Moody's changes Jostens' outlook to developing

Moody's Investors Service revised its outlook on Jostens, Inc. to developing from positive and confirmed its ratings including its $150 million senior secured revolving credit facility due 2006, $58.6 million senior secured term loan A due 2006 and $320.7 million senior secured term loan C due 2009 at B1, $201.5 million 12.75% senior subordinated notes due 2010 at B3 and $74.0 million 14.0% PIK preferred stock due 2011 at Caa1.

Moody's said the action follows Jostens' announcement that it had signed an agreement to be acquired by affiliates of CSFB Private Equity.

The outlook revision reflects the uncertainty regarding Jostens' capital structure and credit protection measures given the merger agreement, Moody's said. Cash consideration for the acquisition will be approximately $48 million per common share, or approximately $494 million.

Moody's noted that Jostens had around $665 million in funded debt (including preferred stock) at the end of the first quarter, and therefore believes that the total consideration for the acquisition could represent a substantial multiple of run-rate EBITDA and could result in a material increase in leverage. The determination of a definitive rating outlook and future rating actions will be focused on the finalization of the transaction, including an evaluation of Jostens' long-term liquidity and its debt levels relative to sustainable profitability and free cash flow generation.

Jostens ratings are supported by its leading market share in most of its business segments, the generally stable demand which exists for its products, the high barriers to entry (including over 100-years in the industry and historical retention rates of over 90%), and its strong profit margins and proven ability to use technology for both product development and operating efficiency, Moody's said.

Ongoing risks include the company's narrow business focus, its reliance on an independent salesforce, the high degree of seasonality and delivery risk associated with its businesses, the mature and competitive nature of its industry, and the limited number of potential strategic buyers which could affect the enterprise value available to bondholders. Finally, Jostens remains exposed to cyclical downturns in disposable income or consumer spending, volatility in raw material prices, technological obsolescence, and adverse long-term cultural/fashion trends.

S&P keeps Jostens on watch

Standard & Poor's said Jostens Inc. remains on CreditWatch Negative including its senior secured debt at BB- and subordinated debt at B.

The original listing followed Jostens' announcement that it had engaged investment banking advisors to assist in the possible sale or recapitalization of the company.

The continuing CreditWatch comes after the company's more recent announcement that it has signed a definitive merger agreement under which DLJ Merchant Banking Partners III LP and affiliated funds, managed by CSFB Private Equity, will acquire Jostens for a cash consideration of about $494.4 million (approximately $48 per common share) plus the assumption of debt, S&P said.

The CreditWatch listing continues to reflect Standard & Poor's expectation that the company will likely continue to be highly leveraged and that the proposed transaction could result in a weaker financial profile, S&P said.

While additional terms of the transaction were not as yet disclosed, given the change of control provisions within Jostens' credit agreement and notes indenture, S&P expects that the company will have to refinance its existing indebtedness.

S&P puts Buhrmann on positive watch

Standard & Poor's revised its CreditWatch on Buhrmann NV to positive from negative including its $2.25 billion bank loan due 2007 at B+ and $350 million subordinated notes due 2009 at B-.

S&P said the CreditWatch revision follows Buhrmann's announcement of a likely sale of its Paper Merchanting division to Australia-based paper merchanting and production group PaperlinX for €746 million ($880 million).

Net proceeds will be applied to debt reduction.

S&P said the proposed transaction considerably alleviates concerns regarding the group's ability to meet its financial covenants during financial 2003. Furthermore, the transaction is considered to be neutral to the group's business risk profile, despite reducing diversity, as the Paper Merchanting business is relatively weaker than the group's office products distribution businesses.

Moody's rates DigitalNet notes B2

Moody's Investors Service assigned a B2 rating to DigitalNet, Inc.'s proposed $125 million senior unsecured notes and confirmed the company's ratings including its senior implied rating at B1 and issuer rating at B2. The outlook is stable.

Moody's said the ratings reflect DigitalNet's high leverage, relatively small size and the potential that the evolution of government agencies under homeland security could alter government procurement practices.

The ratings also reflect the company's above-average EBITDA margins and significant revenue diversification.

The stable ratings outlook reflects the expected growth in the government technology budget and the belief that DigitalNet is competitively positioned to benefit from this growth, Moody's said.

Pro forma for the transaction, total debt to EBITDA is expected to be around 3.1x, Moody's said Additionally there is $100 million convertible PIK preferred stock at the holding company. Including the PIK preferred, debt to EBITDA would be about 5.6x.

Moody's cuts Preem

Moody's Investors Service downgraded Preem Holdings AB including cutting its senior unsecured debt rating to B2 from Ba3. The outlook is stable.

Moody's said the downgrade reflects Preem's deteriorated debt protection measures following the extremely weak refining market in 2002, and Moody's expectation that future investment plans will likely be funded through additional debt, further exacerbating the company's current highly leveraged financial profile. The increased notching of the senior secured rating from the senior implied, from one to two notches, reflects the deterioration of the bondholders' position as a result, in Moody's opinion, of the company's weakened asset coverage in the uncertain and difficult refining environment and the expectation that potential additional senior debt at operating company level will further subordinate the bondholders' position.

The downgrade also reflects Moody's opinion that the high refining margins registered in the first quarter of 2003 are unlikely to be sustainable over the medium term.

S&P rates Vought notes B

Standard & Poor's assigned a B rating to Vought Aircraft Industries Inc.'s planned $250 million senior unsecured notes and a B+ to its existing $466 million secured credit facility.

S&P said Vought's ratings reflect the company's weak financial profile, high debt and exposure to the depressed commercial aircraft industry. These factors are offset somewhat by Vought's position as the largest independent aerostructures manufacturer and strengthened by the pending acquisition of Aerostructures Corp.

The acquisition reduces Vought's exposure to Boeing Co., which has reduced production of commercial aircraft more than Airbus SAS, and is likely to realize some cost savings from reduced overhead and facilities consolidation.

For the bank loan, S&P said that in a simulated default scenario proceeds from the sale of assets or a distressed enterprise value of the company would be insufficient to fully repay outstanding principal; however, a meaningful recovery of principal is likely.

Sales to Boeing for commercial aircraft structures represent 38% of total pro forma revenues. The acquisition of Aerostructures will diversify Vought's commercial revenue base by adding content on various Airbus aircraft, which accounts for 10% of total sales, S&P noted. Declines in the commercial business have been offset somewhat by solid military sales. Vought manufactures structures for the C-17 transport and V-22 tilt rotor aircraft and is likely to benefit from increases in defense spending.

Total debt will increase $75 million. Debt to EBITDA (as adjusted for some noncash charges) will improve in 2003 to 4x, from more than 10x in 2002, due to the earnings contribution from Aerostructures offsetting the higher debt, S&P said. Profit and cash protection measures are expected to be weak in 2003 and 2004 due to the depressed commercial aircraft market and higher interest expense, with pretax interest coverage below 0.5x, EBITDA interest coverage (also adjusted for noncash charges) about 3x, and funds from operations to debt slightly below 10%.

S&P rates DigitalNet notes B

Standard & Poor's assigned a B rating to DigitalNet Inc.'s proposed $125 million senior unsecured notes due 2010 and confirmed its existing ratings including its corporate credit at B+. The outlook is positive.

S&P said the $125 million senior unsecured notes are rated one notch below DigitalNet's corporate credit rating, reflecting the amount of priority senior secured debt in the company's capital structure.

S&P said DigitalNet's ratings reflect its niche focus, aggressive debt leverage and limited financial flexibility, partly offset by moderate but predictable earnings and cash flow.

Long-term prospects are good, because of a large recurring-revenue base and increasing levels of government expenditures as a result of the ongoing upgrade of federal IT systems, S&P said. The average life of DigitalNet's contracts is modestly greater than three years. DigitalNet's low percentage of cost-plus contracts and limited hardware re-selling have translated into very good EBITDA margins, in the low teens percentage area.

However, DigitalNet's focus is not broad, and the company competes in a consolidating industry with many participants, some of which are much larger.

At expected moderate growth rates, working capital and fixed-asset expenditures should be manageable. S&P expects the company to generate modest levels of free cash flow, with capital expenditures in the $10 million area. Pro forma debt to EBITDA is expected to be about 3.2x and EBITDA interest coverage is expected to be about 3.5x as of March 2003.

S&P puts Le Nature's on watch

Standard & Poor's put Le Nature's Inc. on CreditWatch negative including its new $100 million revolving credit facility due 2008 at B+ and new $150 million senior subordinated notes due 2013 at B-.

S&P said the CreditWatch placement follows Le Nature's disclosure to S&P that it is in the midst of a commercial dispute over a contract with one of its key bottle suppliers. This contract, expiring in 2007, requires minimum annual purchases of $4.7 million per year. The supplier claims that Le Nature's has not complied with terms of the contract and has breached its contractual obligations. The supplier is seeking payment for amounts due under the agreement and threatening contract termination.

This disclosure, to be included in the revised offering memorandum for Le Nature's proposed $150 million senior subordinated note offering, was based on receipt of a letter to management from the supplier on June 12. As a result, S&P had not factored this dispute into its initial ratings process.

S&P said it is concerned about the potential ramifications of the commercial dispute if it is not favorably resolved. If Le Nature's is unable to complete the transition to in-house bottling supply on a timely basis and this supplier terminates its contract, the result could be some temporary disruption of production while Le Nature's is securing alternative supply sources.

It is also unclear whether Le Nature's will face litigation related to the contract if the dispute is not resolved, and what the potential financial impact of litigation would be.

S&P lowers Caraustar outlook

Standard & Poor's revised its outlook on Caraustar Industries Inc. to negative from stable and confirmed its existing ratings including its senior unsecured debt at BB and subordinated debt at B+.

S&P said the outlook revision reflects its expectations that credit measures will remain weak for the ratings in the near term as a result of soft economic conditions, cost pressures, and prospects for only modest price improvement without more robust demand.

Although operating rates are gradually improving through the idling of machines, facility consolidation, and mill closures across the industry, Caraustar's earnings and cash flows have not recovered as expected, S&P said. The shortfall has been caused by higher energy costs, spikes in recycled fiber prices, costs stemming from accelerated integration and rationalization actions, plus highly competitive conditions in the oversupplied folding carton segment. As a result, little improvement is likely for the remainder of 2003 with debt expected to remain at about its current level of $570 million, including capitalized operating leases, and debt to EBITDA at more than 8x.

Caraustar remains highly leveraged because of its weak operating performance over the past two years and modest increase in debt to fund the September 2002 industrial packaging group acquisition, S&P said. Debt stood at $570 million at March 31 2003, an increase of $35 million from the year before, and debt to EBITDA was very aggressive at 9x. The company expects modest capital spending in 2003 and should produce breakeven or slightly positive free cash flow this year. Therefore, net debt is not expected to increase (the company has been accumulating cash since it has no amortizing bank debt to repay) even if the U.S economic recovery is delayed.

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