Fitch Downgrades Linens 'n Things' IDR to 'CC'; Rtg Watch Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded its ratings on Linens 'n Things, Inc. (LIN) as follows:

--Issuer Default Rating (IDR) to 'CC' from 'CCC';

--Asset-based revolver to 'CCC-/RR3' from 'CCC+/RR3';

--Senior secured notes to 'C/RR5' from 'CCC-/RR5'.

At the same time, LIN remains on Rating Watch Negative by Fitch.

The downgrades reflect Fitch's concerns about LIN's vendor relationships and liquidity position due to the company's deteriorating credit profile. Other concerns include the challenging operating environment and intense competition from other specialty retailers, discounters and department stores in the home furnishings segment.

In 2007, comparable store sales declined 3.4% on top of a negative 0.7% in 2006 and operating EBITDA margin fell 370 basis points to -1.5%. Given the company's weak financial results, LIN generated negative free cash flow of $160 million in 2007, and credit metrics deteriorated. In 2007, total adjusted debt/EBITDAR was 12.5 times (x) compared to 8.6x in 2006. Interest coverage, defined as EBITDAR/interest expense plus rent, decreased to 0.6x from 1x in 2007.

Given LIN's worsening credit metrics, Fitch is concerned some vendors have either stopped or decreased the amount of merchandise to be shipped to LIN. This would hinder LIN's sales and cash flow generation. In addition, this would negatively affect the company's borrowing base on the credit facility, as the borrowing base is based on eligible inventory and receivables. While LIN had $302.9 million available under its credit facility as of Dec. 29, 2007, Fitch remains concerned about the company's liquidity position. The credit facility states that 'the collateral agents have the right to establish, modify or eliminate reserves against eligible inventory from time to time in their permitted discretion.' Thus, availability can be reduced as long as 'the determination is made in good faith and in the exercise of reasonable business judgment.'

In resolving the Rating Watch Negative status, Fitch is monitoring LIN's ability to sustain operations.

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