Friday, May 25, 2012

Carlyle Group: Synagro Debt Ratings Cut

Reuters reported on Carlyle Group affiliate Synagro Technologies::

 -- The headroom under Synagro Technologies Inc.'s financial covenants has become limited and the company's revolving credit facility matures in less than one year.
 -- The company's profitability has weakened as the alternative fuel mixture credit (AFMC) has expired.
 -- We are lowering our corporate credit rating on Synagro to 'CCC+' from 'B-' and are lowering our issue-level ratings by one notch.
 -- The negative outlook reflects our estimate that covenant cushions may tighten further and that liquidity may become constrained as the absence of AFMC proceeds could overshadow any improvement in operating performance.

The downgrade on Synagro reflects the company's "highly leveraged" financial risk profile and "weak" liquidity, as the headroom under the total leverage covenant has become very thin and availability under the revolving facility has become limited. 

Highly leveraged, weak liquidity, debt refinancing due within a year?  It smells like a PEU.  That's on top of Synagro bribing Detroit City Councilpersons, while under Carlyle ownership.

Greed drove Carlyle to highly lever Carlyle Capital Corporation (CCC).  When CCC violated its debt covenants, Carlyle owners threw in the towel.  This raises questions regarding S&P's assertion that:

In the event of a covenant violation, we believe Synagro's private equity sponsor The Carlyle Group could likely provide relief through an equity contribution.

They might.  Then again, they might not. CCC is more than a debt rating.  It's instructive on how Carlyle can run..