revolving credit facility and accounts receivable securitization
is nominal and liquidity remains a foremost concern. It is Moody's
opinion that the company's free cash flow will be negative during both
fiscal years 2004 and 2005, which will translate into increased
debt levels. EaglePicher notably continues to invest heavily in
joint ventures as well as capital expenditures in excess of depreciation
across most business lines. Some of the most significant investments
are notably being made within the rapidly growing Defense and Space Power
unit for which EaglePicher's headquarters management presently has both
limited information or decision-making control. EaglePicher's
Hillsdale automotive segment continues to under-perform due to
lower average selling prices, the phase-out of certain programs,
lower industry production levels, and plant restructuring and China
start-up costs. Despite revenue increases, the company's
Wolverine automotive segment has also performed below expectations due
to increased steel costs and plant closure costs and lower industry production
levels. EaglePicher's Filtration and Minerals segment was hurt
during 2004 by higher natural gas prices and competitive pricing pressures
which management believes will be somewhat alleviated during 2005.
EaglePicher's ratings could potentially be further downgraded in
the event that liquidity concerns escalate due to weak performance within
one or more business units combined with continued high levels of cash
invested in capital improvements, acquisitions, and restructuring
actions, or in the event that headquarters management becomes apprised
of additional negative developments within the Defense and Space Power
unit over which it has limited visibility or control. Other negative
developments which could affect ratings potentially could include steadily
rising and unhedged commodity costs, 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.
EaglePicher's ratings or outlook could potentially be upgraded once
there is evidence of sustainable improvement in the company's credit
protection measures, financial covenants are further loosened,
headquarters management wins its appeal for regular access to the records
of the company's Defense and Space Power Unit or the company decides to
spin off this unit on favorable terms, incremental debt reduction
is achieved through a combination of improved operations, strategic
asset sales, and/or an incremental equity infusion by equity sponsor
Granaria Holdings B.V., or the company continues to
generate profitable new business awards which incorporate increased diversification
of its customer base and product lines.
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 currently approximate $710 million.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Lisa B. Matalon
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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