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Moody’s Downgrades Claiborne’s Debt

Moody’s downgraded Claiborne’s corporate family and probability of default ratings two notches on weak results.

Liz Claiborne Inc.’s $82.1 million in second-quarter losses weighed on its debt rating Thursday.

Moody’s downgraded the firm’s corporate family and probability of default ratings two notches to “B2” from “Ba3.” The rating on Claiborne’s 350 million euros, or $495.8 million, in senior unsecured notes was lowered to “Caa1” from “B2.” All Moody’s ratings on Claiborne’s debt were placed on review for further downgrade.

Ratings in the “B” range are considered to be “subject to high credit risk,” while debt with a grade of “Caa” is judged to be in “poor standing” and “subject to very high credit risk,” according to the debt watchdog’s scale.

“The two-notch downgrade reflects the substantial decline in Liz’s fiscal 2009 second-quarter operating results,” said Scott Tuhy, a Moody’s debt analyst, who noted the company’s outlook for the second half was also taken into account.

In addition to posting wider losses on Wednesday, the firm said it would cut an additional $100 million in expenses.

“Liz continues to face challenges from weak consumer spending, which is evident in the performance of its premium priced brands such as Juicy Couture and Lucky Brand Jeans,” Tuhy said. “Moody’s believes the company’s problems extend beyond the weak economy, as it also faces the need to stabilize the performance of two of its largest brands, its heritage Liz Claiborne brand and Mexx.”

Moody’s said Claiborne could be challenged to meet the fixed-charge covenant in its asset-based loan agreement without either improved performance or an amendment to the agreement. The charge covenant goes into effect next July.