Moody's cuts Penn Traffic

Moody's Investors Service downgraded The Penn Traffic Co. including cutting its $100 million 11% senior unsecured notes due 2009 to Caa1 from B3. The outlook is negative.

Moody's said the downgrade was prompted by Penn Traffic's unexpectedly poor operating performance since the third quarter of the fiscal year ending Feb. 1, 2003 as evidenced by the May 7,

2003 bank amendment caused by a shortfall in EBITDA as well as the tardy filing of the 10K, the company's diminished financial flexibility as operating cash flow has decreased and Moody's expectation that sales will permanently remain pressured because of increased competition in the company's trade areas.

Moody's said the ratings are constrained by its belief that the competitive environment will require the use of most free cash flow for store remodels and updates over the medium term, the company's recent inability to meet operating and financial targets and the company's exposure to the economic fortunes of a few geographic regions.

Moody's expects operations will perpetually remain challenged due to stiff competition from respected competitors such as Wal Mart (senior unsecured Aa2), Kroger (senior unsecured Baa3), Wegman's and Giant Eagle.

However, the ratings recognize the company's position as the number two supermarket operator in its most important trade areas (Columbus, Ohio, and Syracuse, N.Y.) and the progress that post-reorganization Penn Traffic has already made in renewing its store base.

Operating margin fell to 1.4% for the first nine months of 2002 compared to 2.2% in the same period of 2001 and fixed charge coverage dropped to 1.2 times from 1.4 times, Moody's said. Largely due to the disappointing operating results, lease adjusted leverage grew to 5.3 times for the 12 months ending Nov. 2, 2002 compared to 4.6 times at the beginning of the year.

Moody's cuts Edison Mission Energy

Moody's Investors Service downgraded Edison Mission Energy affecting $5.8 billion of debt including its senior unsecured debt, cut to B2 from Ba3, Midwest Generation LLC's passthrough certificates, cut to B2 from Ba3, Mission Capital, LP's monthly income preferred securities, cut to Caa1 from B2, Mission Energy Holding Co.'s senior secured bonds and senior secured bank credit facility, cut to Caa2 from B3, Edison Mission Midwest Holdings Co.'s bank credit facility, cut to Ba3 from Ba2 and Midwest Funding, LLC's bank credit facility, cut to Ba3 from Ba2. The outlook is negative.

Moody's said the downgrade reflects high consolidated leverage relative to consolidated operating cash flow, the degree of structural subordination throughout Edison Mission Energy and Mission Energy Holding due to the significant amount of debt that exists at many of the projects, a growing reliance on the merchant energy market for a material portion of future revenues and cash flows, the existence of dividend restrictions at virtually all of Edison Mission Energy's projects and at Edison Mission Energy which impede the ability of dividends to flow within the company, limited opportunity for material debt reduction at Edison Mission Energy and Mission Energy Holding from asset sales or equity offerings due to the weak environment for electric asset sales along with the inability of parent company Edison International to issue common stock at this time.

Edison Mission Energy's performance, while improving during the first quarter 2003 and during 2002, remains weak with operating cash flow representing only 7% of total consolidated debt, Moody's said.

Edison Mission Energy's debt is structurally subordinated to more than 60% of consolidated debt, and virtually all of the debt has potential distribution limitations in project level debt agreements which could impact the future level of dividends available to service Edison Mission Energy's debt. For the 12 months ended March 31, 2003, Edison Mission Energy's interest coverage ratio was 2.3x.

S&P keeps Cone Mills on watch

Standard & Poor's said Cone Mills Corp. remains on CreditWatch Negative including its senior secured debt at CCC+.

The original CreditWatch placement reflected Cone Mills' plan to initiate an offer exchanging an equal principal amount of its new notes for any and all of its $100 million notes due March 15, 2005, S&P said. The bondholders will be asked to extend maturities and make other modifications to their agreements.

The proposal to exchange notes was contemplated as part of Cone Mills' overall plan to recapitalize its balance sheet, and it gives current common stock holders the right to purchase up to $27 million of convertible notes, which will bear interest at 12% per year and be convertible into common stock at $1 per share.

The company recently announced, however, that the May 30, 2003, maturity date on its existing revolving credit facility and its senior notes obligations were extended to June 27, 2003.

In a separate development, the company has recently become obligated for other payments. The Nov. 9, 2001, amendment to the company's revolving credit facility contained certain contingent payment rights that were exercisable by the lenders if Cone were unable to refinance its debt prior to Jan. 15, 2003. The lenders have verbally indicated that they would exercise their rights as part of a credit extension. Based on the common stock price during the recent period, the required payment would have been about $4.6 million.

Cone is currently in discussions with its lenders to either defer the exercise date of the payment or reduce the required amount. Cone has also indicated that it will recognize a charge for these contingent payment rights in the June 2003 quarter, S&P said.

S&P cuts Iron Age, on watch

Standard & Poor's downgraded Iron Age Corp. and put it on CreditWatch negative including cutting its $100 million senior subordinated notes due 2008 to CC from CCC- and Iron Age Holdings Corp.'s $25 million senior discount notes due 2009 to CC from CCC-.

S&P said the actions reflect Iron Age's bank covenants violation and liquidity concerns.

Iron Age was in violation of the financial covenants under the company's credit facilities for the first quarter ended April 26, 2003. The company obtained a waiver that will allow Iron Age to operate under the existing requirements of the bank credit facility for 45 days through June 25, 2003.

During this period, Iron Age is required to maintain excess cash availability of at least $3.0 million, S&P noted. As of May 12, the company's cash availability was $3.3 million. Iron Age is currently under negotiations to amend the bank credit facilities.

Operating results for Iron Age continue to be under significant pressure due to overall weakness in the U.S. economy, declining demand for its safety shoes from several of its large customers stemming from plant closings and employee layoffs, the bankruptcy of a key customer, and increased competitive pressure from nationally branded shoe products, S&P said.

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