Standard & Poor's Ratings Services said today it lowered its corporate credit rating on Trevose, Pa.-based Broder Bros. Co. to 'SD' from 'CC'. We also lowered the ratings on the company's $225 million 11.25% senior notes due 2010 to 'D' from 'C'. The recovery rating on these notes remains at '6', indicating expectations for negligible (0%-10%) recovery in the event of payment default. As of Dec. 31, 2008, we estimate Broder had about $375 million in reported debt outstanding.

The downgrades follow Broder's announcement that it elected not to make its April 15th $12.7 million interest payment on the senior notes. On April 9, 2009, the company announced that it was pursuing an exchange offer for its 11.25% senior notes. In addition, it also received an amendment and waiver on its $225 million asset-based revolver, waiving any default arising from the delay in delivering the company's 2008 audited financial statements and delaying the interest payment until May 15, 2009. The amendment also allows for a change of control from the issuance of stock in connection with the exchange offer.

“In addition to the company's default on its scheduled interest payment on the senior notes, the 'SD' rating also reflects our belief that the purchase may be at a substantial discount to the par amount of the outstanding issue," explained Standard & Poor's credit analyst Bea Chiem. As a result, we view the purchase as being tantamount to default given the company's weak financial performance, highly leveraged capital structure, and 2010 maturity on its notes.

“As soon as practical thereafter, we would assess Broder's capital structure and review the ratings and assess recovery based on the amount of notes the company successfully tendered," said Ms. Chiem. Based on our preliminary assessment, we believe there is a possibility that the corporate credit rating may remain in the 'CCC' category because a significant proportion of the company's customers participate in the highly cyclical and mature promotional products industry, which is highly vulnerable to the currently weak economy and Broder's overall operating difficulties. However, Broder's ability to meaningfully improve its capital structure and restore sufficient covenant cushion and liquidity would be key factors in our assessment of the rating following the exchange offer.