Moody's upgrades Dean Foods

Moody's Investors Service upgraded Dean Foods Co. including raising Dean Holding Co.'s $100 million 6.75% senior unsecured notes due 2005, $250 million 8.15% senior unsecured notes due 2007, $200 million 6.63% senior unsecured notes due 2009 and $150 million 6.9% senior unsecured notes due 2017 to Ba2 from Ba3. Dean Food's $2.7 billion senior secured credit facility maturing 2007-08 was confirmed at Ba1. The outlook is stable.

Moody's said the upgrade follows the conversion of substantially all of Dean's $600 million trust preferred securities into equity and Dean management's stated commitment to operate at lower levels of financial leverage than in the past. Moody's anticipates that announced 2003 acquisitions (expected to close later in the year) will keep leverage modestly above 3x EBITDA in 2003, but that Dean will apply free cash flow to reduce leverage to lower levels going forward.

The ratings also are supported by Dean's scale, its market dominance in the U.S. dairy industry and the relative stability of its cash flow.

The stable ratings outlook reflects Dean's current and expected near-term leverage and provides some cushion for moderate acquisition activity and/or share repurchases.

Over the intermediate term, Moody's believes Dean has the ability to enhance its financial cushion, even with continued moderate acquisition activity and heavy planned investment in the company's value-added business. Dean's ratings could be upgraded eventually if Dean sustains a more conservative leverage profile than in the past, with an appropriate cushion to retain flexibility for potential acquisition activity, and moves to a predominantly unsecured debt structure.

The conversion of Dean's trust preferreds significantly improved credit measurements. Pro forma for the conversion, trailing 12 months debt/EBITDA at March 31, 2003 would be 3.3x, down from 4.0x EBITDA at Dec. 31, 2002 and 4.4x at Dec. 31, 2001 (pro forma for the acquisition of Legacy Dean).

The Ba1 rating on Dean's senior secured credit facilities is not notched up from the senior implied rating because they represent the majority of outstanding debt.

S&P rates Eagle-Picher notes B-, loan B+

Standard & Poor's assigned a B- rating to Eagle-Picher Inc.'s planned $220 million senior unsecured notes due 2013 and a B+ to its new $275 million senior secured credit facilities. S&P also confirmed its existing ratings including its corporate credit at B+ and preferred stock at CCC+. The outlook remains stable.

S&P said the bank facilities are rated the same as the company's corporate credit rating, reflecting the likelihood of a meaningful recovery of principal in the event of a default or bankruptcy, despite significant loss exposure.

The ratings reflect Eagle-Picher's heavy debt burden and weak albeit slightly improved financial profile, offset partially by good product and customer diversity in highly competitive, cyclical end-markets, S&P said.

Eagle-Picher has total revenues of around $700 million. The company's business profile is considered to be below average, reflecting the absolute size of each of its three business segments - automotive (61% of sales and 57% of EBITDA for the 12 months ended March 31, 2003), technologies (27% of sales), and filtration and minerals (12%).

Intense pricing pressures have played a large role in the automotive industry. However, the company's strong technical capabilities have helped it to compete against stronger and better-positioned competitors in the industry, including original equipment manufacturers, S&P added.

Eagle-Picher's financial policies are considered aggressive because of heavy debt usage in its overall capital structure, although total debt has declined and debt leverage has improved, S&P said. In addition, given progress in the company's plans to reduce overhead costs and improve productivity, EBITDA margins that have historically held steady in the low-teens percentage range are expected to average around 15%. While a difficult operating environment may make sustainable improvements to credit-protection measures challenging, S&P expects Eagle-Picher's EBITDA interest coverage to average around 2.5x and total debt to EBITDA ratio to average 4x-5x.

S&P lowers Sanitec outlook

Standard & Poor's lowered its outlook on Sanitec International SA to negative from stable and confirmed its ratings including its corporate credit at BB-.

S&P said the action follows lower-than-expected free cash flow generation in 2002 and the first quarter of 2003.

S&P said it is concerned that financial covenants, which apply to €535 million of bank facilities, might be breached in late 2003, as headroom is currently low, which could put pressure on liquidity.

Free cash flow was unexpectedly negative over the 12 months to Dec. 31, 2002, at negative €24 million, despite reduced capital expenditures, following negative working-capital changes and a €24 million onetime refinancing charge. The ratio of net financial debt to EBITDA was 4.7x, which was unchanged compared with pro forma 2001, despite expectations of improvement in 2002, S&P said. The lease-adjusted ratio of funds from operations to net financial debt was about 11% at year-end 2002, compared with pro forma 12% in 2001.

Nevertheless, the group is expected to benefit from cost-reduction measures, which had already brought improved operating margins of 15.5% in the first quarter of 2003 compared with 13.7% in the same period of last year, S&P said.

Moody's rates FHC notes B3

Moody's Investors Service assigned a B3 rating to FHC Health Systems, Inc.'s planned $250 million senior unsecured notes due 2011 and a B1 to its planned $30 million senior secured revolver due 2006. The outlook is stable.

Moody's said FHC's ratings are limited by the high concentration of revenues attributable to a few large accounts, as well as near term contract renewal risk. Factors supporting the ratings include FHC's positive historical operating performance, the company's leading position in an industry with favorable growth trends, and an experienced management team.

Notwithstanding favorable historical operating trends, including modest revenue and EBITDA growth trends, the ratings reflect Moody's concerns over the sustainability of the trends going forward given the high concentration of revenues from a few large accounts, as well as the near-term renewal risk associated with these contracts, and a high reliance on government and third-party payor sources.

Also impacting the ratings are the company's high leverage and modest interest coverage.

Supporting the ratings, Moody's noted the company's leading position within the sector, which with its size, experience and technological capabilities enables it to contend well against the competition, positive demographic trends for the sector and an experienced management team.

The stable outlook anticipates that operating trends will be somewhat mixed to positive going forward, primarily driven by the expectation that several of the company's large accounts that are up for renewal will be retained.

Proceeds of the new notes will be used to refinance existing debt, including the company's senior debt, its subordinated notes and a portion of its preferred stock. While the transaction will result in a simpler capital structure and will extend current debt maturities, it will have little impact on the company's credit profile, as total debt will basically remain unchanged. At the end of fiscal 2002, leverage (as measured by total debt/EBITDA) was modest at 3.1 times (4.0 times when adjusted for rent expense). Coverage (as measured by EBITDA/interest) was also modest at 3.5 times while total debt/capitalization was high at 97%.

Moody's rates Payless notes Ba3, negative outlook

Moody's Investors Service assigned a Ba3 rating to Payless ShoeSource, Inc.'s new $200 million senior subordinated guaranteed notes, confirmed the company's existing ratings including Payless ShoeSource Finance Inc.'s bank debt at Ba2 and assigned a negative outlook, ending a review begun in June.

Moody's said the confirmation reflects its expectation that Payless' current weak performance and financial metrics will start to improve with the back-to-school selling season and continue to show steady improvement thereafter.

Payless is continuing to suffer from excess inventory following weak customer demand due to unseasonably cool summer weather in key parts of the U.S. but also the company's decision to deliberately build inventory to improve its competitive position. This is the second time in three years in which Payless' margins slipped because of excessively high inventories, highlighting risks of early inventory commitments required by direct foreign sourcing, Moody's noted.

The rating outlook is negative, reflecting the potential for ratings to fall if Payless is not able to reduce inventory and regain prior levels of profit margins and cash flow generation within the near term.

Over the longer term, Payless continues to face competition from the growth of Kohl's and Target stores, as well as Wal-Mart's ongoing focus on its apparel offering, Moody's said. Payless continues to be the largest U.S. specialty retailer of footwear with over 10% share of market, but its market position has dropped meaningfully over the past four years. Payless' ratings continue to be supported by its significant market position; by management's demonstrated ability to generate positive cash flow in recent periods despite a weak environment; and by operational benefits still being realized as a result of systems improvements.

S&P puts Salem Communications on watch

Standard & Poor's put Salem Communications Corp. on CreditWatch negative including its $100 million 7.75% senior subordinated notes due 2010, $150 million 9% senior subordinated notes due 2011 and $150 million 9.5% notes due 2007 at B- and $150 million senior secured notes due 2007 at BB-.

S&P said the rating action recognizes that Salem's covenant cushion is narrowing due to debt-financed acquisition activity, which restrains cash flow in the short term, and financial covenants that become more restrictive beginning Sept. 30, 2003.

Limited liquidity, derived from borrowing capacity under existing credit facilities, is expected to be used to fund already committed acquisitions, S&P said. Discretionary cash flow deficits, resulting from high capital spending to re-format acquired stations and startup losses at acquired stations, preclude debt repayment.

Still, Salem benefits from the relative cash flow stability afforded by its block programming time sales, which helps shield its revenues from lingering war-related softness in television advertising.

Salem's EBITDA margin is below average, at less than 25% for the 12 months ended March 31, 2003, due to developing stations, S&P said. For the same period, EBITDA coverage of interest expense was about 1.5x. Total debt to EBITDA was 7.9x at the 2003 first quarter end.

S&P rates KinderCare loan B+

Standard & Poor's assigned a B+ rating to KinderCare Learning Centers Inc.'s senior secured $125 million revolving credit facility due July 2008 and confirmed its existing ratings including its subordinated debt at B-. The outlook is negative.

The bank loan rating is the same as the corporate credit rating indicating that there is a strong likelihood of substantial, but not full, recovery of principal in the event of default, given the value of collateral.

S&P said the ratings continue to reflect KinderCare's leading business position in the highly fragmented child-care industry, which is overshadowed by recent, significant weak demand trends for child-care services, industry threats, and the consolidated company's heavy debt burden.

KinderCare may remain challenged to sustain the favorable tuition trend, particularly if occupancy rates continue to decline and the economy remains weak for an extended period. Competition from corporate and nonprofit providers will remain a threat, as barriers to entry into the child-care market are limited.

In addition, earnings are likely to weaken in fiscal 2004 from fiscal 2003 due to the increased rental expense associated with the company's efforts to monetize its child care center portfolio, S&P said.

Leverage metrics on a consolidated basis inclusive of the mortgage loan to KC PropCo remain consistent with the rating category. Operating lease adjusted total debt to EBITDA and total debt to capital is expected to average about 5x and 80%, respectively over the next three years. Funds from operations to lease adjusted debt is expected to average in the 14% range over the same period.

S&P cuts Consol Energy to junk, on watch

Standard & Poor's downgraded Consol Energy Inc. to junk including cutting its $250 million 7.875% senior unsecured notes due 2012, $218 million revolving credit facility due 2003 and $267 million revolving credit facility due 2005 to BB+ from BBB- and put its senior unsecured debt on CreditWatch negative.

S&P said the downgrade reflects its assessment that the possible cancellation of surety bonds combined with Consol's potential production growth could result in substantially reduced liquidity.

S&P said it believes the rate of cancellations on surety bonds by insurance companies will increase due to the number of re-insurers exiting this business by year's end. As insurance companies exit the surety bond business, Consol will need to provide assurances on the underlying obligations. These assurances will most likely take the form of letters of credit or cash collateral thereby reducing liquidity. The most imminent issue facing the company is the $422 million of workers' compensation surety bonds outstanding as of March 31, 2003.

Potential production growth, in both coal and gas operations, could lead to increased capital expenditures for the next few years, S&P added. Consequently, free cash flow in 2004 and 2005 may not be at levels sufficient to prevent a further reduction in liquidity.

S&P put Consol's senior unsecured debt rating on CreditWatch because operating asset collateral may need to be provided for the company's bank credit facility, which would place the senior unsecured lenders at a disadvantage.

Consol's debt leverage is aggressive with the total debt to total capital ratio at 82% and total debt to last-12 month EBITDA ratio an aggressive 3.3x (excluding certain other income items and adjusted for operating leases) for the period ending March 31, 2003, S&P said, adding that it is not expecting meaningful reduction in debt levels.

Furthermore, Consol's balance sheet is significantly burdened by unfunded postretirement liabilities of $2.1 billion and black lung, mine closing, workers compensation, and reclamation liabilities totaling $1.1 billion.

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