Moody's cuts Marsh Supermarkets

Moody's Investors Service downgraded Marsh Supermarkets, Inc. including lowering its $110 million 8.875% senior subordinated notes due 2007 to B3 from B2. The outlook is stable.

Moody's said the downgrade was prompted by the operational and financial pressures (as measured by cash flow and same store sales) expected to face the company over the next 24 months; Moody's belief that revenue and market share have permanently weakened because of the many new competitive stores in and around Indianapolis; and Moody's opinion that debt protection measure improvements will prove challenging as long as the company continues to run free cash flow deficits (after capital investment, dividends, and cash pension contributions).

The ratings are constrained by the adverse effects (as measured by decreasing average unit volumes and declining operating margins) of intense competition from conventional supermarkets and supercenters, exposure to the economic fortunes of a narrow geographic region and the company's low return on assets.

However, the ratings acknowledge Marsh's well established competitive position as a leading supermarket operator around Indianapolis, its adequate liquidity and the continual investment in maintaining a modern store base. The revenue diversity provided by the convenience store segment also partially mitigates weak sales in the supermarket segment.

The stable rating outlook anticipates that the company will minimize further declines in operating margins and market share, in spite of the increased level of grocery competition around Indianapolis.

EBITDA covered interest expense 2.2 times for the last 12 months but significant levels of capital investment caused free cash flow to become negative. Operating lease obligations are significant since the company leases 71% of its supermarkets and 62% of its convenience stores. Lease adjusted leverage increased to 6.1 times for the 12 months ending June 2003 from 5.0 times in fiscal 2002 as the debt repurchases were made with proceeds from sale & leaseback transactions and operating cash flow substantially weakened, Moody's said.

Moody's confirms Frontier Oil

Moody's Investors Service confirmed Frontier Oil Corp., ending a review for upgrade begun on April 1 in response to its pending $460 million acquisition of Holly Corp. The outlook is positive.

In the ensuing months, on a number of grounds, Holly attempted to renegotiate the merger, culminating last week in Holly's call for all-cash compensation for Holly shareholders. Frontier rejected an all cash deal and sued Holly this week for damages. Since the merger terms had been agreed to by both boards, Holly had then reconsidered its fair value, Frontier had under performed in first half 2003, and Frontier became a party to an environmental suit in California.

Moody's said the positive outlook reflects expected stronger operating results in second half 2003, low net debt on a standalone basis and the possibility of upstream guarantees being provided to the notes.

The ratings would be placed back on review for upgrade if the two parties come together again on terms closely resembling the transactions original stock and cash compensation. The ratings could be placed on review for downgrade, probably of one-notch, if Frontier agreed to an all-cash or predominantly cash acquisition.

Moody's rating of Frontier's escrowed, cash secured, $220 million of 8% senior unsecured notes due 2013 was pending, awaiting final approval of merger terms and conclusion of the rating review in the context of the pro-forma outlook at the time. The bonds must be redeemed for escrowed cash at 101% of par if the merger is not completed by Oct. 31, 2003.

Frontier under performed sector benchmarks in the first half of 2003, a time when most of the sector experienced recovery in varying degrees from a severe downcycle, Moody's noted. Frontier's performance suffered principally from below average light/heavy and sweet/sour crude oil cost differentials and high natural gas costs (both especially impacting the Cheyenne refinery), regionally weaker than expected distillate margins, low margins on Cheyenne's asphalt production, and hedging and inventory losses due to steep oil price backwardation during much of the period.

S&P upgrades infoUSA, rates loan BB

Standard & Poor's upgraded infoUSA Inc. including raising its 9.5% senior subordinated notes due 2008 to B+ from B and assigned a BB rating to its $45 million revolving credit facility due 2006 and a $100 million term loan due 2007. The outlook is stable.

S&P said the higher ratings reflect infoUSA's stronger financial profile, aided by lower debt levels over the past several years, and the expectation that it can be sustained.

The ratings on infoUSA reflect the company's meaningful debt levels, moderate-sized operating cash flow base and competitive market conditions, including competition from firms who have greater financial resources than infoUSA, S&P noted. These factors are tempered by the company's free operating cash flow generation, strong niche market positions, a broad product and service offering distributed through numerous channels to a diverse base of businesses and a significant portion of sales derived from existing or former customers.

The company grew through debt-financed acquisitions primarily through 1999, the largest of which was Donnelley Marketing Inc., a consumer database and database marketing company for about $200 million in 1999. However, future opportunities are expected to be the considerably smaller, tuck-in types of acquisitions. In addition, infoUSA is expected to continue to focus on strengthening its balance sheet.

Despite a very challenging operating climate, the company has generated meaningful levels of free operating cash flow starting in 2001, benefiting from cost reduction and containment programs and lower capital expenditures, S&P said. These funds have been used primarily for debt reduction. In addition, infoUSA has repaid a substantial portion of its 9.5% subordinated notes due 2008 ($30 million is now outstanding) with its lower cost credit facilities. Adjusted for operating leases, debt to EBITDA is in the low 2x area and EBITDA to interest is over 5x.

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