Analysts Skeptical Of Derby Cycle

While Stamford, Conn.-based Derby Cycle Corp. has released some preliminary terms regarding renegotiations of its bank debt, analysts are withholding final judgment on the company until it presents a revised full-year covenant for 2000.

The short-term solutions, made available to investors earlier this month, appear to be a positive move for the company as it attempts to bolster liquidity, said Beth Fusco, an analyst with Merrill Lynch. But, "the question as to the ongoing liquidity needs of the company and how they'll be met haven't been answered."

The initial terms of the renegotiation will allow the company to temporarily use the proceeds from the sale of two U.K. facilities through the first half of the year, its peak borrowing season. Then on June 30, there will be a $14 million permanent reduction of Derby's revolving credit facility.

Derby's equity sponsors, Thayer Capital Partners and Perseus Capital, also agreed to provide a $7 billion bridge loan to Derby to assist it in meeting cash flow needs during the first six months of 2000.

Still, the covenants are what investors need to feel reassured, said a London-based analyst familiar with the company.

"If the new covenants give the company enough leeway to operate, then investors will take comfort. But it doesn't mean you have a healthy company, it just means you have a company that doesn't have its back to the wall month to month."

While Derby has not made public the initial reason behind the need for additional liquidity, the London analyst believes that at least part of the reason stems from increased competition from China and Taiwan.

The longer-term liquidity problems also may soon reach a solution. Derby has submitted a revised 2000 covenant package, which creditors are now reviewing. A response is expected this month. Details of the package will be released to investors along with the company's annual results for 1999 on March 8, said Daniel Lynch, chief financial officer. He declined additional comment until that point.

"The only new thing I can gather is that they are intending to show better [than expected] earnings figures for the fourth quarter," the London-based analyst said. "The fourth quarter should be good for this kind of company... but it remains to be seen if that will actually materialize or not."

The company's outstanding bonds have been trading in the range of 55 to 60. Standard & Poor's Ratings Service in September downgraded Derby's senior unsecured debt ratings to CCC-plus from B-minus and lowered its long-term corporate credit and bank loan ratings to B-minus from B (HYR 09/20/99).

Derby sold its Raleigh U.K. unit's Nottingham bicycle assembly facility and its Sturmey-Archer manufacturing facility to the University of Nottingham in December.