Fitch cuts Fleming, still on watch

Fitch Ratings downgraded Fleming Cos., Inc. including cutting its secured bank facility to B from BB, senior unsecured debt to CCC from B+ and senior subordinated debt to CC from B-. The ratings remain on Rating Watch Negative.

Fitch said the downgrade is due to the significant weakness in Fleming's operating performance, the uncertainty as to the status of its efforts to amend or renegotiate its existing secured bank facility and the lack of clear direction for Fleming from what may be a transitional management team.

The ratings remain on Rating Watch Negative until further clarity is provided as to its strategic and operating plans going forward, Fitch said, adding that it believes Fleming's tenuous financial position renders its ability to continue to manage its existing obligations questionable.

Fleming's reported 2002 results reflected weaker operating profitability due to a heightened competitive environment, weak economy and rising overhead costs, Fitch noted. As a result of these factors, operating margins weakened in 2002 from prior year levels.

The termination of the distribution agreement with Kmart will significantly lower Fleming's distribution volume in 2003 and costs associated with the termination will limit cash available for debt reduction, Fitch said. While proceeds from the sale of its retail assets are expected to be applied toward the outstanding bank term loan, it is unknown at this time what the ultimate proceeds will be.

As a result, Fitch expects credit measures in 2003 to weaken further from 2002 levels. Of note is that Fleming has no schedule debt maturities until 2007, although it is challenged to maintain covenant compliance with the existing bank facility.

Moody's raises Key Energy

Moody's Investors Service upgraded Key Energy Services, Inc. including raising its $150 million senior secured revolving credit maturing 2005 to Ba1 from Ba2, $275 million 8 3/8% senior unsecured notes due 2008 to Ba2 from Ba3 and $97.5 million 14% senior subordinated notes due 2009 and $49.7 million 5% convertible subordinated notes due 2004 to Ba3 from B2. The outlook is stable.

Moody's said the upgrade reflects Key's demonstrated reduction of leverage, its track record of issuing new equity for acquisitions, enhanced downcycle earnings and cash flow resulting from critical mass of repeatable business in a durable segment of the oil and gas industry, and a strategic shift from maximizing asset utilization to a more bottom-line business model.

Moody's said that Key has achieved significant debt reduction and balance sheet strengthening after near ruinous leveraged acquisitions completed through 1999.

Management demonstrated its skill of delevering the company while remaining an active consolidator in the oil and gas services sector. In conjunction with completing the 16 acquisitions since 1999, Key raised approximately $323 million of new equity and issued $32 million of equity for the purchases, while reducing debt by $364 million from its peak of $867 million at March 31, 1999.

As a result, Key's debt/capitalization (adjusted for capitalized leases) declined from 88% at March 31, 1999 to 42% as of Dec. 31, 2002, with run rate debt/EBITDA improving from 9.6x at June 30, 1999 to 3.2x at Dec. 31, 2002.

Moody's puts Centerpulse on upgrade review

Moody's Investors Service put Centerpulse Ltd. on review for upgrade, affecting $635 million of debt including its senior secured credit facilities at Ba2.

Moody's said the review is in response to the announcement that Smith & Nephew plc has agreed to acquire Centerpulse, and in parallel, has recommended an offer for InCentive, a listed company which holds, or has the right to hold, 19% of the issued share capital of Centerpulse for £1.5 billion in a combination of equity and cash.

The offer includes the assumption of Centerpulse's net debt of £165 million as of Dec. 31, 2002.

Moody's said its review will focus on the repayment mechanism of Centerpulse's existing debt, the proposed capital structure going forward and the overall credit profile of the combined entity.

S&P cuts Solectron

Standard & Poor's downgraded Solectron Corp. including lowering its $500 million 9.625% senior notes due 2009, $150 million 7.375% senior notes due 2006, $4.025 billion LYONs due 2020 and $2.9 billion LYONs due 2020 to BB- from BB and $1 billion Adjustable Conversion-Rate Equity Security units (ACES) to B from B+. S&P also assigned a BB rating to its new $200 million 364-day senior secured revolving credit facility. The outlook is negative.

S&P said the downgrade reflects Solectron's weaker-than-expected sales forecast for the May 2003 quarter, and follows the company's announcement that it plans to undertake additional restructuring of its operations.

Ratings on Solectron are based on weak operating performance, disproportionate exposure to depressed communications equipment end-markets, and a leveraged financial profile, S&P added. These concerns are only partially offset by Milpitas, Calif.-based Solectron's top-tier position in the electronic manufacturing services industry, well-established customer relationships with leading original equipment manufacturers, and favorable long-term growth trends toward outsourcing and its cash position.

Sales are expected to decline in the February 2003 quarter to $2.8 billion from $3 billion one year earlier. S&P said it believes the communications equipment end-market, which accounts for about one-half of sales, is likely to remain depressed over the near-to-intermediate term. Following lower revenue levels announced for the May 2003 quarter, prior restructuring activities will not improve operating performance as previously expected.

Operating margins before depreciation and amortization, at slightly above 3% in the February 2003 quarter, were less than one-half of levels seen in past years, S&P said. Credit measures remain very weak for the rating, as net debt-to-EBITDA for the 12 months ending February 2003 exceeded 7x. Ample cash balances and good cash flow generation are expected to provide a cushion for the company as it restructures operations to reduce its currently high cost structure.

S&P confirms Beazer

Standard & Poor's confirmed Beazer Homes USA Inc. including its $100 million senior notes due 2008, $200 million senior notes due 2011 and $350 million senior notes due 2012 at BB. The outlook is stable.

S&P said the ratings acknowledge Beazer's successful integration of Crossmann Communities Inc., ongoing prudent inventory management, and sound financial risk profile. These strengths are somewhat tempered by a higher-than-average goodwill component within the company's asset base.

In 2002, Beazer merged with unrated Crossmann, which provided Beazer entry into various Midwest markets while strengthening its position in its existing North Carolina and South Carolina markets. The merger resulted in $2.6 billion revenues in 2002 from 13,603 deliveries, thereby positioning Beazer as the sixth-largest homebuilder in the country, S&P noted. The integration of Crossmann has gone smoothly to date, due in part to the good strategic fit of the two companies, the retention of key Crossmann personnel, and Beazer's good management information systems, which has also fostered the integration of previous, smaller acquisitions during the past few years.

Beazer has demonstrated discipline with regard to inventory management. The company continues to achieve a roughly 2.0x inventory turnover, which compares favorably with peers. This has been accomplished largely through a combination of Beazer's disciplined approach to land acquisitions, its ability to achieve operating efficiencies through standardized product designs, and its focus on moderately sized communities (150 lots average) with a relatively short life cycle (typically about two years), S&P said.

The company's capital structure is appropriately leveraged at about 47% debt-to-book capitalization, and the debt maturity schedule is very manageable in the near term (a $100 million term loan matures in late 2004 and three senior note issues totaling $650 million will mature in 2008, 2011, and 2012), S&P said. While the Crossmann merger was appropriately financed with just 20% debt, the transaction did increase the goodwill component ($250 million) within Beazer's capital structure to roughly 30% of book value equity, which is significantly higher than most rated peers. This is particularly relevant in light of SFAS 142, which eliminated the amortization of goodwill effective fiscal year 2002.

Moody's rates United Industries add-on B3

Moody's Investors Service assigned a B3 rating to United Industries Corp.'s add-on offering of $75 million senior subordinated notes and confirmed its existing ratings including its $90 million senior secured revolving credit facility due 2005, $75 million senior secured term loan A due 2005 and $240 million senior secured term loan B at B1 and $150 million senior subordinated notes due 2009 at B3. The outlook remains positive.

Moody's said the action reflects the moderately improved liquidity achieved by the planned use of proceeds to reduce borrowings under United Industries' credit facility, as well as the higher interest expense expected from replacing bank debt with longer-dated subordinated notes.

United Industries' ratings continue to reflect its increased scale and improved product mix, as a result of organic growth and value-enhancing acquisitions without a proportional increase in senior debt, Moody's said.

The company has executed three significant acquisitions over the past two years at reasonable multiples, with partial equity participation, and with modest synergy requirements, Moody's noted. When combined with organic growth, these acquisitions have nearly doubled its revenue and increased its product lines beyond pesticides and herbicides to include fertilizers, organic growing media, plant foods and potting soils. The company's improved scale and product mix did not result in a proportional increase in cash interest debt, operational costs or maintenance capital expenditures, thus boosting net free cash flow.

In addition, United Industries' increased scale and product offerings allow it to improve its negotiating position with major retailers and suppliers, while its improved product mix reduces potential weather related revenue and cash flow volatility.

S&P upgrades Brown Jordan

Standard & Poor's upgraded Brown Jordan International Inc. including raising its $105 million senior notes due 2007 to C from D. S&P also confirmed its CC senior secured bank loan rating on the company. The outlook is negative.

The rating actions follow Brown Jordan's March 20 payment of interest to holders of its 12.75% notes due 2007, made within the cure period for the notes. Brown Jordan was able to make this interest payment because its senior lenders amended their bank loan agreement by reducing their lending commitment and by loosening covenants, S&P said.

In return, Trivest Fund III LP, the majority equity owner of Brown Jordan, agreed to provide a guaranty of future subordinated debt interest amounts, ensuring that senior lenders would not be disadvantaged by payments made on the subordinated debt.

S&P will meet with Brown Jordan management to further assess the company's financial and business prospects.

Moody's cuts PolyOne, still on review

Moody's Investors Service downgraded PolyOne Corp. including cutting its senior unsecured debt to B2 from Ba3 and kept it on review for possible downgrade, affecting $600 million of debt.

Moody's said the review will continue pending PolyOne's successful completion of its refinancing, including addressing both its near-term debt maturity and amending or refinancing its revolver and accounts receivable facility.

If the company successfully completes it's refinancing, and in the absence of any other unanticipated negative information, the company's ratings would be confirmed, Moody's said.

Moody's added that the downgrade reflects its opinion that PolyOne's financial profile will be challenged by higher oil and gas prices, as well as an uncertain economic environment in the U.S. and Europe for the reminder of 2003. In addition, the company's ratings reflect $90 million of debt maturities in September 2003, and the need to amend or refinance its revolving credit and accounts receivable facilities by the end of June.

PolyOne's ratings do not incorporate the potential for roughly $200-300 million of asset sales. Moody's believes that potential asset sales, at reasonable valuations, would be difficult to accomplish within the next 6-9 months due to the uncertain economic outlook.

S&P confirms El Paso

Standard & Poor's confirmed El Paso Corp.'s ratings including its senior unsecured debt at B, El Paso CGP Co.'s senior unsecured debt at B and the senior unsecured debt of Tennessee Gas Pipeline Co., El Paso Natural Gas Co., ANR Pipeline Co., Colorado Interstate Gas Co. and Southern Natural Gas Co. at B+. The outlook remains negative.

S&P said the confirmation reflects a settlement reached in principle with the state of California relating to El Paso's bidding practices and market power issues pertaining to natural gas pipeline capacity in California.

The settlement, which is in line with expectations and suitable for current ratings, will minimally effect the company's current liquidity and should improve the company's ability to renegotiate its $3 billion credit facility maturing in May, S&P said. The settlement includes an up-front cash payment of $100 million, the payment of $22 million per year (half of which can be in stock) over 20 years, delivery of $45 million of natural gas per year to the California border over 20 years, reduced sales price of El Paso's long-term power contracts with the California Department of Water Resources by $125 million through 2005, and $125 million in common stock.

El Paso's ratings continue to be pressured by continued reductions in cash flow estimates, ongoing refinancing risk, the inability to successfully meet debt reductions goals, and a stressed liquidity position, S&P added. Reduced cash flow expectations are due primarily to lower capital spending at the exploration and production unit while at the same time the company's financial improvement has been prolonged by the need to use cash to fulfill collateral and margin posting requirements versus paying down debt. Continued deterioration in El Paso's cash flow to interest coverage measures are foreseen due to higher current and anticipated borrowing rates for all El Paso entities.

Of paramount importance to the company's ability to maintain current ratings and an adequate liquidity position is the renegotiation of its $3 billion credit facility and regaining access to the capital markets at the holding company level, S&P said. The likelihood of successful resolution of these issues has improved as a result of the proposed settlement with California. Thus, executing on planned asset sales (targeted at $3.4 billion in 2003) is crucial to meeting debt maturities and accounting for the continued shortfall in cash flow (expected at about $2.5 billion in 2003) versus capital spending ($2.6 billion) and dividend requirements ($200 million) in 2003.

The negative outlook reflects significant hurdles the company faces in renegotiating bank facilities, regaining access to the capital markets at the holding company level, halting the erosion in cash flow, and receiving final approval of its settlement with California, S&P added. Successful execution in these matters could ultimately lead to ratings stability and upward credit momentum.

S&P rates Laidlaw secured debt BB+, notes B+

Standard & Poor's assigned a BB+ rating to Laidlaw Inc.'s senior secured debt and a B+ rating to its senior unsecured notes. The outlook is stable.

Laidlaw is proposing to issue $1.2 billion in debt securities to be issued in conjunction with its emergence from Chapter 11 bankruptcy protection expected to occur in mid-April 2003 including a $300 million secured revolving credit facility maturing 2008, a $525 million secured term loan B maturing 2009, and $350 million of senior unsecured notes.

The BB corporate credit rating is based on Laidlaw's strong market positions in its various businesses (primarily bus and health care transportation), offset by its below-average, albeit improving, financial profile, S&P said.

The ratings on Laidlaw's secured facilities are one notch higher than the corporate credit rating due to their relatively strong collateral coverage (substantially all of Laidlaw's assets, excluding Greyhound U.S.); the rating on the senior unsecured notes is two notches lower than the corporate credit rating based on the high proportion of secured debt in Laidlaw's capital structure, S&P said.

The credit facilities' collateral coverage should provide for a strong likelihood of full recovery of principal in the event of default or bankruptcy, S&P noted.

Laidlaw's credit profile will improve substantially after its emergence from Chapter 11, which it entered in June 2001, S&P said. Approximately $4 billion of debt will be exchanged for $1.2 billion of cash and $1.3 billion of equity. As a result, over the near to intermediate term, Laidlaw's EBIT interest coverage is expected to average in the low-2x area, EBITDA interest coverage in the low-4x area, funds from operations to debt in the 30% area, debt to capital around 50%, and debt/EBITDA in the mid-2x area; with modest improvement expected over the longer term as the company's operating margins improve.

S&P puts Greyhound on positive watch

Standard & Poor's put Greyhound Lines Inc. on CreditWatch with positive implications including its $150 million 11.5% senior notes due 2007 at CC.

S&P said the CreditWatch placement reflects the assignment of a BB corporate credit rating to Laidlaw Inc., Greyhound's parent, which is expected to emerge from Chapter 11 bankruptcy in mid-April 2003.

Laidlaw does not guarantee Greyhound's debt. However, prior to Laidlaw's bankruptcy filing in June 2001, debt ratings on Greyhound had been equalized with those of Laidlaw due to Laidlaw's implicit support of Greyhound, S&P said. S&P added that it will determine how much support will exist from Laidlaw upon Laidlaw's emergence from Chapter 11, and raise the ratings accordingly.

The ratings on Greyhound reflect its ownership by Laidlaw Inc., a company currently operating under Chapter 11 bankruptcy protection, and its participation in a highly competitive market, S&P said. Laidlaw filed for Chapter 11 bankruptcy protection in June 2001 and thus far Greyhound has not been included in that proceeding, continuing to service its debt obligations and maintaining access to independent financing sources for its capital spending needs.

Greyhound is, by far, the nation's largest intercity bus company, providing service to more than 2,600 destinations with a fleet of approximately 2,900 buses. However, Greyhound competes with airlines offering low fares, automobile travel and, in certain markets, regional bus lines and trains, a trend expected to continue over the long term, S&P said. The company has also been negatively affected by reduced travel levels in general after the events of Sept. 11, 2001.

Greyhound's financial profile is weak and the company has limited financial flexibility. In addition, the company's pension plans are underfunded by at least $100 million, S&P added. As part of Laidlaw's bankruptcy emergence, Laidlaw has agreed to contribute $150 million to fund Greyhound's pension shortfall.

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