Moody's cuts Goodyear to junk

Moody's Investors Service downgraded long-term debt rating of The Goodyear Tire & Rubber Co. to Ba1 from Baa3 and the short-term debt rating to Not-Prime from Prime-3 affecting $2.2 billion of senior unsecured debt. The outlook is negative.

Moody's said it cut Goodyear because it expects the company's recent weak financial performance will continue through 2002 due to flat overall unit demand and an unfavorable shift in sales mix.

Some improvement in the company's financial performance is anticipated in 2002 due to positive pricing initiatives, cost reductions and improved capacity utilization, Moody's said. Nevertheless, cash flow generation will remain constrained until global tire volumes return to more normal demand levels.

Moody's said the outlook is negative because it expects Goodyear will continue to face significant challenges through the intermediate term in restoring more appropriate financial measures for the current rating level.

More specifically, the rating could come under pressure if the company is unable to achieve the full level of expected benefits from restructuring initiatives, Moody's said. Furthermore, the inability to generate top-line growth and increased revenue-per-tire, coupled with a rise in raw materials costs, could also place downward pressure on the Ba1 rating.

Moody's is also concerned about the possibility of increasing cash outlays for Goodyear's substantially under-funded pension plan and potential exposure to ongoing asbestos and product liability litigation.

S&P cuts AT&T Canada

Standard & Poor's downgraded AT&T Canada Inc. and put the notes on CreditWatch with negative implications. Ratings lowered include AT&T Canada's notes, cut to CC from BB and bank facility, cut to CCC+ from BB+. The bank facility remains on CreditWatch with developing implications.

S&P said the action is in response to AT&T Canada's announcement it intends to restructure its public debt through private discussions with bondholders during the next several weeks and the recent Canadian Radio-television and Telecommunications Commission ruling.

The bank facility is on developing watch because the rating could be revised upward to reflect an improvement in AT&T Canada's financial risk profile should the recapitalization be successful.

Moody's rates Kennametal notes Ba1

Moody's Investors Service assigned a Ba1 rating to Kennametal Inc.'s new $300 million senior unsecured notes due 2012. The outlook is stable.

Proceeds from the issue, in conjunction with proceeds from its common stock offering and borrowings under its planned senior unsecured credit facility, will be applied to refinance existing senior unsecured credit facilities, to acquire The Widia Group and for general corporate purposes.

Moody's said the rating considers the challenges to Kennametal's financial performance posed by the integration of its J&L industrial supply business and by cyclical pressures on its three other business segments, metalworking, advanced materials and integrated supply.

While management is now planning for the integration of The Widia Group, which will expand its presence in Europe and provide a presence in India, Moody's said it recognizes that there will be integration risks associated with this acquisition.

However Moody's noted that Kennametal is a leader in the metalworking industry worldwide.

Management has implemented both manufacturing and administrative efficiencies intended to realign its cost structure and is in the process of realigning its capital structure, the rating agency added. Furthermore, it has repositioned the business as a tooling solutions provider from a tooling manufacturer and distributor by committing itself to new product development, enhanced marketing and value-added customer services.

At March 31, the company's on-balance sheet debt of $548 million adjusted for off-balance sheet receivables financing of $97 million, represented 3.1 times its last twelve months EBITDA, excluding restructuring charges, Moody's said. This proportion of adjusted indebtedness represents about 44% of Kennametal's capitalization.

The new issue has no financial covenants and will extend Kennametal's debt maturity profile to lower its dependence on short-term bank borrowings, Moody's added.

S&P cuts Satmex

Standard & Poor's downgraded Satelites Mexicanos SA de CV including lowering its $295 million 10.125% notes due 2004 to CCC+ from B- and its $288 million secured credit facility due 2003 to B from B+. The outlook is negative.

S&P said the action reflects Satmex's high debt couple with declining revenues and cash flows and the loss of a significant client, Innova S de RL.

Innova was responsible for 19% of Satmex's revenues in 2001, S&P noted, adding that the loss comes at a time when several new telecommunications clients are facing financial problems and have canceled their contracts.

S&P rates Workflow notes B+

Standard & Poor's assigned a B+ rating to Workflow Management, Inc.'s planned $170 million senior secured notes due 2009. The outlook is stable.

Proceeds of the notes will be used to refinance the company's existing credit facility and for general corporate expenses.

S&P said the ratings reflect Workflow Management's small cash flow base and discretionary cash flow levels and the highly fragmented and competitive nature of the print industry.

Somewhat offsetting the negatives are the company's diversified customer base, its good position in the print outsource management service segment and relatively stable revenue growth, S&P added.

Profitability was affected by the Sept. 11 terrorist attacks and the anthrax scare in the fall of 2001, S&P said. Roughly one-third of the company's revenues are generated from the New York City tristate area and one-third of its revenues are derived from direct mail and envelopes. Following these events, the company closed several facilities and laid off employees.

Despite these events, the company generated revenue growth of 4.1% for its fourth quarter, ended

April 2002, S&P said. While fourth quarter EBITDA margins for its print division declined to 8%, from 10.8% last year, its margins for its solutions division increased to 6.6%, from 4.9% last year.

Margins are expected to improve as the company continues to expand its Workflow solutions division and as the economy recovers and demand for print products and services increases, S&P added.

Fitch rates M/I Schottenstein loan BB, notes B+

Fitch Ratings assigned a BB rating to M/I Schottenstein Homes Inc.'s $315 million revolver and a B+ to its $50 million senior subordinated notes due August 2006. The outlook is stable.

The revolver matures in March 2006. At the end of the first quarter, $219 million was available under the revolver.

Ratings reflect the company's "healthy financial structure", solid coverage, strong operating performance, potential for leverage to increase even though that appears unlikely in the short-term, cyclical nature of the industry, capitalization and size, heavy exposure to the Midwest and moderate bias toward owned as opposed to optioned land, Fitch said.

The company's debt to EBIDTA is 1.5 times and adjusted debt to capital ratio is 35%.

Moody's rates Workflow notes B2

Moody's Investors Service assigned a B2 rating to Workflow Management, Inc.'s planned $170 million proposed senior secured notes due 2009. The outlook is stable.

The ratings reflect Workflow Management's weak balance sheet as evidenced by high financial leverage and a significant level of intangibles, modest free cash flow as a percentage of total pro-forma debt, and thin coverage of interest expense, Moody's said.

The rating agency added that it is concerned about the sustainability of margins given the pressure from virtual pricing inelasticity protecting volume during on-going economic downturn and intense competition.

The ratings also reflect the cyclicality of the underlying print industry and its likely continued pressure on earnings throughout the intermediate term, Moody's said.

The company's current liquidity profile is poor, and execution of the proposed transactions including a new revolving credit facility (unrated) is critical, Moody's added. Liquidity pro-forma for the proposed transactions would improve to adequate with likely modest cushion under proposed covenants addressing minimum EBITDA and maximum capital expenditures.

Positives include the significant level of repeat business at an estimated 95% of total revenue, the company's established and diversified customer base, as well as its ability to manage inventory historically, Moody's said. Also helping is the continuation of favorable trends in the outsourcing industry.

S&P upgrades Hudson Respiratory

Standard & Poor's upgraded Hudson Respiratory Care Inc. including raising its $115 million 9.125% senior subordinated notes due 2008 to CC from D and its $50 million senior secured revolving credit facility due 2004 and $40 million senior secured term loan due 2004 to CCC from D. The outlook is negative.

S&P said the action follows Hudson's payment of interest due in April on its senior subordinated notes and amendment of its credit facility.

Hudson and HRC Holding, its wholly owned subsidiary, issued a total of $20 million of senior unsecured notes to affiliates of Freeman Spogli & Co., the company's majority shareholder. Most of the proceeds were used to make the April interest payment and to reduce Hudson's bank term loan by $12 million, S&P noted.

Financial flexibility for Hudson remains constrained given limited cash and bank resources, S&P added.

S&P raises LIN outlook

Standard & Poor's raised its outlook on LIN Holdings Corp. and LIN Television Corp. to stable from negative and confirmed its ratings including LIN Holdings's senior unsecured debt at B- and LIN Television's bank loan at BB-, senior unsecured debt at B and subordinated debt at B-.

S&P said the outlook revision followed receipt of $402.7 million net proceeds from the initial public stock offering of parent company LIN TV Corp.

Proceeds from the stock offering were used to repay LIN's bank debt and all debt of STC Broadcasting Inc., which was merged into LIN upon the IPO, S&P said.

The new equity improves LIN's financial profile to a level more appropriate for the company at a B+ corporate credit rating, S&P said.

Signs of a strengthening advertising climate, plus the prospect of political ad spending in the rest of 2002 also bode well for LIN, S&P added.

The company has good market positions and greater cash flow diversity with the addition of the STC stations, the rating agency said. However, the company has stated a desire to be a consolidator of middle market TV stations, which could weigh on the financial profile, depending on debt usage.

S&P rates Barnes & Noble bank loan BB

Standard & Poor's assigned a BB rating to Barnes & Noble Inc.'s $500 million secured credit facility due 2005 and confirmed the company's corporate credit rating at BB and subordinated debt at B+.

The facility is secured by contracts, accounts receivable, patents, trademarks, other intellectual property rights and capital stock of certain subsidiaries such as GameStop, which may provide some measure of protection to lenders, S&P said. However S&P added that its simulated default scenario indicated it is not certain that a distressed enterprise value would be sufficient to cover the entire loan facility.

Barnes & Noble's ratings reflect its participation in the fiercely competitive book retailing industry and significant capital requirements resulting from the company's store expansion strategy, S&P said. These factors are offset somewhat by the company's leadership position in book retailing and the success of its superstore format.

During the past few years, the company's superstores have shown steady improvement in store contribution margins and consistently good comparable-store sales growth, S&P noted. Healthy superstore growth, combined with efforts to maximize mall store profitability, should continue to strengthen Barnes & Noble's competitive position.

However, overall profitability has been weakened by the company's entry into game and entertainment software retailing, S&P said. Cash flows from the game business are expected to be volatile due to the vulnerability of the merchandise to shifts in consumer demand and changing technology.

Barnes & Noble's superstores, which account for 69% of total sales, continue to generate good sales. Same-store sales at its superstores increased 2.5% in the first quarter of 2002, 2.8% in 2001, and 4.9% in 2000, S&P said. The company's consolidated operating margin narrowed to 14.4% in the trailing 12 months ended May 4, 2002, from 14.9% in the same period in 2001, a result of lower gross margins in the video game and entertainment business and increased spending by its Readers Advantage members (a frequent customer loyalty program).

S&P keeps Bear Island on watch

Standard & Poor's said Bear Island Paper Company LLC remains on CreditWatch with negative implications. Ratings affected include Bear Island's bank loan at B-, senior secured debt at CCC+ and Bear Island Finance Co. II's senior secured debt at CCC+.

Although Bear Island made its $5 million bond interest payment on June 3 with funds received via a subordinated loan from its parent, Brant-Allen Industries, liquidity remains extremely tight, S&P said.

The company received covenant waivers from its bank group through July 30, 2002, to allow it to resolve the liquidity crisis, S&P added. However, during this period, Bear Island is not permitted to draw on its revolving credit facility.

Even if the waiver were extended, the company would be unlikely to generate sufficient cash from operations to make its December bond interest payment, S&P said.

S&P added that it continues to expect that the company will successfully address the liquidity crisis but said the time frame for a resolution is short, thereby increasing the company's financial stress.

Fitch confirms Del Monte

Fitch Ratings confirmed Del Monte Corporation's senior secured credit facility at BB- and its senior subordinated notes at B. The outlook is stable.

Fitch said its action follows the announcement that Del Monte's parent, Del Monte Foods Co., will merge with certain non-core U.S. assets of Heinz.

Fitch said it views the transaction as a positive, as the product lines of these businesses are highly complementary to DelMonte's.

In addition, Del Monte's management team has a strong record of integrating operations and achieving synergies and cost savings, Fitch said. The new company is expected to achieve operational efficiencies and cost savings of approximately $60 million annually by 2006.

The newly formed Del Monte will assume about $1.1 billion of debt from the businesses spun -off from Heinz and issue Heinz's shareholders 74.5% of its equity. Pro forma credit statistics are debt-to-EBITDA of 3.6 times and EBDITA-to-interest of 2.8x, Fitch said.

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