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04 Dec 1998
MOODY'S LOWERS SENIOR NOTES OF VISKASE COMPANIES, INC TO Caa1 AND SENIOR SECURED NOTES TO B2
Moody's Investors Service downgraded the rating on Viskase Companies, Inc's ("Viskase" - formerly Envirodyne Industries, Inc.) $219.3 million 10.25% of senior notes, due 2001 to Caa1 from B3 and the rating on its $55 million of 12% senior secured notes, due 2000, to B2 from B1. The senior implied rating has been lowered to B3 from B2. The outlook is stable.
The changed ratings reflect the company's increased leverage, falling returns, weak balance sheet, tight financial coverage, intensely competitive business environment and reliance on non-domestic cash flows to service debt obligations. The ratings, however, continue to recognize, the company's efforts to restructure the business, recent debt reductions, investment in new technology, fairly stable demand for the company's products and the possibility that the company will reach a conclusion to its long standing patent litigation dispute with American National Can ("ANC"). The ratings also take into account the relative rankings of the debt within the overall capital structure and the associated collateral packages.
The stable outlook is based on Moody's expectation that cost rationalization and benefits of improved technology will moderate the impact of continued price pressure in key markets, that the company will realize expected annual cost savings, that new film capacity will come on stream in a timely manner and going forward the company is expected to have greater flexibility over capital expenditures than has been the case in recent years.
The B2 rating on the $55 million senior secured notes reflects their over collateralization. The senior secured notes were reduced from $160 million in August 1998, using the proceeds from asset sales. The rating on the senior unsecured notes reflects their effective subordination to the senior secured notes and to the company's other senior secured debt. Moody's believes that in a distressed scenario, the residual unencumbered assets will not provide sufficient coverage to ensure that the holders of the unsecured notes are made whole.
Moody's recognizes that since 3Q 1997, Viskase has sought to strategically restructure its businesses to improve liquidity and reduce debt. In the 12 months to end September 1998, Viskase has reduced debt by $119 million to $405 million. The restructuring has included sale of selected businesses (PVC and oriented polystyrene), sale of subsidiaries (Sandusky and Clear Shield National), as well as internal corporate streamlining, personnel reductions and plant closures. In total the company has taken $146 million in charges (c. $6 million cash charges), including a full write-off of $93 million in intangibles.
Viskase is now a much smaller company, with primary focus in two industry segments: cellulose casings, for the preparation of foods, and flexible specialty films, for packaging foods; the company also retained a small presence in the oriented polypropylene converting ("OPP") market. Sales are split 57% casings, 37% specialty films and 6% other, including OPP. The company still derives approximately 40% of revenues and 31% of EBITDA outside the US, which in Moody's opinion will continue to expose the company to additional political, currency and business risks, which may have an adverse affect on the companies ability to meet it debt obligations.
Moody's remains concerned with respect to Viskase's falling market share, intensely competitive market conditions and relatively low customer switching costs in its core market. Although Moody's recognizes Viskase's long history in its casing's business (over 75 years) and anticipates improved technology will restore some margin stability, the company remains, in the near term, under intense pricing pressure from its principal competitor, Viscofan of Spain, which continue to pursue a strategy of growing market share. Moreover, it is Moody's opinion that because Viscofan is part of a larger, better capitalized group of companies it has greater ability to sustain a longer campaign of price reduction. Moreover, although Moody's anticipates that margins will stabilize in the medium term, further pricing pressure will come in the longer term as other industry players improve their technology.
Moody's believes that difficulties in the company's larger casings business will off-set positive contributions from the specialty films business. Viskase, like many in the industry, have little pricing flexibility in the films market and growth is expected to be purely volume driven. Viskase competes directly with Cryovac (part of Sealed Air Corp), which are much larger and financially stronger. Cryovac still retain a very dominant market share.
For the nine month period ended September 1998, the company generated EBITDA of $44 million on revenues of $309 million. Despite the sale of under-performing assets, the overall return on assets is extremely low at 1% on an annualized basis (4% at year end 1997). The use of asset sale proceeds to reduce the company's debt has however, alleviated Moody's immediate concerns with respect to the company's liquidity, albeit the company faces refinancing risk with respect to the remaining $55 million senior secured bonds and its revolving credit facility which fall due in 2000 and 1998, respectively. The company's balance sheet remains very weak, with negative net worth and high debt levels relative to its revenues and operating cash flows. The company has become increasingly leveraged with debt/capitalization of 106% and compared to 79% at year end fiscal 1997, principally due to the write-off of intangibles. Moody's have factored into its outlook, the expected annual cost savings and the fact that the company has additional flexibility with respect to capital expenditures. This should give some additional cushion to the company's key debt coverage measures, but ratios are expected to remain extremely tight. As of nine months ended September 1998, EBITDA/interest coverage of 1.1 times and incorporating capital expenditures, the coverage falls below 1 at 0.5 times. Over the immediate term, given the size of the unsecured notes and the relatively small percentage of amortizing debt, Moody's anticipates that the company's credit profile will remain basically unchanged.
Moody's continues to monitor developments of the company's ongoing litigation against ANC over alleged infringements on Viskase's multi-layer barrier film patents. In 1996, the court awarded the company $102 million in damages. In September 1997, the court set aside the verdict and ordered a retrial. In August 1998, the court granted Viskase's motion for partial summary judgment. No new date has been set for a retrial. Moody's considers any potential settlement to the litigation as a positive factor on the ratings and would substantially reduce the company's debt burden. Moody's, however, notes that proceedings have now continued for over 6 years and have yet to near conclusion. It is also Moody's opinion that, ANC, who is part of the larger and financially stronger group, Pechiney, continue to delay procedures. Given the tenure of the outstanding notes, Moody's places reduced emphasis on cash flows from a settlement to improve the company's credit profile.
Chicago based, Viskase Company's Inc manufactures cellulosic casings used in the preparation and packaging of processed meats and heat shrinkable bags; and specialty films for packaging and preserving fresh and processed meat, poultry and cheese products.
No Related Data.
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