Top Debt and Ratings Agency Actions (PKX, HOV, PENN, DRI)

Today’s top debt rating story has to be the downgrade by Moody’s of Italian bonds by three notches, from ‘Aa2’ to ‘A2’, while keeping a negative outlook on the country’s debt. And the agency warned that the rating could fall further in the event long-term uncertainty over availability of liquidity from external sources — say, for example, Germany. Moody’s said in mid-September that it was reviewing Italy’s rating, and no one really expected a result much different from what the agency announced today.

Other significant ratings actions were taken on Korean steelmaker POSCO (NYSE: PKX), homebuilder Hovnanian Enterprises, Inc. (NYSE: HOV), gaming company Penn National Gaming, Inc. (NASDAQ: PENN), and dining company Darden Restaurants, Inc. (NYSE: DRI).

POSCO’s (NYSE: PCX) domestic Korean engineering and construction subsidiary Posco E&C received a downgrade on its long-term corporate credit from ‘BBB+’ to ‘BBB’ from Standard & Poor’s. The agency also put the company’s long-term corporate credit outlook at ‘negative’. S&P suggested that except for the parent company’s strength the rating could be lower. Weak demand for new housing in Korea coupled with the E&C company’s projected weakness in a soft foreign market for new building led to the downgrade.

Hovnanian Enterprises, Inc. (NYSE: HOV) received a downgrade of its corporate credit rating from ‘CCC’ to ‘CC’ from S&P. The agency also downgraded $1.6 billion in the company’s rated debt securities. The downgrades were due to an exchange offer from one of the company’s subsidiaries that S&P viewed as a ‘distressed exchange’ and “tantamount to a default.” The existing senior notes carry coupons ranging from 6.25% to 11.875% maturing in 2014-2017, and the exchange offer includes new 2% secured notes maturing in 2021. S&P said that if the company goes through with the exchange offer the agency will downgrade the corporate rating to ‘SD’ and the existing exchanged notes to ‘D’. Hovnanian shares posted a new 52-week low today of $1.05, and is trading at about $1.06, down -4.5%, in the late afternoon. The stock’s 52-week high is $5.00.

Fitch Ratings also placed Hovnanian on Rating Watch ‘Negative’ following the exchange offer.

Penn National Gaming, Inc. (NASDAQ: PENN) received an issue-level ratings upgrade on its subordinated debt from ‘BB-‘ to ‘BB’ at S&P. The resort and gaming company has agreed to fund redemption of $250 million in 6.75% senior subordinated notes due 2015 with its new revolving $2.15 billion revolving credit facility. Penn’s shares are trading up more than 3%, at $35.19, in a 52-week range of $30.34-$44.29.

Darden Restaurants, Inc. (NYSE: DRI) received a ‘BBB’ rating on a proposed issuance of $350 million in senior unsecured notes due 2021 from Fitch Ratings. The rating outlook is ‘stable’. The new notes will rank equally with existing senior unsecured debt. Darden’s shares are trading up about 2.75%, at $43.17, in a 52-week range of $40.69-$53.81.

Paul Ausick