Moody's Investors Service downgraded some of Jefferson Smurfit Corp.'s $7 billion in debt this week, casting further doubt on the viability of the packaging company that would be created by Jefferson's purchase of Stone Container Corp.
The downgrade to B2 from B1 affects Jefferson Smurfit's senior unsecured notes and is related to the company's pending acquisition of Stone, based in Chicago.
Moody's confirmed the ratings on the company's other debt, but Moody's and Standard & Poor's have assigned all of Jefferson Smurfit's debt a negative outlook.
"While Stone and Jefferson Smurfit will initially remain legally separated, there will be strong motivation for Jefferson Smurfit to provide ongoing support to Stone," Moody's analysts said in announcing the downgrade.
Though not unexpected, the move suggests that Clayton, Mo.-based Jefferson Smurfit would be financially handicapped by acquiring the cash- strapped Stone Container.
The downgrade also comes at a time when banks holding more than $1 billion in debt for both companies are being asked to approve amendments that would allow the merger to take place and lessen credit requirements.
Those banks include BankAmerica Corp., Bank of New York, Bank of Nova Scotia, Credit Lyonnais, Dresdner Bank AG, Bank One Corp., and Societe Generale.
Shareholders at the two companies have yet to approve the deal. A vote is scheduled for Nov. 17. In a hint that the vote may not go as smoothly as was hoped, preferred shareholders at Stone Container filed a lawsuit Oct. 21 alleging, among other things, that they are being deprived of a vote on the issue. Bankers also have suggested that their approval may be hard to come by.
Undaunted, a bank group led by Bankers Trust Corp. and Chase Manhattan Corp. is syndicating a $550-million credit line to help Stone meet a cash- flow crunch.
The combined entity, to be called Smurfit Stone Container Corp., expects to have about $8 billion in revenues its first year. It remains debt-heavy on a pro-rata basis with $6.7 billion, mostly bonds.
The deal, announced in May, will be made for the most part through a stock swap that values Stone at $2.12 billion. The downgrade casts further uncertainty on whether Jefferson Smurfit would use bank loans or bonds to complete the financial part of the buyout or would restructure existing debt.
Bankers had sought to syndicate $4.8 billion in loans to Jefferson Smurfit in early September to retire debt and help pay for Stone Container. The deal was shelved after Jefferson Smurfit balked at a 23% pricing increase on a $1.5-billion part of the loan package.