NEW YORK (Standard & Poor's
CreditWire) August 3, 2000
Standard & Poor's today affirmed its ratings on Foamex L.P./Foamex
Capital Corp and removed the ratings from CreditWatch, where they
were placed on May 19, 1998 (see list below). The current outlook is
positive.
The rating action follows the recent
announcement that Foamex has reached an agreement with a key
creditor of Trace International Holdings, Inc., which is in
bankruptcy, relating to the shares of Foamex common stock that were
pledged by Trace to support its obligations. The agreement will
provide for the exchange of a portion of the common shares pledged
to the creditor for a new class of non-voting convertible preferred
stock. This transaction, if consummated as described, will
effectively remove the concern that the bankruptcy court could allow
Trace’s creditors to take ownership of Foamex common stock pledged
by Trace to secure its debt obligations. Such a development could
have triggered change-of-control provisions and the acceleration of
Foamex’s debt repayments. This transaction is subject to approval of
the bankruptcy court.
In addition, the CreditWatch
placement had reflected ongoing concerns surrounding the possible
sale of Foamex to a third party. Such a transaction could have
elevated debt levels at Foamex. During April 2000, Foamex announced
that its most recent efforts to sell the business had been
terminated without reaching an agreement. Standard & Poor’s
recognizes that a strategic transaction of some form remains a
possibility, but now believes that the sale has become a secondary
priority to the successful management of the business.
Ratings reflect Foamex’s good
business risk profile, as the largest North American producer of
flexible polyurethane foam, and an aggressive financial profile. The
company ranks among the industry leaders in the production of auto
trim foam, carpet cushion, and foam for furniture and bedding
applications. Foamex also maintains a strong niche technical foams
business that offers more attractive margins and growth due to
higher valued-added applications and technological innovation.
Still, business prospects are vulnerable to consumer spending trends
and some seasonality around the housing and automotive sectors is
evident. Foamex’s production economics and profit margins are also
heavily dependent on raw material costs, particularly TDI, a
petrochemical derivative used to make polyurethane foam. Feedstock
price volatility can impact near term profit margins, although
increases can typically be passed through to customers. Over recent
periods, management has restored operating profit margins to the low
double digit range through a series of restructuring initiatives
aimed at improving operating efficiencies and at promoting a higher
degree of operating and financial discipline across the company.
Foamex remains highly leveraged with
debt as a percentage of total capital above 100% and debt to EBITDA
near 6 times (x). Management have indicated that free cash flow will
be applied to debt reduction until further improvement is achieved.
Earnings before interest, taxes, depreciation, and amortization
interest coverage is about 2x, an acceptable level for the ratings.
Financial flexibility benefits from access to revolving credit
facilities and expectations that capital expenditures will be
maintained at manageable levels. Notwithstanding, financial
flexibility will remain significantly constrained until the capital
structure is strengthened.
OUTLOOK: POSITIVE
Ratings could be raised if
management is able to maintain consistent operating profits and to
restore a more manageable capital structure, Standard & Poor's said.
-- CreditWire
RATINGS AFFIRMED AND REMOVED FROM CREDITWATCH
Foamex L.P./Foamex Capital Corp. Ratings
Corporate credit rating B
Subordinated debt CCC+
Bank loan rating B
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