S&P puts XL on watch

Standard & Poor's placed the ratings of XL Capital Ltd. and other core holding companies on CreditWatch negative.

The watch follows XL's further strengthening of reserves at XL Reinsurance America Inc., formerly NAC Reinsurance Corp., to $214 million in the first nine months of 2003, including $184 million in the third quarter. This related to additional claims development in core casualty lines that was outside of expectations and existing loss trends.

XL management has also announced that it will be conducting an intensive claims audit and review of ceding companies claims files, which will be completed by year-end.

S&P said it expects XL to replenish the reserve losses through capital markets activity following the completion of the study.

The ratings were placed on negative watch because the amount and type of capital raised could lead to a widening of the notching between the financial strength ratings on other core operating companies and the holding company.

S&P does not expect the impact on the ratings to be greater than one notch. If the nonstandard notching remains, the ratings will be affirmed.

Excluding the reserve strengthening, consolidated operating performance and cash flow for the group has been very strong year-to-date, and within S&P's expectations.

Moody's cuts Barnes & Noble converts to B1

Moody's Investors Service downgraded Barnes & Noble Inc.'s 5.5% subordinated convertible notes due 2009 to B1 from Ba3 but confirmed its senior ratings at Ba2, reflecting the opinion that bondholders' risk has increased as a result of recent acquisitions. The outlook is stable.

Confirmation of the senior implied and senior unsecured issuer ratings reflects a view that enterprise value relative to debt levels remains appropriate, plus Moody's confidence that operating cash flow will remain sufficient to reduce debt and rebuild cash balances while investing in moderate growth.

Ratings also reflect the potential for Barnes & Noble to accelerate vertical or horizontal integration through acquisitions, as demonstrated by recent acquisition activity.

Over the past year, Barnes & Noble has used cash for acquisitions such as Sterling Publishing and Barnes&Noble.com. These ventures are expected to provide long term tangible and intangible benefits, but may not immediately add to bondholders' interests.

The downgrade of the convertible also reflects the conversion of cash into less liquid operating investments and the recent acceleration of acquisitions, which raises the potential that the amount of secured debt ahead of the bonds could be increased.

The convertible is an obligation of Barnes & Noble Inc., a holding company, and are not guaranteed by the operating companies. Moody's noted that virtually all of Barnes & Noble's assets and income reside at subsidiaries.

Furthermore, the published consolidated financial statements include significant amounts of assets and cash flow for GameStop, a public company in which Barnes & Noble has a 63% share of ownership. The value of this investment, estimated at more than $600 million at current share prices, provides value to Barnes & Noble's stakeholders, which is reflected in the senior implied rating.

However, GameStop's operating activities do not directly benefit obligors of Barnes & Noble or its wholly-owned operating entities.

Coverage and leverage measures are not expected to be negatively affected in the medium term as debt taken on to finance the acquisition of Barnes&Noble.com and seasonal needs is repaid through operating cash flow, Moody's said.

S&P puts Diamond Offshore on watch

Standard & Poor's placed the ratings of Diamond Offshore Drilling Inc. on negative watch, including the A rated convertibles, reflecting concern that it may have difficulty maintaining its financial profile.

Houston-based Diamond Offshore has roughly $940 million of debt.

Specifically, S&P said it is concerned that recent worse-than-expected performance could indicate greater volatility and reduced earnings power of the company's rig fleet. Furthermore, management's recent common dividend reduction may signal that earnings and cash flow are unlikely to recover in the near term.

The combination of hefty spending on fleet upgrades/additions and weakness in Diamond Offshore's key drilling markets has eroded the company's cash and marketable securities balances.

Although liquidity remains strong and the company will have substantially completed its upgrade program by yearend 2003, S&P is concerned that future spending could further increase financial leverage or prevent the company from deleveraging in an industry upcycle.

S&P puts Aristocrat Leisure on watch

Standard & Poor's put Aristocrat Leisure Ltd. on CreditWatch negative including its $130 million 5% convertible subordinated bonds due 2006 and A$200 million syndicated bank loan due 2005 at BB.

S&P said the CreditWatch placement reflects the company's reduced financial flexibility as a result of its recent poor performance, significant challenges in increasing its foot print in the U.S. gaming market and the potential for further earnings pressure as Aristocrat transitions to a new management team.

The company also faces a slowing domestic environment, where regulatory and tax changes are posing longer-term challenges, S&P added.

Fitch cuts Horace Mann

Fitch Ratings downgraded Horace Mann Educators Corp. including cutting its senior debt to BBB+ from A-. The outlook is stable.

Fitch said the action reflects its belief that it will be difficult for Horace Mann's property/casualty operation to return to the significantly better than industry average underwriting performance that it had historically generated.

Fitch had previously viewed the company's superior underwriting results as a key factor supporting Horace Mann's ratings and as evidence that Horace Mann's niche-oriented strategy differentiated it from companies' with similar profiles.

Additionally, Fitch believes that Horace Mann's life and annuity subsidiaries' earnings contribution and surplus growth will be below historical levels due to spread compression on its fixed annuity products, lower levels of separate account assets under management, and the effect of finite reinsurance.

Horace Mann's debt rating is supported by its diversified earnings stream and good GAAP basis operating earnings-based fixed charge coverage that Fitch anticipates will exceed 9 times in 2004. Horace Mann's debt rating also reflects its moderate financial leverage measured by its debt-to-capital ratio which is expected to approximate 25%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.