Consumer Products—Not The Place To Be

Portfolio companies depending on Joe Consumer to spend, spend, spend continue to take it on the chin, according to our quarterly analysis of Standard & Poor’s “weakest links” list.

Of the 30 companies on the list identified by Buyouts as being owned by LBO shops, eight operate in the consumer products sector, six in the restaurant industry, and two in retail. They include Ames True Temper Inc., a maker of gardening tools that is owned by Castle Harlan; Sbarro Inc., a pizzeria chain that’s part of MidOcean Partners’s portfolio; and Guitar Center Holdings Inc., a specialty music retailer taken private earlier this year by Bain Capital.

Conditions for these companies aren’t likely to improve for some time. In a recent report titled “Stress in Corporate America,” S&P said it expects declines in the housing sector and mortgage markets to restrain consumer spending in 2008. The ratings agency also said it expects companies dependent on spending by lower and middle-income Americans to be harder hit than those catering to wealthy Americans.

Altogether, the November weakest-links list—those companies judged most at risk of defaulting on their debt—included 100 companies. To make the list, companies must have speculative corporate credit ratings of ‘B-’ or lower, and either carry a negative outlook or be on negative CreditWatch.

The number of buyout-backed companies on the November list held roughly steady with the number appearing on the August list three months earlier (see Buyouts, Sept. 10, page 4). However, the roster changed, with several companies dropping off the list during that time and nine buyout-backed companies joining. Among the newcomers are several in the restaurant and retail categories.

S&P added Trimaran Capital Partners’s portfolio company El Pollo Loco Inc. in part because of the restaurant company’s weakening liquidity position, as well as Guitar Center Holdings Inc., in part because of a challenging operating environment.

S&P also removed a number of companies from its weakest-links list, including Haights Cross Communications Inc., a portfolio company of Boston-based Great Hill Partners. In September, the ratings agency revised its CreditWatch implications on Haights to developing from negative because the company announced it was evaluating potential strategies, including the sale of some or all of the company.