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11 Dec 2001
MOODY'S LOWERS RATINGS OF FORMICA CORPORATION; MAINTAINS WATCHLIST STATUS FOR POSSIBLE FURTHER DOWNGRADES
Approximately $560 Million of Debt Securities Affected.
New York, December 11, 2001 -- Moody's Investors Service has downgraded the debt ratings of Formica Corporation
$345 million secured bank credit facility to Caa1, from B1
$215 million 10.875% senior subordinated notes due
3/01/2009 to Ca, from B3
Issuer rating to Caa2, from B2
Senior implied rating to Caa1, from B1
The company's debt ratings remain watchlisted for possible further downgrades.
The downgrades reflect Formica's seven consecutive years of losses,
its excessive balance sheet leverage, thin interest coverage and
negative tangible net worth, and
its constrained liquidity. The ratings remain on review for further
possible downgrades because the extension of Formica's existing waiver
from its bank syndicate expires February 9, 2002. Unless
the waiver is extended again, the covenant violations are cured,
or the bank credit facility is amended, Formica's liquidity will
be imperiled, resulting in further rating reductions.
Moody's concerns are partially mitigated by Formica's 88-year history,
strong global market position, worldwide brand awareness,
global distribution network, and the diversification of its sales
revenues, which flow from both the new construction and the repair
and remodeling segments, as well as from the residential and commercial
1994 was the last year in which Formica registered positive net income.
EBITDA, which reached $71.4 million in that year,
has never been as high since. The results since 1994 were produced
despite a modest uptrend in company revenues over the period and a generally
strong economic backdrop. With the deteriorating economic fundamentals
that have occurred in Formica's markets this year, operating results
for full year 2001 and 2002 are likely to continue being under pressure,
despite the extensive restructuring efforts made by the company at Perstorp
Surface Materials ("PSM") and in its domestic operations.
The balance sheet, which was conservatively leveraged in the mid-1990's,
has been stretched as a result of the continuing losses, a major
goodwill impairment charge taken in 1997, and large increases in
debt, primarily to finance acquisitions. As of the nine months
ended September 30, 2001, total debt/capitalization was 92.7%,
total debt/EBITDA on a trailing 12-month basis was 9.4x,
and tangible net worth was a negative $105.5 million.
EBITDA coverage of interest was 0.8x for the quarter, 1.0x
for the nine months, and 1.0x for the trailing 12 months.
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 the balance of this year and next, is
not expected to improve near term. The company has a clear reliance
on external sources of funding, which are closed off 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
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
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
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
The notching of the senior subordinated debentures reflects their structural
and effective subordination to the secured bank credit facility.
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
Corporate Finance Group
Moody's Investors Service
Joseph A. Snider
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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