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Still tough times in '03, just a little less so

Despite a difficult operating environment for U.S. textiles manufacturers, the negative ratings trend in the sector is expected to be less severe in 2003, according to Standard & Poor's Ratings Services.

Susan Ding, an S&P credit analyst, said textiles companies have restructured and reduced overhead costs in 2000 and 2001, improving margins and cash flow. In addition, they divested unprofitable businesses and brought capacity into line with reduced demand.

Despite those changes, however, Ding said the "overall outlook for the sector remains negative due to the continued difficult operating environment and the weak retail climate."

Despite those negatives, S&P said most rated textiles companies are seeing improvements in operating and financial results. Revenues remain under pressure, but margins and cash flow have improved as a result of better fixed-overhead absorption and lower operating and raw material costs.

Most mills made heavy capital investments in the late 1990s in response to the Asian financial crisis and the subsequent influx of low-cost competition from overseas. With modern equipment and facilities in place, minimal capital investment will be required in the near term, S&P said.

However, as a result of the significant capital outlays, largely funded with debt, most textiles firms are highly leveraged.

In addition, liquidity in the sector is expected to remain tight, holding ratings down at their current levels, S&P said. Although companies technically may have availability under their credit facilities, covenant compliance issues raise concerns about ability to access those credit lines.

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