S&P puts Otis Spunkmeyer on watch

Standard & Poor's put Otis Spunkmeyer Inc. on CreditWatch negative including its $120 million term loan B due 2008 and $20 million revolving credit facility due 2008 at B+.

S&P said the CreditWatch placement follows second-quarter fiscal 2003 results that were below its expectation for the rating. The decline in credit measures were due to softness in its food service category.

S&P rates Panolam loan B-

Standard & Poor's assigned a B- rating to Panolam Industries International Inc.'s new $60 million term loan C and confirned its other ratings including its existing bank facility at B+.

S&P said the existing revolver and term loan B are rated the same as the corporate credit rating. While S&P believes there is the likelihood of substantial recovery of principal for these creditors in the event of default or bankruptcy, the value of the enterprise in a distressed situation may not fully cover the amount of first-priority position secured debt, assuming a fully drawn revolving credit facility. The rating on the second-priority position term loan C is two notches below the corporate credit rating because of the significant amount of first-priority position secured debt that would rank ahead of term loan C lenders in the event of bankruptcy.

S&P said Panolam's ratings reflect its market leadership in niche decorative panels markets, attractive operating margins and its ability to generate free cash flow, even during an industry downturn.

These factors are offset by the cyclicality of residential and commercial new construction and remodeling activities, competitive market conditions due to oversupply, volatile raw material costs, limited product diversity, and a highly leveraged capital structure.

Despite weaker than expected earnings and cash flow stemming from a poor economy, Panolam reduced debt by about $60 million over the past two years, S&P noted. Still, the company's financial profile is very aggressive, with debt at June 30, 2003, of $180 million, including a $25.7 million payment-in-kind holding company seller note. Last 12-month credit protection measures have deteriorated recently, but are still appropriate for the ratings, with funds from operations to debt in the mid-teens percentage area, EBITDA interest coverage about 2.5x, and debt to EBITDA about 4.5x.

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