Maytag Weakness Prompts Debt Downgrade

The appliance giant faces elevated debt levels -- and challenging industry conditions

On June 5, Standard & Poor's lowered its senior unsecured debt and corporate credit ratings on Maytag Corp. (MYG ) to triple-'B'-plus from single-'A'-minus. These ratings are removed from CreditWatch, where they were placed on Jan. 26, 2001. Maytag's 'A-2' short-term corporate credit and commercial paper ratings are affirmed.

The outlook is negative.

Approximately $900 million in debt was outstanding on March 31, 2001.

The downgrade reflects Iowa-based Maytag's weakened operating and financial performance. The company's credit protection measures weakened considerably in 2000 due to soft earnings, combined with the increase in debt to finance share repurchases. The company continues to be challenged by the slowdown in U.S. demand for home appliances, and the highly competitive nature of the home appliance industry. Standard & Poor's believes that elevated debt levels, combined with challenging industry conditions, will result in a weakening of financial ratios over the intermediate term.

In addition, Maytag recently announced that it has reached an agreement to acquire the Amana appliance business in a transaction entered into with Goodman Holding Co. The proposed $325 million acquisition is expected to be largely debt-financed, which will add further pressure to the company's credit protection measures.

The ratings reflect Maytag's good business profile, based on the company's well-established market position in the U.S. white goods industry, offset by vulnerability to U.S. economic cyclicality. Additionally, the firm's historically moderate financial policies have been a key rating consideration. While Maytag competes against a number of larger players in the highly concentrated U.S. home appliance market, its premium brand strategy should help to sustain shares in a difficult and competitive environment over the intermediate term. With U.S. demand for home appliances slowing down, the industry is experiencing intense price competition as manufacturers strive to retain market share. In addition, the growing importance of mass merchandisers in the appliance business, such as Home Depot and Sam's Club, could potentially have an effect on competitive dynamics.

Reflecting these challenges, financial results for 2000 showed a modest decline in sales and lower margins. Earnings pressure, coupled with higher interest expense to finance share repurchases, resulted in pretax coverage (adjusted for operating leases and a full year carrying cost of the preferred securities) of 5.3 times (x), which is well below 1999's level of 7.8x. Furthermore, Standard & Poor's anticipates that the continued softening of U.S. demand for home appliances will put additional pressure on revenues and operating profits in fiscal 2001. Standard & Poor's expects Maytag's fiscal 2001 performance and financial policies will result in pretax interest coverage between 4.0x-5.0x. The rating does not incorporate flexibility for sizable debt-financed share repurchases.

While Maytag maintains a solid position within the U.S. white goods industry, increased debt levels from share repurchases and the proposed Amana acquisition, combined with earnings softness, are expected to result in key credit measures that are weak for the rating. Ratings could be lowered should the company not meet Standard & Poor's credit ratio expectations over the intermediate term.

From Standard & Poor's CreditWire

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