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03 Sep 2004
MOODY'S INVESTORS SERVICE DOWNGRADES SUB NOTES OF AVONDALE MILLS TO Ca FROM B3 AND THE SENIOR IMPLIED OF AVONDALE INCORPORATED TO B3 FROM B1. ASSIGNS NEGATIVE OUTLOOK.
Approximately $91 million of debt affected
New York, September 03, 2004 -- Moody's Investors Service downgraded the ratings of Avondale Mills,
Inc. and those of its parent company, Avondale Incorporated
(collectively "Avondale") and assigned a negative outlook.
The following ratings were affected:
Avondale Mills, Inc:
$91 million issue of senior subordinated notes due 2013,
downgraded to Ca from B3.
The senior implied rating lowered to B3 from B1;
The senior unsecured issuer rating lowered to Caa2 from B2.
The stable outlook was changed to negative.
The downgrade reflects Moody's view that the recently negotiated
exchange of $59 million of existing senior subordinated notes due
2013 for $41million of new senior unsecured notes due 2012 represents
an impairment of value to the sellers of the subordinated notes.
The additional layer of senior unsecured debt also increases the potential
severity of loss in a distress scenario for the remaining holders of the
subordinated notes. The downgrade also considers the decrease in
cash from operations, significant leverage on a free cash flow basis,
and an operating loss for the last twelve months. In addition,
the operating loss over average total assets may indicate a need for asset
The ratings continue to incorporate the company's market position
as a leading domestic, vertically integrated supplier of apparel
textiles and its on-going cost control and plant rationalization
programs which were initiated in fiscal 2002.
The ratings outlook is negative. The company's determined
efforts to increase absorption of fixed costs through facility rationalization
may not keep pace with the relentless competition from lower price imported
products particularly in light of continued price deflation in apparel.
The uncertain level of future profitable demand, combined with a
more volatile cotton market and an increasing proportion of sales to offshore
contractors, leaves doubt about the company's ability to generate
sufficient cash from operations to reduce its high leverage outside of
a financial restructuring.
The Ca rating on the senior subordinated notes reflects the effective
subordination of the notes to the claims of secured lenders under the
secured credit facility and other senior indebtedness. On May 28,
2004, Avondale had no borrowings outstanding and $30.9
million of availability under its borrowing based revolving credit facility.
The subordinated notes are also effectively subordinated to a $13
million equipment term loan and $41 million of new senior unsecured
notes due 2012. The credit facility and the unsecured notes are
not rated by Moody's.
In the last several years, the company's revenues have consistently
declined due to both the weakened domestic consumer demand for apparel
and increased competition from the cheaper, foreign sourced fabrics
and packaged goods, as well as the company's internalization
of yarn production and shift in product mix. Margin improvements
achieved during the previous twelve month period as a result of facility
rationalization and cost cutting were offset by higher raw material costs
and weaker pricing across the industry over the last twelve months ended
May 28, 2004.
Gross margin for the last twelve months ended May 28, 2004 declined
to 2.1% from 7% for the fiscal year ended August
29, 2003 primarily due to lower unit demand, weaker pricing
and higher average cotton costs. While SG&A remained flat,
EBIT was a loss of $13 million for the last twelve months ended
May 28, 2004 versus $15 million in EBIT (or 2.5%
of sales) at fiscal year end 2003. The loss on average total assets
may indicate a need for asset writedowns.
Free cash flow declined in the last twelve month period ended May 28,
2004 due to the company's net loss which was somewhat offset by
historically low levels of capex. Cash coverage of debt,
measured as cash from operations less capex and dividends for the trailing
twelve months ended May 28, 2004 to debt plus the off-balance
sheet accounts receivable securitization program, decreased to 4.7%
from 6.2% for fiscal year end 2003.
Interest protection measures are inadequate. EBITDA less capex
to interest was insufficient at 0.8 times for the last twelve months
ended May 28, 2004 versus 1.9 times at fiscal year end 2003.
Due to the operating loss, all EBIT based metrics were negative.
Avondale Mills, Inc. with the headquarters in Monroe,
Georgia, is a wholly owned operating subsidiary of Avondale Incorporated.
The company is a leading manufacturer and marketer of indigo-dyed
denim, piece-dyed workwear and sportswear fabrics,
and cotton and cotton-blend yarns.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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