Playboy Ratings Cut on Loan-Covenant Breach Risk, S&P Says

Playboy Enterprises Inc., the men’s magazine publisher, had its debt ratings cut by Standard & Poor’s, four months after it got $185 million in loans.

The company’s corporate credit rating was lowered to CCC+, one level down from B-, and the grade on its senior-secured debt was cut to B-, the New York-based ratings firm said. Playboy is at risk of violating covenants in its financing pact, related to its interest expense and debt relative to earnings that may crimp the company’s ability to access its $10 million revolving credit line, S&P said.

In April, the Beverly Hills, California-based company reduced the rate on the $185 million first-lien loan maturing in 2017, according to data compiled by Bloomberg. The refinancing was arranged by Jefferies Group LLC

Playboy’s debt must be no more than 5.8 times earnings, and earnings must exceed interest expense by at least 2.5 times to remain in compliance with the covenant requirements as of Sept. 30, S&P credit analyst Daniel Haines said in a telephone interview.

The rating reduction reflects Playboy’s weak operating performance in the second quarter, linked to a series of licensing deals that didn’t close in the first half of 2013, S&P analyst Daniel Haines wrote in the report. A five percent drop in earnings may result in Playboy’s covenant requirements being breached, Haines said.

‘Full Compliance’

“Playboy is in the midst of a multiyear turnaround, which is proceeding toward our long-term objective of growing revenues,” Jeff Majtyka, a spokesman for Playboy, said in an e-mail. “While the timing of closing new licensing deals in our pipeline is prone to shift and can affect our results quarter to quarter, we remain in full compliance with our covenants.”

The term loan, due in 2017, pays interest at 6 percentage points more than the London interbank offered rate, with a 1.25 percent minimum on the lending benchmark.

S&P has a developing outlook on the company’s debt, which means the company faces another downgrade in the next 12 months if it encounters delays in securing licensing contracts.

A CCC rating implies that the company is vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for it to meet its financial commitments.

A partnership owned by founder Hugh Hefner and private-equity firm Rizvi Traverse Management LLC took Playboy private in March 2011.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net

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