Moody's cuts Aurora notes

Moody's Investors Service downgraded Aurora Foods Inc.'s $400 million senior subordinated notes due 2007 and 2008 to Caa3 from Caa1 and confirmed its $175 million senior secured amortizing credit facility maturing 2005 and $600 million senior secured amortizing term loans maturing 2005-06 at B2. The senior implied rating was cut to B3 from B2. The outlook is negative.

Moody's said it cut Aurora's notes because of the expectation of lower cash flow in 2002 than previously anticipated, limited free cash flow available to reduce a very high debt burden from past debt-financed acquisitions and tight liquidity.

Aurora took a negative earnings adjustment for about $20 million in the first quarter largely related to understated trade spending in prior periods, reducing the assumed earnings run rate of its business, Moody's noted.

Required debt amortization during the remainder of 2002 is $30 million, which Aurora could be challenged to meet absent additional liquidity and achievement of targeted sales growth/mix and margin improvements during the balance of the year, the rating agency added.

The negative outlook could stabilize with continued liquidity support from lenders and sponsors, along with achievement by Aurora of targeted improvements in cash flow generation, Moody's said. Asset sales that enable debt and leverage reduction also would provide support to the ratings.

Moody's said the credit facilities are rated higher than the senior implied rating because of the large $400 million layer of junior capital from the senior subordinated notes. Although the senior secured credit facilities have heavy collateral reliance on intangibles (66% of total assets at March 31), Moody's said it believes there is sufficient value in the brand portfolio to cover the senior secured debt.

Moody's rates Stone Container notes B2

Moody's Investors Service assigned a B2 rating to Stone Container Corp.'s planned $400 million senior unsecured notes and confirmed the company's existing ratings including its senior unsecured notes at B2 and senior secured bank debt at Ba3. The outlook is stable.

Moody's said the new notes should enable Stone to address all significant debt maturities in 2003, improving its near-term financial flexibility.

However, rising costs of recycled fiber supplies, primarily old corrugated containers, may pressure margins over the near term and delay improvement in the company's operating results, Moody's said.

Stone's parent, Smurfit-Stone Container Corporation, is 29.4%-owned by Jefferson Smurfit Group, which has reached an agreement to be acquired by Madison Dearborn Partners, Inc., a Chicago-based investment firm.

Under Stone's secured bank credit facilities and term loans, a reduction in Jefferson Smurfit's ownership below 20% would result in an event of default, Moody's noted.

Stone is in the process of amending its credit agreements to, among other things, change this provision and the debt ratings anticipate that Stone will be successful, Moody's added.

S&P raises United Stationers outlook

Standard & Poor's raised its outlook on United Stationers Supply Co. to positive from stable and confirmed its existing ratings including its senior secured bank loan at BB and subordinated debt at B+.

S&P said it revised United Stationers outlook because of the company's ability to maintain credit protection measures and generate significant free cash flow despite challenging operating conditions resulting from the weakened U.S. economy.

S&P also believes United Stationers will benefit from cost saving initiatives initiated in 2001, which could help improve credit protection measures and sustain the generation of free cash flow.

The ratings could be raised over the next 12 months if these measures prove successful, S&P noted.

EBITDA coverage of interest expense measures about 5.0 times, S&P said. Leverage has declined, with total debt to EBITDA measuring 2.2x at the end of fiscal 2001, compared with the 4.0x to 5.0x range in the mid-1990s (figures include the effect of certain off-balance-sheet financing activities, such as accounts receivable securitization and operating leases). The company generated significant free cash flow of $150 million in 2001 through improved working capital management.

Fitch lowers XO bank loan

Fitch Ratings downgraded XO Communications' $1 billion senior secured credit facility to C from CC and assigned a negative outlook. The debt was previously on Rating Watch Evolving. The senior unsecured debt and convertible subordinated notes remain at D.

Fitch said the downgrade reflects the increased risk of default on the senior secured credit facility.

On June 17, XO filed for Chapter 11 bankruptcy protection, as the company failed to reach a restructuring agreement with potential investors, Fitch added.

Concurrent with the bankruptcy filing, XO filed a plan of reorganization that offers two different restructuring scenarios, one which would incorporate the plan previously announced by Forstmann Little and Telefonos de Mexico, and a stand-alone plan, which proposes the conversion of the $1 billion in loans under the credit facility into common equity and $500 pay-in-kind junior secured debt.

Bondholders rejected the plan and were in favor of a plan by Carl Ichan, who proposed putting up $550 million for a 55% stake.

XO is currently attempting to legally enforce the Forstmann deal, but Forstmann claims it can legally exit the deal based on a decline in the value of XO. Should the company be unsuccessful in its attempts to enforce the deal, it will be forced to pursue the stand-alone plan.

The negative outlook reflects the probability of a conversion of the bank debt to equity, which would result in default, Fitch said.

Moody's rates Dave & Buster's notes B2, loan B1

Moody's Investors Service assigned a B2 rating to Dave & Buster's, Inc.'s proposed $165 million seven-year senior secured notes at B2 and its $30 million secured revolving credit facility at B1. The outlook is stable.

Moody's said the ratings reflect Dave & Buster's leveraged financial condition (especially adjusted for operating leases), the intense competition for entertainment dollars particularly given the company's relatively sizable average ticket, and the small store count (since poor performance at a few stores would adversely affect overall results).

Ratings are also limited by the uncertainty in realizing value from important assets (restaurant equipment, leasehold improvements, and entertainment equipment) and the continual capital investment required to update entertainment equipment, Moody's said.

Positives include Dave & Buster's leading niche position in the entertainment industry, the modern condition of the store base and the record of strong openings at all entertainment complexes opened to date, Moody's said.

The stable outlook reflects Moody's expectation that the company will continue the pattern of strong cash flow generation from existing and newly opened stores, keep an adequate liquidity cushion, and modestly improve leverage.

S&P raises Applica's loan to BB-

Standard & Poor's upgraded Applica Inc.'s $205 million senior secured revolver due Dec. 2005 to BB- from B+. In addition, S&P affirmed the company's B+ corporate credit rating and B- subordinated debt rating. The outlook is stable.

"The upgrade of Applica's bank facility to one notch above the corporate credit rating reflects Standard & Poor's assessment of the value of the company's discrete assets collateralizing the credit facility," S&P said. "Important to the analysis, Standard & Poor's considered the assets' potential to retain value over time and in an orderly liquidation under a default scenario. The bank facility is rated one notch above the corporate credit rating based on Standard & Poor's belief that the security interest in the collateral offers reasonable prospects for full recovery of principal if a payment default were to occur."

Ratings reflect leverage, participation in the small household appliance industry that has relatively low margins and intense competitions, strength of the Black & Decker brand name and good cost structure.

For the first quarter ending March 31, EBIDTA was $6.2 million versus $6.6 million in the previous year. For the 12 months ending March 31, EBIDTA coverage of interest expense was 2.3 times and total debt to EBIDTA was 3.0 times.

Fitch keeps CMS on negative watch

Fitch Ratings said CMS Energy and its subsidiaries, Consumers Energy and CMS Panhandle Eastern PipeLine Co., remain on Rating Watch Negative following the announcement that the company has reached an agreement with its lenders to extend a $450 million revolving credit facility through July 12.

CMS is now working on establishing a longer-term financing structure. CMS' financial statements for 2000 and 2001 are being restated following the revelation that revenues and expenses were overstated in those periods due to 'wash trades' in the energy marketing and trading business. The SEC investigation of the 'wash trades' combined with CMS' engagement of Ernst & Young to replace former audit firm Arthur Anderson will likely complicate the refinancing of the expiring bank facility and $100 million of maturities at Consumers in 2002, Fitch said.

While Consumers and Panhandle Eastern are financially sound, the companies' financial condition and credit ratings may be adversely affected by the financial stress of their parent, Fitch commented.

Fitch rates CMS Energy's senior unsecured debt at BB+ and its preferred stock at BB-, Consumers Energy's senior secured debt at BBB+, senior unsecured debt at BBB and preferred stock at BB+, Consumers Power Financing Trust I's trust referred securities at BB+ and CMS Panhandle Eastern Pipe Line's senior unsecured debt at BBB.

S&P says Tesoro ratings unaffected by announcement

Standard & Poor's said Tesoro Petroleum Corp.'s announcement that it intends to reduce debt by $500 million by the end of 2003 through asset sales, job cuts, and reduced capital spending will not immediately affect the ratings or outlook on the company. S&P gives Tesoro a BB corporate credit rating with a stable outlook.

While the announced plan is an acceleration of previously announced debt reduction, S&P said its current rating anticipates debt reduction in line with the announcement.

Despite the announced debt-reduction plan, Tesoro remains vulnerable to sustained periods of weak refining margins due to its high debt leverage, S&P said.

If the company experiences a prolonged period of below-average margins before achieving meaningful debt reduction, S&P said it would likely revise the company's outlook or ratings, or both.

S&P raises Chattem outlook

Standard & Poor's raised its outlook on Chattem Inc. to stable from negative and confirmed its ratings including its subordinated debt at B-.

S&P said it revised Chattem's outlook in response to the company's announcement that it intends to sell 1.8 million shares to the public and apply $38.5 million of the proceeds to reduce debt through the repayment of the bank term loan, with the remainder held as cash.

The additional resources will allow Chattem to pursue its growth strategy within the parameters of the current rating, S&P said.

Financially, lower debt leverage, resulting from the expected repayment of the senior bank debt, will bring about a strengthening of credit protection measures, S&P said. The rating agency anticipates that fiscal 2002 EBITDA interest coverage will exceed 2.5 times, while debt to EBITDA will be in the 4.0x area.

However, S&P said it expects the credit measures will continue to fluctuate given the firm's acquisition orientation.

Moody's cuts Mission Resources

Moody's Investors Service downgraded Mission Resources including cutting its $225 million 10.875% senior subordinated notes due 2007 to Caa1 from B3 and its senior secured $200 million bank revolver to B1 from Ba3. The outlook is negative.

Moody's said downgrade reflects cumulative erosion of asset coverage, production trends, and production potential; higher unit costs and leverage on reserve volumes; and reduced liquidity.

Unit costs (production, G&A, interest, and reserve replacement) may rise again in 2002, production will be lower (before asset sales), and unit cash flow insufficiently covers unit reserve replacement costs and inherent risk, Moody's said.

The Caa1 note rating reflects probable less-than-par asset coverage in a range of scenarios, Moody's commented.

The B1 bank rating reflects substantial secured asset cover of bank debt, which may rise further with new reserve sales to retire bank debt, the rating agency added.

If prices do not support expected EBITDA; production, unit costs, cash flow, or leverage materially worsen; or Mission has not announced a credit-enhancing merger, the ratings may be lowered further in 2002, Moody's said.

S&P cuts Solutia, rates notes BB-

Standard & Poor's downgraded Solutia Inc. put its ratings on CreditWatch with negative implications and assigned a BB- rating to its planned $250 million senior secured notes due 2009. Ratings lowered include Solutia's senior unsecured debt, cut to BB- from BB+, and its bank debt, cut to BB from BB+.

S&P said it downgraded Solutia because of slower-than-expected progress in improvement to its financial profile.

Solutia faces increasing pressure on its liquidity and financial profile due to the continuing delays in addressing near-term refinancing needs, S&P said.

The proposed note issue is Solutia's first step in refinancing its $150 million notes due October 2002 and its bank credit facility, which matures in August 2002, S&P added. However, Solutia is unlikely to complete the refinancing in the next few weeks, as originally expected, thereby increasing the pressure to complete this plan.

S&P said Solutia is on CreditWatch because the ratings could be lowered further if the refinancing is unsuccessful.

Nevertheless, the ratings incorporate the expectation that the refinancing effort will be successful, S&P said. If completed, the ratings will be affirmed and removed from CreditWatch.

Solutia's financial profile has been weakened by the continuation of challenging industry fundamentals, an increase in liabilities and expenditures related to the company's PCB exposure, and slower-than-expected progress in the completion of asset sales, S&P said.

S&P says no change to Milacron

Standard & Poor's said it is making no change to Milacron Inc.'s ratings or outlook in response to news it its selling its North American metalcutting tool subsidiary, Valenite, to Sweden's Sandvik AB for about $175 million. Milacron's corporate credit rating is BB- and the outlook is negative.

S&P called the sale consistent with the company's credit rating and outlook.

In May, Milacron announced the sale of its European and Indian metalcutting tool businesses to Kennametal Inc. for €188 million (about $170 million).

Net cash proceeds from both sales are estimated at $290 million, the bulk of which will be used to repay bank debt, S&P noted.

Reflecting slower-than-expected recovery in Milacron's capital equipment sales, relevant covenants in Milacron's revolving credit facility have been amended through the end of 2002, with further amendments through the first half of 2003 expected prior to the Valenite closing, S&P said.

Revenues and operating earnings are expected to be lower than previously expected, with the company reaching net income break-even by the fourth quarter of 2002, S&P added. Despite adequate near-term liquidity due to around $100 million in cash and the bank covenant waivers, should the current downturn become more prolonged, the ratings could be lowered.

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