S&P Cuts Argentina to 'SD' from 'CCC-/C' Jul 30, 2014 04:31PM

On July 30, 2014, Standard & Poor's Ratings Services lowered its unsolicited long- and short-term foreign currency sovereign credit ratings on the Republic of Argentina to selective default ('SD') from 'CCC-/C'. At the same time, we removed the 'CCC-/C' foreign currency ratings from CreditWatch, where they were placed with negative implications on July 1, 2014.

We affirmed our unsolicited 'CCC+/C' long- and short-term local currency sovereign credit ratings and 'raBB+' national scale rating on Argentina. The outlook on these ratings on Argentina remains negative. The transfer and convertibility (T&C) assessment remains 'CCC-'.


RATIONALE

On June 30, 2014, Argentina failed to make a US$539 million interest payment on its Discount Bonds maturing in December 2033. Under the terms of the Discount Bonds, Argentina had a 30-day grace period following the June 30 scheduled interest payment date to make payment.

Standard & Poor's defines "default" to include instances where either scheduled debt service is not paid on the due date or an offer of new replacement debt contains terms that are less favorable than those of the debt being replaced. Our interpretation of an issuer meeting its financial commitments "as they come due" is that investors are paid in full and on time (see "Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings," published Oct. 24, 2013), failing which we lower the rating on the relevant rated issue(s) to 'D' and we downgrade the issuer to 'SD'.

Our affirmation of the 'CCC+/C' local currency ratings reflects our view that the potential disruptions to interest payments on Argentina's external debt are not likely to further erode its ability to service its debt issued in its local currency and under its local law. We also maintain our 'CCC-' T&C assessment for Argentina because we believe that assessment still reflects the risks of Argentina's restrictive exchange control laws and policies.

The foreign currency sovereign credit ratings will remain at 'SD' until Argentina cures its payment default on the Discount Bonds. If and when Argentina cures the payment default on the Discount Bonds, we will reassess the sovereign's general credit standing, most likely raising the foreign currency rating to the triple 'C' or low 'B' categories.


Moody's Lowers Outlook on GenCorp (GY) to Negative; Operational Gains Have Been 'Sluggish' Jul 30, 2014 03:36PM

Moody's Investors Service has changed the rating outlook of GenCorp Inc. (NYSE: GY) to negative from stable and concurrently affirmed all of the company's ratings, including the Corporate Family Rating of B1. The rating outlook change follows increased downgrade risk as soft earnings, cash flow deficit, and debt growth over H1-FY2014 drive credit metrics that are presently weak for the rating.

Ratings:

Corporate Family, affirmed at B1

Probability of Default, affirmed at B1-PD

$460 million guaranteed second lien notes due 2021, affirmed at Ba3, LGD3

$0.2 million convertible subordinated notes due 2024, affirmed at B3, LGD6

Speculative Grade Liquidity, affirmed at SGL-3

Rating Outlook: to Negative from Stable

RATINGS RATIONALE

The negative rating outlook recognizes the sluggish pace of operational gains since the June 2013 Rocketdyne acquisition, internal revenue declines and weak credit metrics for the rating. Over H1-FY2014 debt, net of cash, rose more than $160 million with operational cash flow deficits, stock repurchases and loss on notes repurchased. In H1-FY2014 revenues, excluding Rocketdyne, declined about 20% year-over-year and EBITDA margin, excluding unusual charges, was about 11% versus 13%. Even if performance soon improves, debt may continue rising as GenCorp's effort to limit potential equity share dilution from its in-the-money convertible notes (4 1/16% due 2039, unrated) has taken debt higher, and $143 million of those notes remain outstanding. Positive free cash flow should be achievable in H2-FY2014 but the amount may not be significant without a material degree of revenue and operating margin growth. At Q2-FY2014, debt to EBITDA was 6.5x (Moody's adjusted basis, which adds back the loss on notes repurchased and business acquisition costs), high for the B1 CFR.

The B1 Corporate Family Rating has nonetheless been affirmed, reflecting GenCorp's rather strong market position and potential that financial leverage may decline near-term. GenCorp is a leading rocket propulsion company in the US and propulsion technologies represent a critical part of national defense and space systems. The company's content resides on many programs where the funding view seems solid (e.g., Space Launch System, Standard Missile, Evolved Expendable Launch Vehicle). Significantly, in H1-FY2014 GenCorp's backlog rose to $3.1 billion from $2.5 billion and some of the higher operating cost drivers in H1 will likely not repeat in H2.

The Speculative Grade Liquidity Rating has been affirmed at SGL-3, denoting an adequate liquidity profile. A good revolver borrowing availability level is a key support to the liquidity rating, particularly as the company's pending RD Amross merger agreement carries a $110 million minimum liquidity requirement. While the $143 million of convertible notes can be put in December 2014, likelihood of put is low with the notes well in-the-money and a put can be settled in cash or stock at the company's option, as defined in the indenture. Financial ratio covenant test headroom under the first lien bank credit facility should remain sufficient, but if earnings do not soon rise, cushion could quickly erode.

The rating could be downgraded if debt to EBITDA continues above the mid-5x level by early FY2015, liquidity weakens, or if free cash flow does not develop over H2-FY2014. Stabilization of the rating outlook would depend on expectation of debt to EBITDA below 5x, free cash flow to debt of 5% or higher and sustained adequate liquidity.


S&P Updates Ratings Outlook on GFI Group's (GFIG) Following CME Deal News Jul 30, 2014 03:33PM

Standard & Poor's Ratings Services today said it placed its 'B' counterparty credit rating on GFI Group Inc. (Nasdaq: GFIG) on CreditWatch with negative implications and its 'B' issue-level rating on GFI's $240 million senior unsecured notes due 2018 on CreditWatch with positive implications.

The CreditWatch actions follow the announcement that CME and GFI have entered into definitive agreements on a two-step transaction in which CME Group will first acquire all of the outstanding shares of GFI Group in exchange for $4.55 per share in CME stock. Immediately following the acquisition of GFI Group, a private consortium of GFI Group management expects to acquire GFI's wholesale brokerage and clearing business for $165 million plus the assumption, at closing, of approximately $63 million of unvested deferred compensation and other liabilities. Upon closing of the transaction, CME will assume GFI's current $240 million senior unsecured notes.

"The CreditWatch negative on our counterparty credit rating on GFI Group indicates that there is a 50% likelihood that we will lower our rating on GFI upon the completion of the proposed transaction," said Standard & Poor's credit analyst Sebnem Caglayan.

This transaction would result in a meaningful weakening in GFI's business risk profile because the surviving brokerage and clearing business would be less diversified and its revenue would be mostly transactional and dependent on levels of market activity. In addition, although the financial terms of the transaction were not disclosed, we believe it is likely that GFI management will use external debt financing to fund the acquisition of the brokerage business back from CME. The leverage profile, which will reflect the smaller EBITDA base of the surviving business, will be an important factor in our assessment of GFI upon the completion of the transaction.

The CreditWatch positive on the senior unsecured debt rating indicates that there is a 50% likelihood that we will raise our issue-level rating on GFI's senior unsecured debt upon the completion of the transaction because the $240 million senior unsecured notes would be assumed by a much higher rated entity. We currently rate CME Group 'AA-'.

Our rating on GFI already incorporates the company's position as a small firm in the intensely competitive, low-margin, and relatively narrow institutional agency brokerage business. Market volumes that affect GFI, particularly over-the-counter (OTC) derivative market volumes, generally declined across most asset classes during 2013 and first-quarter 2014 compared with prior comparable periods. OTC markets continued to confront regulatory, market, and economic uncertainties, as well as continuing low short-term interest rates globally and low volatility. Accordingly, GFI's brokerage revenue was down 7.2%, and its net clearing services revenue was only $4.4 million in 2013. First-quarter 2014 brokerage revenues were down 2.0%, and net clearing services revenue was only $1.4 million in the first quarter.

"Risk stemming from evolving regulation is also a negative for our counterparty credit rating on GFI, in our opinion," said Ms. Caglayan.

At a minimum, new regulations, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, swaps regulatory reform, and European regulatory reform, continue to force GFI to incur various charges as it continues to restructure in rapidly changing business conditions and comply with increased regulation. As an example, the decision to register as a designated contract market and swap execution facility (SEF), as well as the additional capital required for Amerex, which became regulated, has increased GFI's regulatory capital requirements by approximately $15 million to $20 million, and the company has spent considerable amounts to set up the SEF. To the extent that regulation requires other OTC derivatives, such as forwards and exotic options, be moved on to electronic trading venues in the near future, GFI will need to incur additional costs in order to maintain its current business.

We will continue to analyze the impact of the pending transaction. We expect to ultimately resolve the CreditWatch actions both on the counterparty credit and senior unsecured debt ratings on GFI when the transaction is completed, which we expect to happen in early 2015, or in the event that it is called off.


Moody's: RadioShack (RSH) May Not Have Enough Liquidity to Successfully Complete Turnaround Jul 29, 2014 03:19PM

RadioShack's (NYSE: RSH) deteriorating liquidity gives the company a limited window for executing a turnaround in sales and earnings, says Moody's Investors Service in the report "RadioShack Liquidity Runway May Not Be Long Enough for a Turnaround." Moody's says that liquidity is adequate for another year, with no debt maturities coming due, but that its base case scenario for RadioShack has the company running through its liquidity by the end of October 2015.

"The company's deteriorating liquidity profile and dismal earnings give very little cushion to RadioShack to execute its turnaround strategy over the next several quarters," says Mickey Chadha, a Moody's Vice President and Senior Analyst. "Absent a credible turnaround strategy to improve sales growth and increase earnings, RadioShack will be hard pressed to remain relevant in the increasingly competitive mobile phone and consumer electronics business."

Moody's rates RadioShack Caa2, with a negative outlook.

The company's cash balance at the end of its fiscal first-quarter 2014 (3 May 2014) was $62 million, versus $180 million at 31 December 2013. Moody's expects RadioShack to rely increasingly on its unrestricted cash balances as operating losses will likely to continue for the rest of the year and free cash flow remains negative over the next 12 months, further curtailing liquidity.

Unless RadioShack can orchestrate a successful turnaround over the next 12-18 months and improve customer traffic in its stores, Moody's says the company's liquidity will continue to deteriorate and it will start to lose vendor support.

Under Moody's base case scenario, sales fall 7.4% in 2014, leading to RadioShack burning approximately $401 million of cash in fiscal 2014 (ending 1 February 2015). Under this scenario, barring any infusion of additional cash, the company will run out of liquidity at the end of the third quarter of fiscal 2015 (ending October 2015).

Under a second, more optimistic scenario, with sales falling 4.6% in 2014, cash flow from operations will still not be sufficient to cover capital expenditures and will result in a cash burn of $267 million in 2014 and about $142 million in 2015. The company's liquidity will be around $338 million for fiscal 2014 and $196 million for fiscal 2015. Even in this optimistic scenario EBITDA remains negative through fiscal 2015.

The company had planned to close about 1,100 stores in the US as part of an attempt to improve profitability. However, the terms on which its lenders were willing to provide the consent for its store closure program were not acceptable to the company and it is therefore scaling back the closures.


Moody's Upgrades El Pollo Loco (LOCO) CFR to B2 Amid IPO Jul 29, 2014 02:52PM

Moody's Investors Service upgraded El Pollo Loco, Inc.'s (NASDAQ: LOCO) Corporate Family Rating to B2 from B3 following the company's successful IPO. At the same time, Moody's affirmed the company's B3-PD Probability of Default Rating and the B1 rating on its $205 million senior secured first lien bank facility. The Caa2 rating on EPL's second lien term loan will be withdrawn once it is repaid. Moody's also assigned a Speculative Grade Liquidity rating of SGL-2. The rating outlook is stable.

The upgrade of EPL's Corporate Family Rating ("CFR") to B2 reflects the company's successful $100 million IPO (net proceeds), the proceeds of which will be used to repay in full the company's $100 million second lien term loan due 2019. "EPL's credit metrics will improve significantly after the company repays 35% of reported debt", said Peter Trombetta, an Analyst at Moody's. "Pro forma for the IPO, EPL's lease-adjusted leverage will improve to 4.6 times from about 6.0 times and its interest coverage will improve to 3.2 times from 1.3 times", added Trombetta.


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