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Rating Action:

MOODY'S INVESTORS SERVICE DOWNGRADES THE LONG TERM DEBT OF HARTMARX CORPORATION AND ASSIGNS NEGATIVE OUTLOOK

26 Dec 2001
MOODY'S INVESTORS SERVICE DOWNGRADES THE LONG TERM DEBT OF HARTMARX CORPORATION AND ASSIGNS NEGATIVE OUTLOOK

Approximately $235 Million of Debt Affected.

New York, December 26, 2001 -- Moody's Investors Service downgraded the long-term ratings Hartmarx Corporation ("Hartmarx"). The affected ratings include:

$200 million senior secured revolving facility due 2003 to B2 from Ba2;

$34.7 million issue of 10.875% senior subordinated notes due 2002 to Caa3 from B3;

The senior implied rating to B3 from B1;

The senior unsecured issuer rating to Caa2 from B2.

At the same time, the rating outlook was revised to negative from stable.

The downgrade follows the company's announcement that it has commenced an offer to exchange all of its outstanding 10.875% senior subordinated notes due on January 15, 2002. Hartmarx will issue $850 principal amount of new 12.5% senior subordinated notes due on January 15, 2005, and pay $150 in cash for each $1,000 principal amount of existing notes that are properly tendered and not withdrawn pursuant to the exchange offer. The successful completion of the exchange offer is a condition precedent for the lenders of the senior secured credit agreement to waive certain existing defaults and to modify certain covenants.

Further, the downgrade reflects the company's lack of liquidity and insufficient cash generation as evidenced by its recent extensions of its debt maturities; increased leverage, high cash drain from working capital, partly due to the acquisition of Consolidated Apparel Group; and insufficient fixed charge coverage.

The ratings continue to reflect Hartmarx's exposure to fashion trends, lack of meaningful revenues and cash flow growth, and declining profits. However, the ratings are supported by the company's efforts to expand its casual-wear business, diversify its distribution into moderate and discount channels, efforts to repay its debt and a broad portfolio of brands.

The negative outlook on the ratings reflects the uncertainty regarding the completion of the exchange offer on the subordinated notes as well as the ability to meet the covenants under the secured credit agreement. Moody's notes that the secured credit agreement has had several amendments this year which have provided the lenders with a stronger collateral agreement, required monetization of assets as well as the injection of new money. The negative outlook reflects the weakness of the retail environment, particularly in the sales of men's tailored suits, as well as within the company's primary distribution channel, the department stores.

The B2 rating on the company's senior secured bank credit facility reflects the benefits of upstream guarantees and collateral package as amended on August 31, 2001. All borrowings under the credit facility are subject to a borrowing base formula, and lenders are secured by a perfected first priority security interest in substantially all assets of the company and its subsidiaries, including its brand names. As of the end of Q301, the company had $100 million drawn under its credit facility, as well as the addition to the credit facility of a $15 million Tranche C.

The Caa2 rating on Hartmarx's 10.875% senior subordinated notes due 2002 reflects the contractual subordination of the notes to the senior secured lenders as well as the severity of loss in a stress scenario. During the nine months of 2001, Hartmarx purchased $27.2 million par value of its 10.875% senior subordinated notes, which was funded in part by $17.4 million of new long term mortgage notes. Approximately $34.7 million of the subordinated notes were outstanding as of August 31, 2001.

Despite the company's efforts to diversify its revenue stream, its core business is still centered on men's tailored apparel (approximately 60% of revenues pro forma for the recent acquisition). Decreasing demand and difficulties at retail caused continuous top line pressure. As a result, total revenues in 3Q01 decreased approximately 8.7%, to $160.8 million, as compared to 3Q00 revenues. Further, the company's cost reduction actions, which included shutting down certain domestic operations and decreasing the workforce, have had a near term negative impact on operating margins. The gross profit margin, excluding the impact of non-recurring charges, decreased 70 bps, to 26.6% in 3Q01 versus comparable period last year. SG&A margin in 3Q01 remained high, at 25.4% as compared to 22.8% in 3Q00, which put some additional pressure on operating profitability. Likewise, EBIT and EBITDA margins, adjusted for the impact of non-recurring charges decreased to 2.2% and 3.4%, respectively in 3Q01 from 4.8% and 5.9%, respectively, in 3Q00. Return on assets, measured by adjusted annualized EBIT to average total assets, is very low, at 2.9% in 3Q01 as compared to 6.7% in 3Q00, which supports the need to have closed underperforming assets.

Interest protection measures have not enjoyed the benefits of recent rate reductions and continue to decrease further. In 3Q01 normalized EBIT-based interest coverage was insufficient, at 0.99 times, as compared to 2.3 times a year ago. Normalized EBITDA-based interest coverage in 3Q01 is low, at approximately 1.6 times, as compared to 2.9 times for a comparable period last year. Increased working capital needs, as well as borrowing to fund an acquisition, resulted in an increase in leverage. At 8/31/01, total debt represented 48.5% of the company's book capitalization, which compares to 44.8% at 8/31/00, and total debt to the trailing twelve months ending 8/31/01 EBITDA, was high, at 6.4 times.

Going forward, Moody's will focus on the company's ability to improve its cash generation, to generate operating profits and to reduce its debt.

Headquartered in Chicago, IL, Hartmarx Corporation is one of the largest manufacturers and marketers of men's suits, sportcoats and slacks in the United States, as well as a manufacturer and marketer of men's and women's sportswear, including golfwear, dress furnishings (shirts and ties) and women's career apparel. The company offers its products under a large portfolio of well-known brand names. Some of the brand names are owned, such as Hart Schaffner & Marx, Hickey-Freeman, while other brands are under licensing agreements such as Perry Ellis, Tommy Hilfiger, Kenneth Cole and Burberry's men's tailored clothing. The company also produces product under private label arrangements.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Catherine Guinee
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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