Investors Back-Pedaling Away From Derby Cycle

Bond investors, far tougher to please than Derby Cycle Corp.'s customer base of child cyclers, are getting wary of the issuer.

One London-based buy-sider said that the firm is in the throes of renegotiating its bank debt, and the nature of those discussions indicate a company that is facing some serious obstacles.

Derby Cycle officials did not return phone calls seeking comment.

The outstanding bonds are trading in the high 60s and low 70s, according to a high yield trader, and at least one investor is not expecting it to see any upside in the near future. In fact, he said that the company, which had been expecting about $25 million in cash flow this year, would now be lucky just to break even.

Indeed, Standard & Poor's last week downgraded its senior unsecured debt ratings on Derby Cycle to CCC+ from B- and also lowered its long-term corporate credit and bank loan ratings to B- from B. The rating agency said the outlook is negative.

The ratings downgrade is based on Derby Cycle's lack of long-term arrangements with its banks, the likelihood that recovery in the U.K. will be slow, the short record of its new management, and other challenges it faces.

Derby Cycle has reached an agreement with its banks over the covenant breaches earlier this year. However, although covenants have been reset for the remainder of 1999, new covenants have not been established for 2000 and thereafter. The lack of long-term arrangements places some uncertainty over the company.

And top management is relatively new to Derby Cycle and to the bicycle industry, according to buy-siders and Standard & Poor's.