Comments about American Reprographics Debt Offering - ratings explained

In the previous post, I mentioned that American Reprographics (ARC) is in the process of selling notes; this, to raise funds that will be used to retire its line of credit. The existing line of credit has all sorts of covenants and restrictions. In addition, the existing line of credit requires substantial "pay-downs" of principal each quarter. It appears as though American Reprographics decided that it no longer wanted to deal with those covenants and restrictions. And, since the "new" debt will not (evidently) require quarterly or annual pay-down of principal, ARC will be able to horde cash and use it as it deems essential to its business, without having to worry about asking for permission from the financing entities that gave ARC the line of credit it is now replacing. Based on what I read about the "new" debt, ARC is supposed to receive the proceeds on or about December 1, 2010.

About the "new" debt. This new debt is "unsecured" debt. Meaning that, if there is a default on the debt, security holders (i.e., holders of the "new" debt) don't have (are not holding) "collateral", hence the term "unsecured."

Standard & Poors gave the new debt a BB- rating.
Moody's gave the new debt a B1 rating.

I was kind of surprised at the high interest rate ARC will be paying on the new debt. Nowadays, you can't earn much interest on savings accounts and CD's (today, 10 year treasury notes are yielding less than 3.0%. Want to earn substantially more than that? Well, how about ARC's new debt at a yield of around 11%. Maybe not as safe as a bank CD or a treasury note, but as to ARC's new "high-yielding" debt, ARC apparently hasn't had any difficulty paying down debt the past several years, in spite of difficult economic conditions.

I saw the credit ratings Standard & Poors and Moody's assigned to ARC's new debt. Apparently, ARC's new debt was rated "junk bond" status. That really surprised me. Anyway, who in this "new world" believes any of the ratings that S&P and Moody's come up with. Were they not the same rating agencies who gave AAA ratings to the CDO's that contained all of those exotic (or, I should say, toxic) mortgages?

Here's some information about ratings:

This first part comes from Wikipedia………..
Non-Investment Grade (also known as junk bonds)
▪ BB: more prone to changes in the economy
▪ B: financial situation varies noticeably
▪ CCC: currently vulnerable and dependent on favorable economic conditions to meet its commitments
▪ CC: highly vulnerable, very speculative bonds
▪ C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
▪ CI: past due on interest
▪ R: under regulatory supervision due to its financial situation
▪ SD: has selectively defaulted on some obligations
▪ D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations
NR: not rated

This next part comes from Standard & Poors Credit Ratings………..
What do the letter ratings mean?
The general meaning of our credit rating opinions is summarized below. 

‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.

‘AA’—Very strong capacity to meet financial commitments.

‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.

‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.

‘BBB-‘—Considered lowest investment grade by market participants.

‘BB+’—Considered highest speculative grade by market participants.

‘BB’—Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. 

‘B’—More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. 

‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.

‘CC’—Currently highly vulnerable.

‘C’—Currently highly vulnerable obligations and other defined circumstances.

‘D’—Payment default on financial commitments.
Note: Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.