The ratings incorporate concerns about Anchor's ability to sustain the operational efficiency and enhanced business fundamentals which the company has recently exhibited.
Moody's views the ratings as prospective for run-rate
financials at or above current annualized levels. Moody's believes that pro-forma liquidity should be adequate although remaining fairly tight with effective availability under the $100 million committed, borrowing base revolver limited by modest cushion under the bank covenant (Moody's does not rate Anchor's bank debt). The ratings continue to reflect significant customer concentrations (i.e. top ten customers account for approximately 76% of net sales through August 2002), constrained capacity requiring additional investment likely debt financed, and critical inventory management needed to remain competitive. More positively, the ratings reflect the strength of the domestic glass industry, resilience of the glass beer bottle (Anchor's primary product category) to other forms of packaging, and Anchor's established long term customer relationships.
The ratings acknowledge the company's improved operating efficiencies and margins, increased penetration in existing accounts, and successful new product introductions.
Additionally, Moody's views positively the strides the company is making on improved transparency and financial management.
Equity sponsorship from Cerberus Capital (approximately $80 million of fresh equity injected post-filing) further supports the ratings. The stable outlook reflects Moody's expectation of consistent performance resulting in no material deterioration in current pro-forma credit statistics. The outlook further incorporates Moody's belief that debt-funded capital expenditures may exceed depreciation throughout the intermediate term as the company funds new projects and required capacity expansion. There is some tolerance for modest stretching of credit statistics given the aforementioned, however, precipitous declines and/or material variances under Moody's expectations could result in downward pressure on the ratings.
Pro-forma for the proposed transaction at LTM 9/30/02,
financial leverage is high with total debt to EBITA at over 8 times (approximately 3.5 times EBITDA). Given that capital spending, in a growth scenario, is likely to exceed depreciation throughout the intermediate term, Moody's uses EBITA as a more indicative measurement. Coverage of interest expense is thin with EBITA coverage of pro-forma interest expense at approximately 1 time (EBITDA less capital expenditures covers pro-forma interest expense approximately 1.6 times). The B2 rating assigned to the proposed senior secured notes reflects the benefits and limitations of the collateral with a fair market value modestly in excess of the $300 million proposed issuance. The absence of significant excess collateral coverage precludes notching above the B2 senior implied rating.
The proposed notes are secured by a first priority interest in substantially all of Anchor's property, plant and equipment. Pro-forma for the restructuring, Anchor has no existing subsidiaries, however if Anchor were to acquire or create subsidiaries, senior secured guarantees would likely be provided, under certain circumstances.