S&P cuts Fleming multiple notches, still on watch

Standard & Poor’s downgraded Fleming and kept it on CreditWatch with negative implications including its senior secured debt, cut to CCC from B, senior unsecured debt to CC from CCC+ and subordinated debt to C from CCC.

S&P said the watch downgrade was based on Fleming’s likely need for covenant relief, the lack of a new or renegotiated bank facility, and reports that Fleming has hired Gleacher & Co., an investment bank that advises companies on renegotiating debt and finding new financing sources.

The company is in negotiations to either revise its existing bank loan agreement or obtain a new facility to focus on asset-based measures for financial covenants, S&P noted. Although the banks are well secured, lending support to prospects for an amended or new loan, to date the company has not had success in obtaining the banks’ cooperation.

There is currently sufficient room under the $550 million revolving credit facility for further borrowings, though covenant levels are very tight, S&P said. Sources of liquidity include asset sale proceeds expected to be received in the first and second quarters of 2003, and reduced capital spending for 2003. The company has no debt maturities until 2007.

Fleming’s challenges include an SEC inquiry into accounting matters, the recent departure of the CEO, and the need to manage a host of business factors, S&P said. These factors include downsizing the company to adjust for the loss of the large Kmart Corp. contract, completing the sale of retail assets, and integrating the Core-Mark International Inc. acquisition.

S&P said it believes Fleming will be challenged to manage the downsizing of the wholesale business, the sale of retail assets, the SEC investigation, and shareholder lawsuits while maintaining focus on its core distribution business.

S&P cuts HealthSouth, still on watch

Standard & Poor’s downgraded HealthSouth Corp. and kept it on CreditWatch with negative implications. Ratings lowered include HealthSouth’s $1 billion 7.625% notes due 2012, $1.25 billion senior unsecured revolving credit facility due 2007, $200 million 7.375% senior notes due 2006, $250 million 6.875% senior notes due 2005, $250 million 7% senior notes due 2008, $375 million 8.5% senior unsecured notes due 2008 and $400 million 8.375% senior notes due 2011, cut to CCC- from B-, and $350 million senior subordinated notes due 2008 and $568 million 3.25% convertible subordinated debentures due 2003, cut to CC from CCC.

S&P said the action is because emerging details of a Justice Department charge of massive criminal fraud by HealthSouth suggest the possibility of a near-term credit default.

These recent events raise concern that the company might fail to meet financial obligations as early as April 1, S&P added.

Moody’s puts Dan River on upgrade review, rates notes B3

Moody’s Investors Service assigned a prospective B3 rating to Dan River Inc.’s proposed $150 million senior unsecured notes due 2009 and put the company’s existing ratings on review for possible upgrade including its $120 million 10.125% senior subordinated notes due 2003 at Caa3.

Proceeds from the new notes and borrowings under the new credit facility will be used to retire the existing $120 million 10.125% notes maturing on Dec. 15, 2003 and refinance the existing $207 million senior secured credit facility maturing on Sept. 30, 2003.

Moody’s said the provisional rating incorporates Dan River’s strong market positions in home fashion and apparel fabrics markets and significant improvements in operations as evidenced by better working capital management and increased asset utilization in 2002. But it also incorporates a significant revenue concentration with Kmart (approximately 19% in fiscal 2002).

The conclusion of the review and potential upgrades are contingent upon successful completion of the notes offering. This refinancing will significantly improve Dan River’s near-term liquidity by eliminating all current maturities of long term debt, and will better position the company for future growth, Moody’s said.

Further, Moody’s said it recognizes management’s efforts and success in returning the company’s margins and cash generation to more normalized levels in 2002 after a difficult 2001.

Should Dan River not be able to conclude its refinancing plan, Moody’s said it will confirm the company’s existing ratings.

Moody’s cuts Goodyear, rates loan Ba2

Moody’s Investors Service assigned a provisional Ba2 long-term debt rating to Goodyear Tire & Rubber Co.’s three proposed senior secured credit facilities totaling $3.3 billion and downgraded its existing ratings, affecting $7.3 billion of debt. The new credit facility is a $1.3 billion senior secured asset-based lending facility and $1.35 billion senior secured U.S. bank revolving credit facility and term loan plus a $650 million senior secured European revolving credit facility and term loan at Goodyear Dunlop Tires Europe BV. Ratings lowered include Goodyear’s senior unsecured notes and debentures, cut to B1 from Ba2. The outlook is stable.

Moody’s said the downgrade of the existing ratings reflects the structural subordination of the senior unsecured debt to the proposed senior secured credit facilities.

The assignment of a Ba3 senior implied rating reflects the fact that despite six out of seven business units demonstrating year-over-year improvement, the largest and most critical unit, North American Tire, continues to struggle, Moody’s said. Moreover, challenges are prevalent as rising raw material, labor, health and pension costs in 2003 could constrain overall earnings and cash flow generation.

Management’s ongoing initiatives are expected to modestly enhance credit metrics in 2003, however, despite the improvement, credit measures are likely to remain weak.

Goodyear has initiated actions to increase its market share, improve tire-selling prices, reduce operating costs and contain capital expenditure requirements. Nevertheless, absent a marked improvement in its end markets, namely the North American replacement tire market, Goodyear’s profitability is likely to remain at depressed levels, Moody’s added. The weaker earnings, in conjunction with sizable cash contributions to the company’s under-funded pension plans, will constrict free cash flow generation during the next several years, thereby resulting in limited if any improvement in debtholder protection measures.

The notching of the senior unsecured rating to B1 reflects the weakened position of the notes in Goodyear’s capital structure as a result of the security enhancement provided to the new facilities. Furthermore, the fact that nearly half of the company’s debt will be secured at the expected closing date with the potential of exceeding 60% when fully drawn, as well as limited access to proceeds from future asset sales further weakens the unsecured debtholders’ position.

The stable outlook incorporates the benefits of the proposed refinancing program, which extends debt maturities, improves liquidity and provides a timeframe for turning around the North American Tire segment, Moody’s said.

S&P rates Goodyear loan BB+, BB-

Standard & Poor’s assigned BB+ and BB- ratings to Goodyear Tire & Rubber Co.’s new $3.3 billion credit facilities and confirmed its existing ratings including its senior unsecured debt at BB-. For the new facilities, S&P rates Goodyear Tire & Rubber’s $500 million senior secured revolving facility and $800 million senior secured term loan, both asset-based, at BB+ and its $750 million senior secured revolving facility and $600 million senior secured term loan along with Goodyear Dunlop Tires Europe BV’s $250 million senior secured revolving facility and $400 million senior secured term loan at BB-. The outlook is negative. Most existing notes remain on CreditWatch with negative implications, S&P said.

S&P said most existing notes will likely be lowered one notch below the corporate credit rating when Goodyear closes on the new facility, based upon the proposed proportion of secured debt. Goodyear announced that one unsecured issue, the approximately $100 million of Swiss franc-denominated bonds, will become secured upon closing of the proposed bank facilities, sharing liens on certain U.S. manufacturing facilities. As a result, the rating on this one issue will likely be affirmed at the equivalent of the corporate credit rating, currently BB-, upon closing of the bank facilities.

S&P said the asset-based facility is rated two notches above the corporate credit rating, reflecting the very strong likelihood of full recovery of principal in the event of default or bankruptcy given the value of the collateral, close monitoring requirements, and tight controls around usage of the facility. Collateral is provided by a first priority pledge of all U.S. and Canadian accounts receivable and inventory (excluding joint venture assets). Eligible accounts receivable quality is believed to be good. Goodyear has a large, fairly diverse customer base made up of automotive manufacturers and tire retailers, dealers, and distributors. Several of Goodyear’s largest customers are investment-grade rated, although the bulk of the receivables are from smaller companies that would not warrant investment-grade ratings. Inventory is of good quality and the market is fairly liquid. Inventory primarily consists of tires, other rubber products, and commodity raw materials. A net liquidation value was determined by an independent appraisal.

Advances under the asset-based facility facility will be governed by a conservative borrowing base that limits borrowings to 85% of eligible accounts receivable, up to 65% of eligible finished goods, and 35% of eligible raw materials. Work-in-process inventory is excluded from the borrowing base. Periodic reporting will be required to assess the value of the collateral, and disbursements are to be controlled by the lenders.

The other U.S. and European facilities are rated the same as the corporate credit rating, reflecting the likelihood of meaningful recovery of principal in event of default, despite potentially significant loss exposure, S&P said. The U.S. facility consists of a $750 million revolving line of credit and a $600 million term loan maturing April 2005. Collateral includes a second priority security interest in the assets pledged to the asset-based facility, a first priority interest in certain tangible and intangible assets, and a pledge of subsidiary stock, which together provide some measure of protection to lenders.

Nevertheless, collateral protection is limited by the expected minimal residual value of assets pledged to the asset-based facility after covering asset-based facility outstandings; a limitation in various bond indentures on the value of the pledge of manufacturing assets to 15% of the company’s net worth; and the likely significant deterioration of subsidiary equity value in a default scenario. Intangible assets, primarily Goodyear’s trademark, are expected to retain some value even in a default scenario due to the company’s well-recognized brand name.

S&P added that Goodyear’s ratings reflect the company’s exposure to a highly competitive and cyclical industry, an aggressively leveraged capital structure, weak cash flow protection, and looming cash needs in 2004 and 2005. These factors are partly mitigated by the company’s significant market position as the world’s largest tire manufacturer, supplying both the replacement and original equipment segments of the industry.

Goodyear has reported very disappointing financial results for the past four years owing to a number of factors including competitive pricing conditions; product shortages; product mix shifts; and depressed demand in key markets, S&P added. Recent profit pressures have been exacerbated by ineffective management of inventory in the face of demand and product mix shifts, primarily in the company’s North American Tire business segment.

S&P said it is concerned about the timely execution of Goodyear’s plan to improve profitability in its North American Tire operation. Poor recent operating performance has diminished financial flexibility and made the timing of long-term profit potential uncertain.

Moody’s cuts Antenna TV

Moody’s Investors Service downgraded Antenna SA including cutting its $115 million 9% senior unsecured notes due 20007 and €150 million 9.75% senior unsecured notes due 2008 to B1 from Ba3. The outlook is negative. The action concludes a review begun on Nov. 21, 2002.

Moody’s said the downgrade reflects Antenna’s continued weak debt protection measures which have not improved in line with Moody’s previous expectations; notwithstanding a relatively strong year-over-year improvement in fourth quarter 2002 EBIT to €7.6 million from a relatively low base of €4.5 million in the fourth quarter of 2001 and reduced debt levels resulting from open market debt repurchases over the past year.

The company’s weakened financial position is largely attributed to increased competition in both TV broadcasting and publishing in the Greek market, which has resulted in higher programming and marketing costs, Moody’s added.

Moody’s said it continues to positively recognize Antenna’s strong liquidity position, with approximately €89.8 million in cash and unused bank lines of €38.8 million at the end of December 2002; the company’s success in generating free cash flow in 2002 (before debt repurchases) through reduced capital spending and working capital improvements; and Antenna’s strong position in the Greek media market.

While Antenna’s demonstrated solid top-line revenue growth in 2002 with approximately a 7% increase over 2001 levels, the company’s EBITDA levels (after programming amortization) remained slightly below the already depressed 2001 levels while operating cash flow before working capital movements decreased to negative €13.2 million from negative €7.1 million in 2001 and positive €18.3 million in 2000. Net debt/EBITDA for the year-ending 2002 was approximately 7.0x versus 6.6x in 2001 and 2.1x in 2000, Moody’s said.

Moody’s raises Comstock outlook

Moody’s Investors Service raised its outlook on Comstock Resources to stable from negative and confirmed its ratings including its $220 million 11.25% senior unsecured add-on notes due 2007 at B2.

Moody’s said the action reflects Comstock’s sound liquidity; sufficient cumulative exploration and development success in multiple basins to modestly grow 2002 proven developed reserves and perhaps make 2003 Comstock’s first year of material organic production gain; sound proven developed and proven developed producing reserve lives; and greater prospect diversification.

This is tempered by high leverage, inconsistent prior volume trends, and 54% of 2003 capital outlays devoted to higher cost short-lived Gulf of Mexico (GOM) activity, Moody’s said.

Comstock has hedged little 2003 production, exposing it to price declines, but prices are currently high.

S&P keeps US Airways on watch

Standard and Poor’s said ratings on issues of US Airways Inc. that have not already defaulted are on credit watch with developing or negative implications. The corporate credit rating remains D.

The rating reflects prospects for continued payment during the bankruptcy reorganization and, in the case of enhanced equipment trust certificates, prospects for full recovery of principal in the event that aircraft collateral is repossessed and sold, or is renegotiated at lower rates, S&P said.

US Airways Group Inc. and its subsidiary US Airways Inc. moved closer to emerging from Chapter 11, with the bankruptcy judge’s approval on March 18, 2003 of the companies’ reorganization plan

The company hopes to emerge from bankruptcy by the end of the first quarter of 2003, an accelerated schedule compared with most airline reorganizations, S&P said.

S&P said the company’s ability to reorganize is supported by substantial labor and other cost savings, and the expected availability of a $1 billion credit facility upon emergence from Chapter 11. The ATSB backing for a federal loan guarantee remains conditioned on US Airways executing its business plan and agreement from other key parties.

US Airways’ unrestricted cash totaled about $480 million at Feb. 28, 2003, lower than $633 million at Dec. 31, 2002. The company needs to substantially complete the conditions needed to emerge from reorganization before it gains access to the final $131 million of its $500 million debtor-in-possession credit facility provided by The Retirement System of Alabama.

Arlington, Va.-based US Airways is the nation’s seventh-largest air carrier.

S&P puts ArvinMeritor on watch

Standard & Poor’s put ArvinMeritor Inc. on CreditWatch with negative implications including its senior unsecured debt at BBB-.

S&P said the watch placement reflects ArvinMeritor’s relatively weak credit protection measures and concerns over its intermediate-term prospects for improvement as a result of lackluster end markets.

S&P said it expects ArvinMeritor’s largest business segment – light vehicle sales to the original equipment market – will likely face continuing difficult conditions in 2003, including soft demand, higher costs, and pricing pressures. These business conditions may offset management’s ongoing cost-control initiatives and focus on debt reduction, thus preventing achievement of improved credit measures in the intermediate term.

End market deterioration has adversely affected ArvinMeritor’s financial results since 2000, despite the company’s restructuring efforts and efficiency improvements, S&P added.

Negative factors that may depress fiscal 2003 financial results include a possible year-over-year decline in heavy-truck demand, higher steel costs, restructuring costs, lower margins for the Zeuna Starker acquisition that is expected to close in the second quarter of 2003, and weak aftermarket demand. Although a light-vehicle segment backlog totaling $710 million supports modest internal sales growth through 2005, reported sales are subject to production variations, which have been negative year-to-date in 2003.

For the first fiscal quarter of 2003 (ended Dec. 31, 2002) ArvinMeritor’s operating income rose 16% on a 9% sales increase, year-over-year, but additional restructuring and capacity reduction actions were announced, including a workforce reduction and facility closure as a result of continuing weak end-market conditions, S&P said. While the latest quarter’s sales improvement reflects new business awards, favorable currency translations, and strong heavy-duty truck production, profitability was mixed. Light-vehicle segment operating margin declined 4.7%, from 5.2%, year-over-year, because of higher steel-related costs, while the commercial vehicle segment operating margin improved to 4.2%, from 2.3% year-over-year, because of cost control efforts and cost absorption from higher sales.

S&P rates United Industries notes B-

Standard & Poor’s assigned a B- rating to United Industries Corp.’s proposed $75 million senior subordinated notes due 2009 and confirmed the company’s existing ratings including its bank debt at B+ and subordinated debt at B-. The outlook remains stable.

S&P said United Industries’ ratings reflect its high debt leverage, seasonal business characteristics, and competitive industry dynamics. These factors are somewhat mitigated by the company’s solid market positions in consumer lawn and garden pesticides and fertilizers and in household insecticides.

United Industries’ low cost structure with limited marketing expenses enables its products to provide high returns to its customers, S&P said. Nevertheless, customer concentration is significant, with three of the company’s largest customers (Home Depot Inc., Lowe’s Co. Inc., and Wal-Mart Stores Inc.) representing about 75% of sales in 2002. United Industries’ business is also highly seasonal, with about 70% of sales and profitability occurring in the first half of the calendar year. In addition, sales can also be hurt by unfavorable weather conditions.

However, recent acquisitions have diversified United Industries’ product portfolio and provided cross-selling opportunities that could lead to an improved customer mix, S&P added.

United Industries’ operating performance continued to show improvement in 2002, S&P said. As expected, the company’s growth has come primarily from acquisitions but has also benefited from favorable demographics and new product introductions. Indeed, net revenues increased about 75% for the year ended Dec. 31, 2002, reflecting the fertilizer brands acquisition, the Schultz merger and, to a lesser extent, increased sales of the company’s Spectracide products.

The company’s EBITDA margin declined to about 16% in 2002 from about 20% in 2001, primarily as a result of lower margins of acquired businesses, S&P said. Still, pro forma for the acquisitions, EBITDA coverage of interest increased to more than 2x in 2002 from 1.6x in 2001, and debt to EBITDA fell to about 5x in 2002 from 5.5x the previous year.

Moody’s upgrades Weight Watchers notes, rates loan Ba1

Moody’s Investors Service assigned a Ba1 rating to Weight Watchers’ $85 million term loan D, confirmed its existing $45 million revolving credit facility due 2005, $41.6 million term loan A due 2005, $97.4 million term loan B subordinated facility and $57.7 million term loan C subordinated facility due 2007 at Ba1 and upgraded its $100 million euro senior subordinated notes and $150 million senior subordinated notes to Ba2 from Ba3. The outlook is stable.

Moody’s said the upgrade reflects Weight Watchers’ strong cash flow and its ability to sustain its operating margins in a difficult economy, and its track record of growth.

The ratings reflect Weight Watchers’ impressive scale and scope as evidenced by its reach into 30 countries, and a high level of free cash flow. The company’s market position makes it among the strongest in the industry, Moody’s said.

The ratings are constrained by the company’s low level of tangible assets and a lack of meaningful product diversification.

The $85 million in proceeds from the term loan D will be used to partially fund the purchase price of 9 Weight Watchers’ franchise properties from The WW Group, Inc., the largest North American Weight

Watchers franchisee. The transaction will also be funded by accessing the company’s revolving credit facility and by cash.

The stable ratings outlook reflects the company’s strong market position and cash flows. It also reflects an expectation that the company’s free cash flow will be reinvested to further grow the business, Moody’s said.

Moody’s believes that the company is unlikely to experience any significant effect from the current weak economy. The ratings could come under pressure if attendance was to decline on a sustainable basis for any reason including the growth of alternative products that pressure the company’s margins and free cash flow.

S&P upgrades JDN

Standard & Poor’s upgraded JDN Realty Corp. to investment grade and removed it from CreditWatch with positive implications.

Ratings raised include JDN’s $75 million 6.8% senior unsecured notes due 2004, $75 million 6.918% mandatory par putable remarketed securities due 2013 and $85 million 6.95% senior unsecured notes due 2007 to BBB from B and $75 million 9.375% class A cumulative redeemable preferred stock to BBB- from B-.

S&P puts Town Sports on watch

Standard & Poor’s put Town Sports International Inc. on CreditWatch with negative implications including its $155 million 9.75% senior notes due 2004 at B and $25 million revolving credit facility due 2004 at B+.

S&P said the watch placement is in response to Town Sports’ announcement that it plans to undertake a recapitalization to refinance some or all of its debt and preferred securities with new debt.

The CreditWatch listing is based on concerns that the company could potentially increase its financial risk by replacing preferred stock with debt, S&P said. The recapitalization will be used to refinance significant maturities due in 2004 and is expected to be in the form of new senior bank and high yield debt.

Town Sports’ financial risk is high due to the relatively small cash flow base, capital spending-related discretionary cash flow deficits, and ongoing expansion plans, S&P added. Liquidity and access to capital have also been of some concern. These factors are balanced by good comparable club revenue growth, driven by increasing new memberships, dues, and ancillary services.

S&P raises Woori Bank

Standard & Poor’s upgraded Woori Bank including raising its $150 million 3.625% senior unsecured notes due 2005 and $150 million 4.5% senior unsecured notes due 2007 to BBB- from BB+. The outlook is stable.

S&P said the upgrade is in response to Woori Bank’s progress in enhancing its asset quality, long-term benefits from its more disciplined credit practices, and heightened earnings potential through cross selling the products of its sister companies.

Problem loans (loans classified as precautionary or below) declined to 6.0% at December 2002 from 9.54% at the end of 2001, S&P noted.

Woori’s ratings are constrained by its remaining exposure to Korean chaebols, uncertainties surrounding the domestic economy, and growing concerns over household indebtedness, S&P added.

Moody’s confirms GH Water

Moody’s Investors Service confirmed GH Water Supply (Holdings) Ltd. including its tranche B debt at Ba3 and withdrew its Ba3 rating on the tranche A and tranche C debt, which have been repaid. The outlook is stable. The announcement concludes a review for possible downgrade commenced on Dec. 10, 2002.

Moody’s said the rating reflects confirmation that tranche B creditors remain pari passu with most other unsecured creditors. However the provincial government debt and permitted hedging transactions rank in priority ahead in right of payment of the remaining tranche B debt, refinancing facilities and bank phase IV project debt.

While the level of debt ranking ahead of tranche B debt has been reduced, it nevertheless represents a continuing material level of subordination so that the tranche B debt rating is notched one level down from the senior implied rating, Moody’s said.

On the positive side no material amount of additional debt has been incurred post-refinancing and the debt maturity profile of the company has been extended. GH Water Holdings will also benefit from the current low interest rate environment as the refinancing facilities are floating rate rather than previous higher fixed rate.

S&P cuts CESP

Standard & Poor’s downgraded CESP (Companhia Energetica de Sao Paulo) including cutting its $150 million notes due 2005 and $300 million 10.5% notes due 2004 to CC from CCC and kept it on CreditWatch with negative implications.

S&P said the downgrade follows the announcement by the government of the state of São Paulo that it does not intend to provide support to CESP for the company to meet, in particular, a put option on a $150 million medium-term note due on May 9, 2003.

CESP’s management confirmed that it does not expect to receive any support from either the state or the federal government for this financial obligation.”

These announcements break the initial expectations that CESP could still receive some support given its importance in the national electric generation industry, and in fact leave the company in a situation in which a default on the notes, under S&P’s criteria, is imminent.

On March 14, CESP formalized a solicitation to amend the terms of the medium-term note indenture in which the company proposed, among other alterations: (i) to cancel the May 9, 2003, put option; (ii) to add a put option on Jan. 30, 2004, that could be exercised if the company has not refinanced its debts by Nov. 28, 2003; and (iii) to provide a partial payment of $200 per $1,000 of nominal amount of the notes on May 9, 2003.

The solicitation will expire on April 4, 2003, and S&P said it will view its successful conclusion as equivalent to a default.

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