Moody's cuts Reader's Digest to junk

Moody's Investors Service downgraded Reader's Digest Association, Inc. including cutting its senior secured ratings to Ba1 from Baa3. The outlook is negative.

Moody's said the downgrade reflects: declining revenues and profitability; weakened debt-to-EBITDA metrics; limited success to date in rebuilding profitability at its flagship magazine and integrating and expanding new business offerings, like Reiman, QSP and BAF, to drive revenue growth; the need to take restructuring actions to rationalize its cost structure to reflect the challenging operating environment, which will take time to gain any traction; and the need to amend the leverage covenant for existing secured bank facilities in order to provide intermediate-term covenant relief which could be offset by a marginal increase in interest costs and future covenant step downs.

The negative outlook reflects Moody's expectations that: revenues and profitability will remain under pressure, particularly in the international businesses, which account for over 40% of total revenues, and that credit metrics will not improve significantly, and could even deteriorate further over the next 12-18 months.

Moody's expects that the company will successfully amend the financial leverage covenant for its existing secured bank facilities in order to avoid a potential breach at the end of this quarter when it will step down from 3.75x debt-to-EBITDA to 3.25x. Despite the performance declines, the company generates free cash flow and should be able to pay down debt, given it is not buying back shares and Moody's does not expect it to make any acquisitions. This should provide some comfort to the bank group. Should the amendment encounter difficulties, further rating actions will be necessary.

S&P upgrades Stillwater

Standard & Poor's upgraded Stillwater Mining Co. including raising its $135 million 7-year term secured bank loan due 2007, $50 million 5-year secured revolver bank loan due 2005 and $65 million 5-year term secured bank loan due 2005 to BB from BB-.

S&P said the actions followed the company's announcement that it has received the necessary approvals from its stockholders and the Federal Trade Commission to complete its proposed transaction with MMC Norilsk Nickel, whereby Norilsk will acquire a 51% ownership interest in Stillwater through the issuance of 45.5 million new shares of Stillwater common stock in exchange for $100 million in cash and 877,000 ounces of palladium.

The upgrade reflected the expected improvement in Stillwater's liquidity from the cash infusion and the future cash flows that are expected to be generated through the liquidation of palladium inventories provided by Norilsk, S&P said. This will enable the company to complete the required capital investments at its mines needed to reduce its high costs and enhance its weakening profitability levels.

It also incorporates the expected improvement in the company's capital structure as Stillwater is required under its bank credit agreement to apply $50 million of the cash proceeds received from the transaction and 50% of the proceeds from the sale of palladium (received from the Norilsk transaction) to term loan prepayments, S&P said.

Ratings on Stillwater will be limited by the credit quality of its Russia-based parent, which is viewed as a weaker entity because of its high exposure to political risk, low transparency, large social liabilities and limited access to capital markets.

Moody's rates Raytheon Aerospace loan B1

Moody's Investors Service assigned a B1 rating to Raytheon Aerospace LLC's proposed $43 million add-on to its existing senior secured credit facility due 2007 and confirmed its $40 million senior secured revolving credit facility due 2006, $38 million senior secured term loan A due 2006 and $147 million senior secured term loan B due 2007 at B1. The outlook is stable.

The ratings reflect the company's highly levered capitalization, which has increased with the issue of the additional facility, relatively weak coverage provided by the company's balance sheet, and the fact that the company is replacing preferred equity with senior debt soon after their December 2002 re-capitalization and acquisition of Flight International, Moody's said.

Ratings are supported by a continued favorable operating environment in the defense sector, increasing backlog and apparently successful integration of Flight International, which the company acquired in December of 2002.

The stable outlook reflects Moody's expectations that the company will continue to grow its revenue base, improve margin over historical levels and that cash flow generation will increase in the medium term.

After taking into account this transaction, Raytheon Aerospace's leverage will increase modestly. As debt increases from $222 million (estimated balance, as of June 2003) to pro forma $265 million upon closing, leverage will increase from 3.5x estimated last 12 months June 2003 EBITDA to pro forma 4.2x, Moody's said. Interest coverage (EBITDA-CAPEX/cash interest expense) decreases marginally from 5.5x to pro forma 4.7x. Moody's notes, however, that total debt increases relative to total capitalization (from 76% of total capital as of June 2003 to pro forma 90%).

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