In light of Standard and Poor’s downgrading of Finlay’s bonds last week, a lot of people have become concerned about the company.
I just spoke to David M Kuntz, the analyst who made the rating for Standard and Poors. The new rating was in response to a recapitalization announced last week. Finlay looks like it would have defaulted on its interest payment due December 1, so it negotiated a new plan which delayed the interest payment. While this prevents a default, it also makes the bonds worth less; hence the downgrading. The S and P note says: “We view this transaction as detrimental to the noteholders, who will be receiving less value for their holdings, and as coercive since a viable alternative for Finlay is a filing for bankruptcy protection.”
S and P also lists the following negative factors for Finlay:
- The poor overall retail climate.
- The company is dependent on department stores, and, as they have problems, so does Finlay
- The company has a substantial amount of debt, including a leverage ratio of 16.4 to 1.
- The company has limited experience in running free-standing retail stores.
It should be noted that, if the company does default on its bonds, that doesn’t necessarily mean Chapter 11; it could renegotiate again. But these are troubling omens, and these misgivings are apparently shared by the stock market – the company’s stock is trading, as I write this, at nine cents.