Analyst defends Brunswick’s solvency

LAKE FOREST, Ill. – Following a downgrade of its debt rating by Moody’s Investors Service, boat and engine builder Brunswick Corp.’s shares dipped 22 percent to a low not seen in 25 years yesterday, the Associated Press reported in an article yesterday.

However, RBC Capital Markets analyst Edward Aaron said in a statement today that investors overreacted by selling off Brunswick Corp. shares in reaction to Moody's junk rating of Brunswick’s debt. The downgrade by Moody's will have little impact on Brunswick's financials, Aaron added.

"Brunswick faces strong headwinds that will likely result in further downward estimate revisions, elimination of its dividend and potentially the impairment of certain assets," Aaron stated. "While it might be a long road to recovery, we believe solvency concerns ... seem excessive."

While he acknowledged that Brunswick is likely to violate a leverage ratio covenant on a revolving credit facility during the quarter, Aaron said he believes the company will resolve the issue by reducing the size of the revolver, accepting higher interest rates and pledging certain assets.

Moody’s concerned about pressure on dealers

Yesterday, Moody's Investors Service downgraded the rating on Brunswick's unsecured notes to Ba3 from Baa3 and downgraded its commercial paper rating to not prime from P3, concluding a review for possible downgrade initiated on Oct. 10, the agency reported in a statement yesterday.

At the same time, Moody's assigned a Ba2 corporate family rating and a Ba2 probability of default rating to Brunswick. The ratings remain on review for possible additional downgrade, with the LGD assessments and point estimates also being subject to change, the agency stated.

"The downgrade reflects our concerns that the continuing turmoil in the financial markets will result in a significant contraction in discretionary consumer spending over the foreseeable future and may put pressure on the company's dealer network and its liquidity position" said Kevin Cassidy, senior credit officer at Moody's Investors Service. “While Moody's believes that Brunswick will continue to attempt to protect its credit metrics and liquidity, we are concerned about the company's reduced financial flexibility as its ability to comply with a financial covenant is uncertain.”

Moody's review will continue to focus on the outlook for the company's profitability and cash flow generation over the medium term as well as the expected financial condition of its dealers, it said. It will also analyze the company's liquidity position, including the cushion for covenant compliance in its bank agreement and in its joint venture agreement with GECC.

The rating for the unsecured notes reflects both the overall probability of default of the company, to which Moody's assigns a PDR of Ba2, and a loss given default assessment of LGD 5, it reported. The notes are unsecured and are not guaranteed by Brunswick's subsidiaries.

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