(The following statement was released by the rating agency)
MOODY'S DOWNGRADES THE RATINGS OF COLLINS & AIKMAN PRODUCTS, CONCLUDING REVIEW FOR POSSIBLE DOWNGRADE; OUTLOOK NEGATIVE
Approximately $1.45 Billion Of Debt Obligations Affected
NEW YORK, Aug 22 - Moody's Investors Service downgraded the debt ratings and speculative grade liquidity rating for Collins & Aikman Products Co. ("C&A"), concluding the review for possible downgrade initiated on May 20, 2003. C&A's rating outlook is negative. Moody's review action was initiated upon management's announcements regarding C&A's disappointing first quarter 2003 conversion of increased revenue into profits, together with sharply reduced operating margin expectations for the balance of 2003. Moody's concluded its review action following detailed analysis of C&A's reported results for the first two quarters of 2003 and other publicly available information, supplemented by discussions with and additional supporting information provided by the company's management and advisors. Moody's additionally evaluated the impact of new developments, including the initiation of a headcount reduction of 750 salaried staff, the designation of a new chief executive officer, and the disclosure that C&A's audit committee is looking into assertions by former officers of the company, which the company asserts are without merit, regarding certain accounting and non-accounting issues concerning related party transactions and other matters. The following ratings were downgraded: - Downgrade to B3, from B2, of the rating for C&A's $400 million of 11 1/2% guaranteed senior subordinated notes due April 2006; - Downgrade to B2, from B1, of the rating for C&A's $500 million of 10.75% guaranteed senior notes due December 2011; - Downgrade to B1, from Ba3, of the ratings for C&A's approximately $540 million of guaranteed senior secured bank credit facilities, consisting of: (a) $175 million guaranteed senior secured revolving credit due December 2005; (b) $73.9 million remaining guaranteed senior secured term loan A due December 2005; (c) $292.4 million remaining guaranteed senior secured term loan B due December 2005; - Downgrade to B1, from Ba3, of C&A's senior implied rating; - Downgrade to B2, from B1, of C&A's senior unsecured issuer rating; - Downgrade to SGL-4, from SGL-3, of C&A's speculative grade liquidity rating C&A also has in place a $250 million off-balance sheet accounts receivable securitization which is not rated by Moody's. At June 30, 2003 this facility was unused, had $118.5 million of maximum availability based upon the existing receivables pool, and was subject to limitations under the senior secured credit agreement. The company also has access to various small lines of credit and factoring arrangements around the world. The rating downgrades reflect that while C&A's revenue base has held up fairly well in the face of declining North American OEM production rates and the steady loss of market share by the domestic Big Three, the company continues to have difficulty converting these revenues into stronger levels of profitability and cash flow generation. Improved margin performance is warranted in order for C&A's operations to comfortably support the company's high financial leverage and generate cash interest coverage above currently marginal levels. Fixed cost improvements already being realized as a result of the company's 2002 operational restructuring program aimed at consolidating C&A's existing and acquired plants are being masked by a variety of other operating and industry-driven obstacles. Margins have been more negatively affected than originally estimated by high up-front launch costs; launch delays and plant downtime associated with various platform transitions, including the Dodge Durango and Chrysler minivans; labor inefficiencies, slower-than-anticipated achievement of engineering changes and materials cost reductions (particularly for petroleum derivatives) directed at offsetting OEM price concessions; and market share losses by key customers. Operational inefficiencies were particularly apparent during the first quarter of 2003, when C&A reported that 12 of its 85 plants were responsible for generating negative $18 million of EBITDA on just $117 million (11%) of C&A's total revenues. Management did notably report material improvement at these under-performing plants during the second quarter, as discussed below. C&A's margins are also being driven down by the company's changing business mix. Under GAAP accounting convention, C&A's growing proportion of purchased parts associated with the expansion of C&A's cockpit business must be reported as sales, offset by corresponding levels of cost of goods sold. The rating downgrades additionally factored in concerns regarding C&A's management stability and the company's failure to achieve earnings goals. The company has experienced a steady stream of senior management changes over the past 1 1/2 years. On August 11, 2003 C&A's vice chairman David Stockman was appointed as the company's new chief executive officer, replacing Jerry Mosingo who had only assumed the CEO role about one year ago from Tom Evans. A five-member "president's council" was also created, consisting of David Stockman, the company's chief financial officer, and three newly-appointed divisional presidents. While this latest of several managerial reconfigurations is intended to restore confidence in the company and seems to highlight the commitment of private equity firm Heartland Industrial Partners ("Heartland," which was founded by David Stockman) to continue to actively support its more than $300 million cash investment in C&A, it remains to be seen whether the new senior management team will prove more effective on a consistent basis than its series of predecessors. The company has notably also changed auditors twice over the past two years. C&A first switched to PriceWaterhouseCoopers after the downfall of Arthur Andersen. More recently, C&A and the other three existing Heartland investments combined their purchasing power and switched auditors as a group to KPMG LLC in order to take advantage of the more favorable rates offered. Moody's additionally has concern regarding the outcome of the review by C&A's audit committee of certain assertions concerning certain related accounting and non-accounting issues associated with party transactions and certain other matters by two former officers of the company. The company maintains that the assertions are without merit, but has also stated that it cannot predict either the outcome of the audit committee's inquiry or whether or not it will impact financial results. In addition, the company cannot assure that additional assertions will not be made in the future and that the scope of the inquiry will not expand. The company's independent public accounting firm KPMG LLC will not sign off on the second-quarter June 30, 2003 results reported in the 10Q filing prior to completion of the audit committee's independent inquiry. Moody's downgrade of C&A's speculative grade liquidity rating to SGL-4 reflects the company's weakened liquidity status, despite the relief provided by the second amendment to the credit agreement executed during May 2003. C&A's cash balance plus debt facility availability (after incorporating covenant restrictions) declined to just over $100 million at June 30, 2003. Moody's considers this level of liquidity insufficient to support an almost $4 billion revenue company that is characterized by fluctuating working capital needs, along with significant up front R&D and capital expenditures requirements. In the event of any further performance deterioration, Moody's expects that C&A would require reliance upon either existing cash balances or funding under its external liquidity facilities to service its 2003 scheduled debt service requirements. The company's financial flexibility appears limited based upon its below-par bond prices, low market capitalization, and the immaterial amount of idle or non-core assets which could be proposed for disposition. However, Moody's notes that C&A has the ability to manage capital expenditures and other new business-oriented investments in the event of production delays. The company also expects to generate incremental availability under the senior secured bank covenants through transactions such as new sale-leasebacks of real estate and property, additional factoring agreements, and/or advanced reimbursement for tooling. The rating agency additionally believes that there is potential for Heartland to provide incremental support for the company if necessary to forestall defaults under any of the company's debt agreements, given the private equity firm's substantial investment of cash into C&A and the high profile nature of this investment. The ratings more favorably reflect that C&A has nearly completed its operational restructuring and has consolidated operations down to a footprint of 85 plants. The company has additionally established a near-term goal of attaining a minimum 10% consolidated EBITDA margin (before restructuring charges, impairment charges, and corporate overhead), versus the 6.7% and 8.1% levels achieved, respectively, during the first and second quarters of 2003. The company's new restructuring initiative aimed at cutting its salaried work force by 750 individuals and certain other final consolidation steps is expected to improve margins by 1.5% (or $60 million) on an annualized basis, which will bring C&A much closer to its minimum goal. The new mandate to right-size the overhead support structure and eliminate the top-heavy nature of existing staffing levels will be implemented quickly, with a payback period for the $20 million cash investment for severance charges approximating four months. The company additionally reported that the during the second quarter of 2003 the number of negative EBITDA generating plants was reduced to only five, versus twelve during the first quarter. These five plants, which represented $53.6 million of quarterly revenues, posted negative EBITDA of $11.5 million in the aggregate during the second quarter. Only three of these plants are experiencing persistent operational problems. Of the other two, performance of one will turn positive upon the September 2003 launch of the Dodge Durango. The other is located in Brazil, where the company has faced unfavorable macroeconomic conditions out of its control. Management believes that the situation in Brazil will improve as inflation and currency valuations stabilize and the Brazilian government follows through with tax reductions related to vehicle purchases. The ratings also reflect C&A's #1 or #2 North American market share in seven-out-of-ten major automotive interior categories; the company's rising content per vehicle evidencing stepped-up cross-selling of products and increased engineering of the product line; and the substantial book of value-added new business slated to roll out during the balance of 2003 through 2006. Management believes that it has a strong relationship with the company's bank group and is optimistic regarding C&A's ability to obtain further amendments to loosen the bank financial covenant requirements, given the company's low leverage through the senior secured bank debt and its strong collateral coverage of outstandings. C&A's negative rating outlook reflects the company's limited liquidity and its potential to violate senior secured credit agreement covenants over the near-to-intermediate term; the uncertainty of the outcome of the audit committee investigation; the potential for major program launches to either be delayed or problematic; the risk of being persistently unable to offset OEM price concessions through value added/value engineering initiatives as planned; exposure to lower productions volumes and loss of market share by the company's key customers; and Moody's concern that operational improvements achieved to date will not prove to be permanent. Future events that have potential to drive C&A's ratings down include a further decline in liquidity; violations of financial covenants which are not immediately addressed through amendments or waivers; determination by KPMG of the need for a material unfavorable accounting restatement; evidence of lost market share or a decline in the rate of new business generations; and/or problematic program launches. Future events that have potential to drive improvements in C&A's ratings and outlook include evidence that the new management structure is operating more effectively; steadily improved operating margins; implementation of financial covenant amendments and/or other measures which increase effective liquidity; achievement of debt reduction through retained cash after capital expenditures; and a progressively growing book of new business with a broadened customer base. For the last twelve months ended June 30, 2003 C&A's total debt/EBITDA leverage was approximately 4.8x and 5.0x, respectively, before and after treating the company's $141.5 million of preferred stock and the approximately $222 million present value of operating leases as debt. EBIT coverage of cash interest was marginal at approximately 1.1x, while the EBIT return on total assets was weak at about 5.1%. Moody's EBITDA calculation for the LTM period of $271.3 million added back $71.6 million of restructuring and impairment charges, but fell slightly below the calculation per the definition of EBITDA under the bank credit agreement. Collins & Aikman Corporation, headquartered in Troy, Michigan, is a leading designer, engineer, and manufacturer of automotive interior components, including instrument panels; fully assembled cockpit modules; floor and acoustic systems; automotive fabric; interior trim; and convertible top systems. The company has content on approximately 90% of all North American light vehicle platforms. Collins & Aikman's common stock is publicly listed, but is thinly traded given that approximately 70% of shares are owned by insiders. Heartland, itself, owns more than 35% of the company's common stock.