Moody’s Investor Services includes Quiksilver among nearly 300 U.S. companies in its first quarterly “bottom rung” report.
We took a closer look at the report, and called Moody’s analyst Scott Tuhy, who follows Quik, to find out more about the report, what Moody’s thinks about Quiksilver, and why – especially after we saw the Wall Street Journal story about the report.
The Journal  built a centerpiece on its Money & Investing section cover using a Quiksilver action photo and a chart that listed it with six others under a heading, “Life on the Bottom Rung.” The story called out the Huntington Beach-based brand as one of the “most likely to default” companies in America.
Quiksilver executives declined to comment, noting that the company is in the “quiet period” observed in advance of its earnings report coming tomorrow.
First of all, it’s pretty easy to see that while Moody’s has substantive concerns about Quiksilver, the Journal overstated its risk of default, at least as Moody’s sees it. Though Quiksilver is included in the report, it is not, as the chart implies, one of the seven companies most likely to default in America.
The Journal story also noted that the companies in the report have a 45 percent likelihood of defaulting this year on speculative-grade bonds held by investors.
That average overstates the risk for Quiksilver. It carries a B3 rating from Moody’s – meaning that it is in a category of companies which historically carry a 13 percent risk of default on bonds, Tuhy said. Other companies are in categories that carry a 60 percent, or even 80 percent, default risk.
In Quiksilver’s case, the rating is based on a $400 million bond that matures in 2015.
The report also lists other criteria ratings issued by Moody’s, and Tuhy notes that Moody’s is most concerned by Quiksilver’s on-going reliance on short-term debt – loans and other credit facilities due in 12 months or sooner.
Quiksilver carries a 4 rating in short-term debt quality – the worst level on Moody’s scale. It has
$248 million in short-term borrowings that mature in the next 12 months, and another $31 million in long-term borrowings, Tuhy said.
Quiksilver did gain some breathing room this week when it was able to extend the terms on a
€55 million line of credit carried by a French subsidiary, Pilot S.A.S., according to a filing today with the U.S. Securities and Exchange Commission.
The extension means the company will have until June 30 to retire the line of credit – rather than Friday, when it was originally due. In exchange, Quiksilver will pay about $600,000 in extra interest, by Tuhy’s estimate.
The 8K filing also declares that “The Company intends to conclude either a strategic or refinancing transaction within the period covered by this extension, in which case, the indebtedness subject to the LC Agreement would either be refinanced or repaid.”
Even after the deal announced today, “we have concerns about the liquidity of this company,” Tuhy said. “If the company is able to make tangible progress in improving its liquidity profile, that might” lead to a review of its credit rating, he said.
Tuhy also noted that Moody’s felt the sale of Rossignol last year did nothing to improve Quiksilver’s liquidity profile.
So, in a sense, Quiksilver is among the “best of the worst” companies on the Moody’s report.
The Bottom Rung report – which the Journal characterized as an effort by Moody’s to get ahead in its credit alerts after being criticized for lagging in 2008 – does not represent a new credit rating for Quiksilver or any of the companies listed in it. Instead, it is a quarterly compilation of data already published and circulated to companies and investors.
“We see that all these companies have a higher probabilty of default, given the financial markets and business climate at this time,” Tuhy said.
“We note in the report that by the end of this year, the default rate could reach 14.5 percent, and it was 4.4 percent for 2008.”
Still, “there are a certain names in this report that are in much weaker positions than Quiksilver,” Tuhy told me.
How to interpret Quiksilver’s ratings, by category: Probabilty of default, B3 – the best rating for speculative-grade bonds, historically 13% of companies in this category default.
Corporate family rating, B3 – the same as above.
Outlook, negative – because of the Quiksilver’s outstanding short-term debt and the eroding consumer market.
LGD assessment, 66. A 66% chance that bondholders would be repaid in the event of a default.
SGL, 4 – A ‘poor’ rating for reliance on short-term debt.
Quiksilver is the only action sports company in the report, although several other apparel makers, including outdoor specialist Eddie Bauer and Irvine, California-based St. John Knits, each make the list.
