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Rating Action:

MOODY'S LOWERS RATINGS OF FORMICA CORPORATION; MAINTAINS WATCHLIST STATUS FOR POSSIBLE FURTHER DOWNGRADES

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 as follows:

$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 markets.

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 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 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 products market.

New York
Michael Rowan
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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