By  on June 17, 2005

NEW YORK — Wall Street brushed off two ratings downgrades on Saks Inc., after a hedge fund issued a default notice on one of the department store retailer's debt notes.

Shares of Saks Inc., closed down Thursday by 1.1 percent to $17.90 on lighter-than-average trading of 988,100. Average trading on the stock is about 1.9 million.

Equity analysts didn't weigh in on the downgrades or the default notice. None of the major banks sent out research notes on the retailer Thursday. But Saks was loud and clear when it issued a response to one of the downgrades from ratings firm Standard & Poor.

After the market closed, Douglas E. Coltharp, executive vice president and chief financial officer of Saks Inc., said in a statement that the retailer was "extremely surprised and perplexed with [Wednesday's] announcement from S&P."

The S&P said in its report that the financial risks Saks faces have "the potential to lead to an eventual default. However, the ratings will be raised if Saks is able to resolve this situation either through timely filing or a receipt of waivers by the senior note holders."

Coltharp said in his statement: "We believe this action was unfounded given the overall strength of our financial position and our ability and intent to fully retire any accelerated debt, as well as the fact that we have the 60-day cure period to negotiate with note holders if we choose to do so. As we reiterated yesterday, we expect to file our prior-year Form 10-K and our first-quarter Form 10-Q on or before Sept. 1, 2005, thereby addressing the specific reason the notice of default was issued in the first place. It is and remains business as usual for our company."

On Wednesday, S&P's Ratings Service lowered the rating of Saks' speculative-grade debt. Moody's Investors Service also reduced the ratings on several of the retailer's debt securities. Fitch Ratings said it would not take action, and said in a report that Saks has "sufficient liquidity to repay its $1.2 billion of senior notes in the event all of its debt is accelerated in 60 days."

Saks is currently in the midst of examining improper markdown allowances. Due to the internal reviews, Saks ended up delaying its annual report and 10-K, saying that it would adjust financial statements going back to 1999. As reported, the company is also the subject of separate investigations by the Securities and Exchange Commission and the U.S. Attorney's Office in Manhattan.On Wednesday, Saks was hit with a default notice on $230 million worth of debt, but quickly said it has the money to repay it if necessary. The retailer said it was notified of being in default of convertible senior notes, due March 15, 2024, from an unnamed hedge fund that owns more than 25 percent of the debt. Saks was given notice because the company delayed filing its annual report. Saks has until Aug. 13, or 60 days from the date the default notice was given, to resolve the issue. If Saks can't clear the notice or get a waiver, then the notice becomes an "event of default."

However, any default could lead holders of other senior debt notes to accelerate the maturity of their notes. If all the senior notes are accelerated, Saks' total liability would be $1.22 billion. Saks said it would be able to repay all its debt holders if this occurred. The retailer said it has $324 million in cash on hand, and expects $620 million in proceeds from the pending sale of the Proffitt's and McRae's stores to Belk Inc. If Saks needs more money, it intends to rely on borrowings under its amended and restated credit agreement, which has about $650 million of unused capacity.

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