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Moody’s Downgrades St. John Credit

Credit downgrade for luxury knitwear firm St. John was spurred by declining performance, weakening liquidity.

Moody’s Investors Service lowered its corporate credit rating for St. John Knits International Inc. based on weaker-than-expected performance.

The corporate family rating was lowered to “B3” from “B2,” indicating high credit risk, while the probability of default rating declined to “Caa1,” indicating very high credit risk, from “B3.” About $177 million of debt is affected. The outlook is negative.

The rating on the company’s secured bank credit facilities was maintained at “B2.”

The Irvine, Calif.-based firm has a “weakening liquidity profile” as it faces expiration of its revolving credit facility in March 2010 and subsequent increases in scheduled term loan amortization payments up through the revolver’s March 2012 maturity, Moody’s said. Deterioration in its operating performance had been anticipated in light of pressure on all consumer spending and the luxury sector in particular, but “the company’s earnings and credit metrics have been weaker than expected due to a significant level of promotional activity in the first quarter, partially offset by significant cost reductions,” said Andris Kalnins, senior vice president at Moody’s.

Despite the perils ahead, St. John is expected to generate “positive free cash flow, balance sheet cash and access to its $45 million revolving credit facility up to its March 2010 expiration.” However, amortization of its term loan is set to begin next March and increase afterward, “eventually outpacing projected free cash flow.”

Moody’s said the negative outlook could be revised to stable if it refinances its obligations and generates results in line with expectations, but refinancing difficulties could result in a further ratings downgrade.

Moody’s estimated the company’s revenues for the 12 months ended May 3 at about $315 million. St. John was put on review for a possible downgrade on Jan. 22.