This Week in "Huh?": Claires Stores and S&P

The following is a press release from Standard & Poor's (highlights are mine):

  NEW YORK (Standard & Poor's) May 15, 2008--Standard & Poor's Rating Services
said today that Pembroke Pines, Fla.-based Claire's Stores Inc.'s
(B-/Negative/--) election to pay in kind (PIK) all interest due on Dec. 1,
2008, for the $350 million 9.625%/10.375% senior toggle notes due 2015 will not
have an immediate effect on the company's ratings or outlook. Claire's is a
specialty retailer of value-priced jewelry and fashion accessories for
preteens, teenagers, and young adults.
  Standard & Poor's views the decision to elect to use the PIK feature on the
notes rather than pay cash interest as indicative of ongoing performance
difficulties at the company. Claire's has performed well below expectations
over the past year, and we anticipate operations will continue to deteriorate
over the near term given the challenging economic conditions and significant
decline in consumer spending. We will continue to monitor the rating as
additional information becomes available.

HUH?????

So let me get this straight: S&P readily admits the Company is slowly hemorrhaging itself into the depths of oblivion by utilizing the PIK-toggle feature on their debt, thus paying interest in, wait for it, more debt. S&P - in their infinite wisdom - then makes the surprise move of... doing nothing!  HUH????  Am I the only one who's stumped here?  Is it a full moon?  Are pigs flying?  WTF? (...He said in his best Lewis Black impression)

I realize it doesn't take much to get S&P to give you decent rating ("oh, you paid for a rating, score!  What would you like?"), but if blatantly admitting the company is going to hell doesn't warrant at least a single freaking notch downward revision, wtf does???

Comments

[1-2]

A) If only FICOs were as easily manipulated as S&P ratings! Heck, FICO doesn't even put me on "credit watch" when i don't pay my bills; wtf is up with that!

B) I think the senate banking committee should go after S&P if Claire's goes bust, because, you know, they totally knew! Round up Barney!

[Lee D]

Firstly, excellent choice of graphic.

Secondly, Claire's stores are grotesque. They make dollar stores look like Holt Renfrew. They must be choking on at least a decade's worth of unsold hair clips and lip gloss. Small wonder they don't have to cash to cover their debt issue.

[Johnny Debacle]

But the PIK toggle features allows them more flexibility to potentially avoid a default, which is what ratings purport to measure. And for the lenders at the top of the capital structure, the PIK toggle is a boon. S&P probably should be bee downgrading them because their credit statistics have materially weakened, but the PIK toggle election is likely a slight positive from a ratings standpoint. Obviously their liquidity and fixed charge coverage look a lot better now....

[Anal_yst]

All good points in-kind (ha! get it? in-kind?)...

Debacle brings up a good point which I believe Mr. Juggles pointed out earlier this week, re: GM's liquidity. Sure everything looks rosy, for now...

[1-2]

A) Anal_yst: did you see my comment on the gm story?
B) PIK toggles are great, until you can't issue more debt using them...then you're fucked.