Moody's cuts R.A.B. Enterprises

Moody's Investors Service downgraded R.A.B. Enterprises, Inc. including cutting its $80 million 10.5% senior unsecured notes due 2005 to Caa3 from Caa2. The outlook is negative.

Moody's said the downgrade is prompted by its expectation that sales will permanently remain weak as the supermarket industry further consolidates into large self-distributing chains, by the company's constrained liquidity position over the shorter term because of depressed operating cash flow, and by the company's limited financial flexibility over the longer term due to its high financial leverage.

The negative outlook reflects Moody's opinions that remaining in compliance with covenants in the bank loan agreement will be challenging and, given the likely inability to substantially improve operating profit in a short time frame, refinancing the bank loan (due October 2004) and 10.5% senior notes (matures May 2005) will prove difficult.

Revenue has fallen to $492 million in the four quarters ending June 2003 from $588 million in the four quarters ending June 2002.

However, the ratings acknowledge the potential value of the "Manischewitz" trade name, the pattern of modest revenue growth in the food manufacturing segment, and Millbrook's status as an important independent distributor of specialty products.

Revenue fell 12% in the quarter ending June 2003 compared to the same period of June 2002 as the company lost customers from supermarket consolidation and bankruptcies. After scaling back its capital investment program, cash flow (as measured by EBITDA) for the 12 months ending June 2003 covered cash interest expense and capital expenditures by about 1.5 times. For the 12 months ending June 2003, lease adjusted leverage equaled 8.3 times compared to 8.2 times and 9.6 times at the end of fiscal 2002 and 2001, respectively, Moody's' said.

S&P cuts American Restaurant

Standard & Poor's downgraded American Restaurant Group Inc. including cutting its senior secured notes to CCC+ from B-. The outlook is negative.

S&P said the downgrade is in response to America Restaurant's deteriorating operating performance, weak cash flow protection measures and very limited liquidity.

Same-store sales fell 7.4% in the first half of 2003 after falling 2.7% in all of 2002, S&P noted. The large sales decline is attributed to a weak economy and the competitive environment in the restaurant industry in addition to a planned reduction of less profitable product promotions.

Moreover, the company's operating margin for the six months ended June 30, 2003, decreased to 8.9% from 9.1% due to higher labor and beef costs.

As a result, cash flow protection measures are very weak, with lease-adjusted EBITDA covering interest by about 1x, S&P said. Moreover, liquidity is constrained, with $2.8 million in cash and $6.2 million available on the company's revolving credit facility as of June 30, 2003, and a $9.3 million interest payment due in November 2003.

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