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17 Nov 2004
MOODY'S UPGRADES SOTHEBY'S (SENIOR IMPLIED TO Ba3); OUTLOOK STABLE
Approximately $100 Million of Debt Securities Affected
New York, November 17, 2004 -- Moody's Investors Service upgraded the long term debt ratings of
Sotheby's Holdings, Inc. with a stable outlook.
The upgrade reflects the company's strengthened liquidity,
a moderation in the liabilities remaining from the department of justice
investigation, and strong operating performance.
The new rating level reflects Sotheby's strong brand name,
its recognized expertise in an industry that has high barriers to entry
and is dominated primarily by two players, as well as current management's
financially responsible behavior. It also reflects Sotheby's
very strong liquidity from on balance sheet cash, operating cash
flow, and an unfunded $200 million revolving credit facility,
as well as the nearest term debt maturity being in 2007. The rating
is constrained by the high level of funded debt, the seasonal and
cyclical nature of the industry, which results in swings in operating
performance and credit metrics, and the high level of fixed costs
making it difficult to adjust to cyclical downturns.
The stable outlook takes into account our expectation that leverage metrics
will be uneven given the cyclical nature of the company's business.
It also assumes that the company will maintain strong liquidity and that
Sotheby's will finance capital expenditures, working capital
needs, and dividends from internally generated cash flow.
Given the recent upgrade, a further upgrade is unlikely in the intermediate
term; however, ratings could move upward should the company
reduce on balance sheet debt, including sale leasebacks, to
below $100 million while maintaining consistent cash balances.
Ratings could move downward should the company's liquidity deteriorate
such that cash balances fall below $100 million for an extended
period of time, should the competitive environment change,
or should on balance sheet debt rise above $300 million.
While we expect some volatility in credit metrics, significant deterioration
during a trough in the business cycle, such that Adjusted Debt/EBITDAR
rises much above 5.0x is likely to trigger downward rating pressure.
2004 has been a strong year for Sotheby's. Operating performance
has improved as a result of two successful auction seasons, as well
as significant private sales, including the Forbes Faberge eggs.
LTM 9/30/04 EBITDA from continuing operations rose to $75.1
million from $34 million in the prior fiscal year. This
improvement in EBITDA caused Adjusted Debt/EBITDAR to improve to 4.4x
on a LTM basis. Given the cyclical nature of the company's
business, the current year's performance is not an indication
of future levels of operating cash flow. In addition, liquidity
has strengthened; the company sold the real estate business to Cendant
(net cash proceeds of $94.0 million); and it extended
the maturity on its $200 million credit facility to 2007.
The remaining liabilities as a result of the department of justice investigation
have moderated. The remaining fine to be paid is $27 million
due in February 2005 and February 2006. The other remaining liability
is $62.5 million in discount certificates which can be used
to satisfy consignment charges or redeemable for cash between May 2007
and May 2008.
The senior unsecured notes and issuer ratings are notched down by two
from the senior implied rating as a result of the bank facility being
secured by all the assets of the company, the subsidiary co-borrower
structure of the credit facility, the lack of any subsidiary guarantees,
as well as the sale of the York Avenue property in a sale lease back transaction.
In addition, the two notches represent the preponderance of secured
debt in the capital structure relative to the size of the unsecured notes.
The following ratings were upgraded:
Senior implied to Ba3 from B1;
Senior unsecured to B2 from B3;
Senior unsecured shelf to (P)B2 from (P)B3.
The following rating has been assigned:
Issuer rating of B2.
Sotheby's Holdings, Inc., headquartered in Bloomfield
Hills, Michigan, is one of the two largest auction houses
in the world. Total revenues from continuing operations were $319.6
million for the fiscal year ended December 31, 2003.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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