S&P cuts AirGate PCS, on watch

Standard & Poor's downgraded AirGate PCS Inc. including lowering its $300 million senior subordinated discount notes due 2009 to C from CC and put it on CreditWatch negative.

S&P said the actions are based on AirGate's proposed financial restructuring plan, which includes an offer to exchange all of its outstanding $300 million 13.5% senior subordinated discount notes due 2009 for $160 million of new 9.375% senior subordinated secured notes due 2009 and new shares of AirGate PCS common stock estimated to be about $35 million based on pricing at Sept. 24.

The deal also proposes a prepackaged Chapter 11 reorganization plan that would be executed if at least 98% of bondholders do not consent to the exchange offer.

Because the consideration being offered by the company in exchange for the existing debt represents a discount to its accreted value, S&P said it will view completion of the deal as a distressed exchange and tantamount to a default on the original debt issue terms. The company's intent to execute a prepackaged Chapter 11 reorganization in order to effect the exchange offer increases the distressed characteristics of the transaction.

Upon completion of the exchange offering, AirGate PCS's corporate credit rating will be lowered to SD, denoting a selective default, and the subordinated debt rating will be lowered to D.

Post restructuring, it may be challenging for AirGate's corporate credit rating to be rated higher than the CCC category, S&P said.

First, despite the modest deleveraging effect of the exchange offer, the company is expected to continue having a weak financial risk profile characterized by aggressive leverage and limited liquidity.

Second, there are still substantial execution challenges relating to a subscriber base that has about 30% sub-prime credit customers and longer-term competition from better-capitalized competitors.

Third, AirGate does not own spectrum licenses.

S&P upgrades Allied Holdings senior unsecured, raises outlook

Standard & Poor's upgraded Allied Holdings Inc.'s $150 million 8.625% senior notes due 2007 to B- from CCC+, confirmed its corporate credit at B and raised the outlook to stable from negative.

S&P said the outlook revision reflects recent favorable developments including implementation of various cost reduction initiatives, ratification of labor agreements with the U.S. and Canadian Teamsters unions and amendment of the company's bank agreement, which improved liquidity.

The upgrade on the company's $150 million senior unsecured notes to one notch below the company's corporate credit rating reflects the decrease in the outstanding secured debt that would rank ahead of senior unsecured creditors in the event of bankruptcy.

Allied Holdings's ratings reflect its weak financial flexibility, aggressively leveraged capital structure and concentrated end customer base, S&P said. Allied's dominant position as the largest North American motor carrier of new vehicles and improving operating performance partially offsets these negative credit aspects.

Although Allied's specialized fleet delivers approximately 60% of new vehicles in North America, it faces intense competitive pressure on the rates it charges because of competition from other specialty carriers for short-distance trips and major railroads for long-distance trips. The company also faces continued pricing pressure from the large auto manufacturers, which represented 87% of 2002 revenues, S&P added. In addition, revenues for 2003 have been negatively affected by reduced automobile production levels, a shift in mix toward larger vehicles, and higher fuel prices.

Financial flexibility is constrained because of Allied's small equity base (approximately $10 million as of June 30, 2003) and lack of unencumbered assets, although availability under the company's revolver is adequate for near-term operational and financing needs, S&P said. Although debt levels have decreased, the company still has a highly leveraged balance sheet, with lease-adjusted debt to capital of 95.6% at June 30, 2003, because of debt-financed acquisitions in 1997 and 2000 and losses incurred since 2000. This ratio is not expected to improve significantly in the near term.

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