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Rating Action:

MOODY'S LOWERS RATINGS OF FORMICA CORPORATION

09 Jan 2002
MOODY'S LOWERS RATINGS OF FORMICA CORPORATION

Approximately $560 Million of Debt Securities Affected.

New York, January 09, 2002 -- Moody's Investors Service has downgraded the debt ratings of Formica Corporation as follows:

$345 million secured bank credit facility unchanged at Caa1

$215 million 10.875% senior subordinated notes due 3/01/2009 to C, from Ca

Issuer rating to Ca, from Caa2

Senior implied rating to Caa3, from Caa1

Formica's debt ratings, which were lowered on December 11, 2001, remained on review for possible further downgrades because the company had already entered a second waiver period from its bank group. This waiver extension is due to expire on February 9, 2002. Unless the waiver is extended again, the company's covenant violations are cured, or its bank credit facility is amended, Formica may very well be forced into bankruptcy. Yesterday's announcement regarding the replacement of Formica's CEO and the retention of Lazard Freres as a restructuring advisor suggest that bankruptcy might be moving up in order of preference as a solution to the company's liquidity problems. In any event, the bank lending group will probably block the coupon payment of $11.7MM on the subordinated notes that is due on March 1, 2002 unless a long-term solution to the company's problems is reached by that date, which appears increasingly uncertain.

Although Formica had $26.3 million of cash on the balance sheet at 9/30/01, its liquidity is constrained. Its operating cash flow for the nine months ended September 30, 2001 did not cover working capital and minimal capital spending requirements, and based on the economic outlook for 2002, is not expected to improve near term. The company has a clear reliance on external sources of funding, which are closed off to it at the current time. It is in violation of its covenants. It has a large amount of its debt that has been reclassified as current, and its lenders could accelerate this amount in the near term if they chose. Formica's domestic assets are fully encumbered, and the company has few alternatives by which to raise new cash.

Formica has a senior secured credit facility with Deutsche Bank as agent for $345 million, divided into three tranches. The facility includes a $120 million revolving credit facility, an $85 million term loan, and a $140 million term loan.

The $120 million revolver expires May 1, 2004 and had $91.8 million drawn down plus $28.5 million in letters of credit outstanding as of 9-30-01, leaving an available balance of $0.1 million. This facility is now closed off to the company until its covenant violations are cured or the facility is amended.

Term loan A for $85 million and term loan B for $140 million expire 5-1-04 and 4-30-06, respectively. The total amount currently outstanding under the two loans is $200.4 million.

The entire facility is secured by all property and assets (tangible and intangible) of Formica and its current and future domestic subsidiaries, by 100% of the capital stock of Formica and its domestic subsidiaries, and by 65% of the capital stock of non-U.S. subsidiaries of Formica (including PSM). In addition, the facility is guaranteed by Formica, its direct and indirect parent companies, and all existing and future domestic subsidiaries of Formica.

The notching of the senior subordinated notes reflects their structural and effective subordination to the secured bank credit facility as well as their recovery potential in a bankruptcy.

Founded in 1913 and headquartered in Warren, New Jersey, Formica Corporation is one of the largest producers of decorative high-pressure laminates in the world and a leading brand name in the decorative surfacing products market.

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

New York
Joseph A. Snider
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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