Moody's rates Eddie Bauer loan B2

Moody's Investors Service said it assigned a B2 (LGD4, 54%) rating to Eddie Bauer, Inc.'s proposed $225 million term loan and confirmed its corporate family and probability-of-default ratings at B2 and its $300 million senior secured term loan at B2 (LGD4, 55%).

This concludes the review for possible downgrade begun on Nov. 13, and the outlook is negative.

The agency said the confirmation reflects the fact that the company will not be significantly increasing its debt levels as expected given the shareholder's rejection of the proposed leveraged buyout by affiliates of Sun Capital Partners and Golden Gate Capital. The company has decided not to sell the company and to instead focus on its new turnaround initiatives, which include refinancing its current debt with the new proposed $225 million term loan and $75 million of junior capital.

However, the negative outlook reflects Moody's view that the company will maintain very weak credit metrics over the next 12 to 18 months while it is going through a transitional period and the risk that management might not be able achieve modest quarter-over-quarter sales growth. The agency said the B2 corporate family rating reflects the company's very weak credit metrics, its thin profitability, its history of mispositioning its merchandise, its high seasonality and the high fashion risk associated with specialty apparel.

Balancing out these weaknesses is the company's well-recognized brand name, its multi-channel distribution and national diversification, its modest scale with $1 billion in annual revenues and its adequate liquidity, Moody's said, adding that the company's proposed term loan eliminates its likely covenant violation.

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