Moody's lowers Houghton Mifflin outlook, rates notes Caa1

Moody's Investors Service lowered its outlook on Houghton Mifflin Co. to negative from stable, confirmed its ratings including its $325 million senior secured revolving credit facility due 2008 and $150 million 7.2% senior secured notes due 2011 at Ba3, $600 million 8.25% senior unsecured notes due 2011 at B2 and $400 million 9.875% senior subordinated notes due 2013 at B3 and assigned a Caa1 rating to HM Publishing Co.'s proposed $150 million senior discount notes due 2013.

Moody's said the ratings incorporate the especially high leverage profile which will result from the proposed note issuance, the deterioration of equity value resulting from the unexpected proposed special dividend, concerns related to the recent changes at the CEO and CFO level, current restraint in state and local educational spending and a highly competitive operating environment.

Moody's said it is concerned that the company has approved a dividend of such magnitude so soon after the equity sponsors acquired the company from Vivendi in January 2003. Although the sponsors contributed a considerable $615 million cash component towards the buyout, Moody's notes further that a special $50 million management fee was paid to the equity sponsor group at closing.

The outlook revision to negative reflects the diminished financial flexibility of the company pro forma for the proposed note issuance and, more importantly, the planned special dividend to shareholders. Moody's correspondingly has heightened concerns about the company's ability to return to a more reasonable leverage profile, particularly given that net proceeds from the offering will neither be used to reduce financial leverage nor to enhance operational capacity. On the contrary, leverage will rise to approximately 7 times EBITDA after prepublication expense from approximately six times at present. With such high post-closing leverage, the company's ratings are considerably more pressured than they have historically been.

Moody's said it will likely downgrade Houghton Mifflin's ratings if it is unable to track a reduction of leverage to less than six times by year-end 2005.

Ratings are supported, nonetheless, by the dependable (albeit cyclical) pattern of educational text spending, and the company's ability to maintain market share, especially in the core disciplines of Reading, English, Spelling K-6, and Math and World Languages 7-12, against better capitalized competitors, including Harcourt, McGraw Hill and Pearson.

Proceeds from the proposed senior discount notes will be used to effect a special dividend to Houghton Mifflin's owners, including Thomas H. Lee Partners, Bain Capital, LLC, and the Blackstone Group.

Moody's raises Friendly's outlook

Moody's Investors Service raised its outlook on Friendly's Ice Cream Corp. to positive from stable and confirmed its ratings including its $178.7 million 10.5% senior notes due 2007 at B3.

Moody's said the revision is because it expects Friendly's will continue the recent pattern of operating progress and improvements in financial flexibility.

Friendly's could support a higher rating over the medium term if the company continues growing comparable store sales in spite of the overall economy or the weather's impact on sales, carrying out remodels with a high return on investment, and improving financial flexibility, Moody's said. However, a protracted spike in dairy commodity prices, failure to slow down the remodel program in a timely manner if the pace of operating improvement diminishes, or financial difficulties at a significant proportion of franchisees would negatively impact the ratings.

The ratings currently reflect the company's relatively high financial leverage (especially when adjusted for operating lease obligations) and low fixed charge coverage, the competition with financially stronger casual dining competitors and the seasonal nature of ice cream sales and working capital fluctuations.

However, the company's established position in the Northeast and demonstrated ability to grow average unit volumes, in spite of the economic slowdown and a cool summer, support the ratings, Moody's said.

Fixed charge coverage equaled 1.2 times for the twelve months ending June 2003 compared to 0.9 times at the end of 2001, Moody's noted. Current adjusted leverage (lease adjusted debt to EBITDAR) of 5.4 times has remained fairly constant over the previous several years.

S&P rates B/E Aerospace notes B+

Standard & Poor's assigned a B+ rating to B/E Aerospace Inc.'s proposed $150 million senior notes due 2010 and confirmed its existing ratings including its senior secured bank loan at BB and subordinated debt at B-. The outlook is negative.

S&P said B/E's ratings reflect risks associated with difficult conditions in the airline industry (the company's primary customer base), high debt levels, unprofitable operations, and poor credit protection measures. Those factors are partly offset by BE Aerospace's position as the largest participant in the commercial aircraft cabin interior products market; a leading share of that business on corporate jets; efficient operations; and sufficient liquidity.

The consequences of the Sept. 11, 2001, attacks; a soft global economy; and the impact of SARS and the Iraq war have significantly affected commercial aviation, leading to a decline in air travel, excess capacity, and deep losses by many airlines, especially those in the U.S. As a result, air carriers are conserving cash, deferring refurbishment of cabin interiors, and scaling back deliveries of new airplanes, which has adversely affected aerospace suppliers, including BE Aerospace. Orders and deliveries of business jets, a smaller market for the firm, have also declined significantly, due to lower corporate profits and a sluggish economy.

In response, BE Aerospace has implemented an aggressive cost-reduction program (which is essentially completed) to adjust capacity by closing five (out of 16) production facilities and cutting the workforce by more than 1,400 employees (30% of the workforce), with an additional 100 positions to be eliminated by December 2003.

The lower cost structure and some stabilization in the airline industry (there has been some recovery in air traffic from depressed levels in recent months, stemming primarily from the end of the Iraq war and the containment of SARS) should allow a small profit in 2004, after sizable losses in 2002 and 2003.

Credit protection measures will be very weak in the near term, with debt to capital in the 95% area, net debt to EBITDA around 8x, and EBITDA interest coverage about 1.5x, with gradual strengthening likely as the market recovers, S&P said.

Moody's cuts B/E, rates notes B3

Moody's Investors Service downgraded B/E Aerospace including cutting its $250 million 8 7/8% senior subordinated notes due 2008, $200 million 9½% senior subordinated notes due 2008 and $250 million 8 7/8% senior subordinated notes due 2011 to Caa3 from Caa2 and assigned a B3 rating to its proposed $150 million senior unsecured notes due 2010. Moody's upgraded the speculative-grade liquidity rating to SGL-3 from SGL-4. The outlook is stable.

Moody's said the downgrade reflects continued deterioration in B/E's credit fundamentals in 2003 and Moody's expectations that the company will not see significant improvement in its operating margins or free cash flows through at least 2004.

B/E's operations continued to generate negative cash flow through the first half of 2003 (six months ended June 30). On six month revenues of $307 million, the company generated EBITDA of $25 million (8% of revenues), and $44 million (14% of revenues) after adjustments for non-cash items and one-time cash expenses. Cash flow generated in this period were lower than Moody's expected, as the company's gross profit margins were below historical averages.

Moody's notes positively that B/E will have completed its facilities consolidation program by the end of 2003, which should eliminate non-recurring expenses associated with such transitions going forward, while plant capacity should be adequate for current and potential increased future production requirements.

Debt of $787 million as of June 2003 stood at approximately 7.9x trailing 12 months EBITDA (adjusting for non-recurring expenses), Moody's said.

With the issue of the proposed $150 million notes and after paying down the $80 million balance of B/E's current senior secured revolving credit facility, the company's gross debt is expected to increase to about $858 million (net debt, however, will not increase materially), which Moody's estimates to result in leverage of over 8.5x EBITDA by year-end 2003, and is not expected to improve dramatically through 2004. Also, with interest expense expected to increase as the result of the new notes, Moody's expects EBIT-to-interest coverage to remain below 1.0x through 2004.

Moody's said the stable outlook reflects its expectations that the commercial aerospace industry in which B/E competes is currently at its cyclical low-point and that, through both the proposed notes offering and amendments achieved on its senior bank facility, the company's near-term operational prognosis and liquidity are adequate to cover debt service requirements.

The speculative-grade liquidity rating was raised because Moody's believes the company possesses adequate liquidity to meet all operating needs and debt service requirements over the next 12-18 months.

S&P upgrades Dade Behring

Standard & Poor's upgraded Dade Behring Holdings Inc. including raising its senior secured debt to BB from B+ and subordinated debt to B+ from B-. The outlook is stable.

S&P said the actions reflect the steady improvements in cash generation and evident commitment to debt reduction demonstrated by Dade since its 2002 prepackaged bankruptcy.

Moreover, concerns that customers would switch suppliers due to uncertainties about Dade's ultimate fate have not been borne out. Indeed, during this period the company's installed base of diagnostic instruments has grown at a 7% annual rate.

Dade's ratings continue to reflect its short track record of financial prudence, which limits the benefits of its important position as a maker of medical diagnostic equipment, S&P said.

The terms of the bankruptcy allowed Dade to eliminate roughly $700 million of pre-bankruptcy debt, reducing its total debt to about $800 million, including the use of factoring facilities. Since Sept. 30, 2002, the company has reduced net borrowing by some $100 million, S&P said. Currently, lease-adjusted debt to capital of 58% and total debt to EBITDA of about 3.1x indicate a leveraged, but much less aggressive, financial profile. These measures are expected to improve as Dade continues to use free cash flow to reduce debt.

Moody's cuts Universal Hospital, rates loan B1, notes B3

Moody's Investors Service downgraded Universal Hospital Services, Inc.'s senior implied rating to B2 from B1 and assigned a B1 rating to its planned $100 million senior secured revolver due 2008 and a B3 to its planned $250 million senior unsecured notes due 201.. The outlook is stable.\

Moody's said the downgrades specifically reflect the fairly material increase in financial leverage and weaker credit profile of the company following completion of its pending recapitalization.

The ratings reflect the company's high leverage and modest interest coverage, its aggressive financial policies and relatively weak free cash flow generation. The ratings further reflect Moody's concern regarding the recent softness in hospital census and the potential impact that this may have on the company's operating performance.

Mitigating factors in support of the assigned ratings include Universal Hospital's favorable operating performance, its strong market leadership position, the diversity of revenues stemming from a large customer base and favorable demographic trends for the healthcare industry more broadly. Moody's also notes that the company's liquidity position will strengthen considerably following the planned recapitalization.

Moody's anticipates continued moderate growth for Universal Hospital, with operating cash flow continuing to improve. Due to the capital intensive nature of the business and cash needs for growth capital expenditures, free cash flow, which has historically been weak, will likely continue to be minimal. As a result, Moody's does not expect the company to reduce debt in the near term and may increase modestly given the company's interest in acquisitions.

Following the recapitalization, J. W. Childs Associates, L.P. will remain the majority owner, while The Halifax Group will own a minority stake. Pro-forma for the refinancing, debt will increase by about 30% and the credit metrics will weaken fairly materially. Adjusted debt/EBITDAR will climb from approximately 3.8 times, based on results for the 12 months ended June 30, 2003, to about 4.7 times pro forma for the same period. EBITDAR/(interest + rent) will drop from about 2.8 times to 2.0 times.

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