S&P cuts Allegheny Energy

Standard & Poor's downgraded Allegheny Energy Inc. and kept it on CreditWatch with negative implications, affecting $5 billion of debt. Ratings lowered include Allegheny Energy's senior unsecured debt, cut to B from B+, Allegheny Energy Supply Co. LLC's senior unsecured debt, cut to BB- from BB, West Penn Power Co.'s senior unsecured debt, cut to BB- from BB, Monongahela Power Co.'s senior secured debt, cut to BB+ from BBB-, and senior unsecured debt, cut to B from B+, and Potomac Edison Co.'s senior secured debt, cut to BB+ from BBB-, and senior unsecured debt, cut to B from B+.

S&P said it lowered Allegheny Energy because it expects the company's consolidated funds from operations to interest coverage will be closer to 2x coverage for 2003 and 2004, substantially weaker than previously anticipated.

This is largely due to higher interest costs associated with likely refinancing actions and other restructuring charges, S&P added.

The rating remains on CreditWatch negative because the company still has not completed its negotiations with the lenders on the terms of the new credit facility that is intended to address the current liquidity crisis, S&P added.

S&P rates TRW notes B+, loan BB

Standard & Poor's assigned a B+ rating to TRW Automotive Acquisition Corp.'s planned $1 billion senior notes due 2013 and $400 million senior subordinated notes due 2013 and a BB rating to its planned $900 million term B bank loan due 2011. The outlook is stable.

Proceeds from the debt issues will be used to finance the purchase of TRW Automotive by Blackstone Group LP from Northrop Grumman Corp.

The ratings reflect TRW Automotive's average business profile as a leading provider of automotive systems, combined with a below average financial profile, characterized by a heavy debt load and below average cash flow protection, S&P said.

The company's average business profile reflects its leading market positions, strong technical capabilities, moderate growth prospects, and good diversity within the automotive industry, S&P noted. TRW Automotive was a leader in the development of four-wheel and rear-wheel antilock brake systems and, more recently, electrically assisted steering, vehicle stability control, and radar-based cruise control.

These products have above average growth prospects because they improve vehicle performance, safety, space utilization, and fuel economy, which are key concerns of vehicle manufacturers and consumers, S&P noted. Competition, however, is intense, with several large companies investing in the high value-added areas of electrically assisted steering and braking. TRW Automotive is one of the top three leading global providers of antilock brake systems, foundation brakes, steering systems, occupant restraint systems, and engine valves, which together account for about 61% of the company's revenues.

TRW Automotive's business profile is constrained by the competitive and cyclical nature of the automotive industry, S&P said. Despite soft economic conditions, vehicle sales and production were strong during 2002, supported by manufacturer incentives and low interest rates.

The outlook for 2003 is uncertain as the possibility of war, fragile consumer confidence, and the robust demand of the past three years could result in soft sales and reduced production.

TRW Automotive will have high financial risk, with pro forma debt (including securitized accounts receivable and capitalized operating leases) to EBITDA (excluding pension income) of about 3.4x, S&P said. Cash flow protection is below average, with pro forma funds from operations to debt of 14%.

Although niche acquisitions are possible, TRW Automotive is expected to gradually reduce debt leverage, S&P said. The company's credit statistics should improve, with debt to EBITDA averaging 3x-3.5x, funds from operations to debt averaging 15%-20%, and EBITDA interest coverage averaging 3.5x through the economic cycle.

Moody's rates TRW notes B1, B2, loan Ba2

Moody's Investors Service assigned a B1 rating to TRW Automotive Acquisition Corp.'s planned $1.0 billion of guaranteed senior unsecured notes maturing 2013, a B2 rating to its $400 million guaranteed senior subordinated unsecured notes maturing 2013 and a Ba2 rating to its new $500 million guaranteed senior secured revolving credit facility maturing 2009, $410 million guaranteed senior secured term loan A maturing 2009 and $900 million guaranteed senior secured term loan B maturing 2011. The outlook is stable.

The ratings were assigned in conjunction with the pending acquisition of substantially all assets and the assumption of certain liabilities of TRW Automotive (currently a wholly-owned subsidiary of Northrop Grumman Corp.) by an entity controlled by affiliates of The Blackstone Group LP. Total purchase consideration (including assumed debt) for TRW Automotive is $4.725 billion, which represents an approximately 4.8x multiple of the company's 2002 estimated cash EBITDA.

Moody's said the rating reflect TRW Automotive's moderate pro forma EBIT interest coverage; weak pro forma EBIT return on assets, high pro forma leverage relative to both EBITDA and capitalization measures (both before and after considering the $600 million seller note as debt); and declining historical operating margin trends up through 2001 which then stabilized in 2002.

Moody's noted TRW Automotive's low average content per vehicle relative to that of many other leading Tier 1 suppliers, which has potential for greater ongoing susceptibility of the company's operating margins to price compression efforts by the company's automotive OEM customer base.

While TRW Automotive is nearing completion of several years of extensive restructuring and cost cutting programs that are expected to enhance future margin performance, the company's margins and fixed cost absorption remain vulnerable to downtrends or erratic movements within both the automotive industry and the general economies within TRW Automotive's global markets, Moody's said.

Positives are TRW Automotive's large critical mass; status as a major Tier I automotive supplier globally; #1 or #2 global market shares for the vast majority of its niche product lines; extensive platform and geographic diversity; strong book of business with most of the company's projected near-to-intermediate-term revenues already under contract; and status as a value-added supplier of technologically-oriented active and passive vehicle safety systems. No single customer currently accounts for more than 20% of the company's approximately $10.6 billion revenue base and future growth is anticipated to occur at a faster rate among the company's smaller foreign OEM and transplant customers.

TRW Automotive's pro forma debt protection measures for the twelve months ended September 30, 2002 are estimated as follows, based upon amounts presented within the offering memorandum for the notes: total debt/adjusted EBITDA, before and after including the $600 million seller note as debt, are estimated at 3.5x and 4.1x, respectively; adjusted EBIT/cash interest is estimated at 2.1x, and the adjusted EBIT return on assets is estimated at 5.7%, Moody's said.

Moody's raises Lennar to investment grade

Moody's Investors Service upgraded Lennar Corp. including lifting its senior ratings to investment-grade. Ratings affected include Lennar's $272 million 7.625% senior notes due 2009, $303 million 9.95% senior notes due 2010, $267 million accreted amount 3.875% zero-coupon convertible senior debentures due 2018 and $392 million term loan B due 2007, raised to Baa3 from Ba1 and its $242 million accreted amount 5.125% zero-coupon convertible senior subordinated notes due 2021, raised to Ba2 from Ba3. The outlook is changed to stable from positive.

Moody's said the upgrade reflects Lennar's improving financial results and profile, long and consistent history of revenue and earnings growth, strong liquidity, successful track record in integrating acquisitions, diversification, large equity base, and significant management ownership.

At the same time, the ratings consider the financial and integration risks that accompany an active acquisition policy, ongoing share repurchase program, substantial off-balance sheet joint venture and partnership debt, and larger-than-industry-average lot position.

Going forward, the ratings outlook will depend largely on Lennar's capital structure discipline, Moody's said, adding that it would view positively the company's continuing reduction in debt leverage.

Any transaction or action that may have a significant adverse effect on debt leverage would be viewed negatively.

Moody's believes that the capital base of an investment-grade company cannot be subject to management actions that decapitalize or unduly stress the balance sheet.

After boosting its leverage ratios to 62% (debt/cap) and 2.8x (pro forma debt/EBITDA) at the time of the U.S. Home acquisition and making numerous smaller subsequent acquisitions, Lennar lowered its debt leverage to 42% and 1.5x as of the fiscal year ending Nov. 30, 2002, Moody's said.

Moody's raises MDC to investment grade

Moody's Investors Service upgraded MDC Holdings, Inc. to investment grade including raising its $175 million 8.375% senior notes due 2008 and $150 million 7% senior notes due 2012 to Baa3 from Ba1. The outlook was changed to stable from positive.

Moody's said the upgrade reflects MDC's success in diversifying its profit base away from Colorado, its consistent generation of some of the strongest financial ratios within the homebuilding industry, its conservative accounting and cautious land position, the strong, largely organic growth rate, the growing equity base, and significant management ownership.

At the same time, the ratings incorporate the company's still large concentration in the Colorado market, its smaller equity base relative to those of its peer group, the intense competition it faces in each of its markets, and the cyclical nature of the homebuilding industry, Moody's said.

In addition, the ratings reflect the rapid expansion in new and existing markets, which is leading to an unaccustomed debt build up.

Further, Moody's said it believes the possibility exists that the senior notes due 2008 may be refinanced, which would lead to the absence of any provisions in its remaining note indentures that would protect note holders against a potential decapitalization.

Like the rest of the homebuilding industry, MDC faces intense competition in each of its markets. Although still number one overall in Colorado, the company is no longer number one in Denver, Moody's said.

Although it is still likely to maintain one of the industry's strongest balance sheets going forward, MDC is adding to its debt levels to fund its rapid expansion in faster growing existing and newer markets. As a result, leverage is likely to increase from its three-year average of 28% (debt/cap) and 0.9x (debt/EBITDA) to 35-40% and above 1.25x, respectively, in 2003.

Moody's rates Houghton Mifflin notes B2, B3, loan Ba3

Moody's Investors Service assigned a B2 rating to Houghton Mifflin Co.'s planned $250 million senior unsecured notes, a B3 rating to its $400 million senior subordinated notes and a Ba3 rating to its new $575 million of senior secured facilities and confirmed the company's existing $275 million senior notes at Ba3. The outlook is stable. The action ends a review for possible downgrade.

Moody's said the ratings incorporate the challenges associated with the leveraged buyout of the company from Vivendi Universal. The purchase price is $1.7 billion or 9.3 times EBITDA after plate capital expenditures (which Moody's said is closer to its view of operating cash flow).

Moody's said it believes that the inherent stability of the business helps support the consequent high leverage.

The ratings reflect Houghton Mifflin's moderate cash flow coverage of interest after plate and other capital expenditures, the lack of meaningful free cash flow before 2005; high fixed cost nature of the business and the mature stage of Houghton Mifflin's existing properties, Moody's said. Also incorporated in the ratings are the company's vulnerability to the current weak economic environment and its effect on state and local educational spending (although offset somewhat by positive education trends set by the federal government); the competitive operating environment (its three primary peers are better capitalized); exposure to paper price fluctuations and the seasonal and cyclical nature of educational publishing.

Positives include the company's long operating history and sizable market share in its each of its textbook niches (Reading, English, Spelling K-6; Math and World Languages 7-12; College introductory courses), and, albeit its much smaller, but strong back list at the company's trade publications division (including, Lord of the Rings, Curious George, etc.).

Moody's said it also values the company's significant brand recognition, product diversity, meaningful stability (7 year cycles, high renewal rates), long relationships and associated barriers to entry.

Pro forma for the transaction and as of Dec. 31, 2002, Houghton Mifflin's leverage is high -revenues about equal to total debt and combined debt-to-EBITDA-less plate CapEx of about 6 times, Moody's said.

S&P rates Houghton Mifflin notes B, loan BB-

Standard & Poor's assigned a B rating to Houghton Mifflin Co.'s planned $250 million senior unsecured notes due 2011 and $400 million senior subordinated notes due 2013 and a BB- rating to its new $250 million term B bank loan due 2009 and $325 million revolving credit facility due 2008. The existing $125 million 7% senior secured notes due 2006 were confirmed at BB-. The outlook is stable.

S&P said the senior and the senior subordinated notes are rated the same due to the large amount of secured debt and operating liabilities relative to total assets.

S&P said Houghton Mifflin's ratings reflect the company's strong business position in the educational publishing industry and stable operating performance, offset by financial risk resulting from the December 2002, $1.66 billion leveraged acquisition of the company by Thomas H. Lee Partners LP, Bain Capital Partners LLC and the Blackstone Group.

Operating performance and EBITDA margins have been relatively stable due to increased sales to adoption states, S&P said. Adoption states make textbook selections and purchases on a statewide basis through long-term contracts and programs ranging from five to eight years. The company remains dependent on the kindergarden-12th grade market, which accounts for two-thirds of its EBITDA. The company's college, educational testing, and trade and reference divisions provide some operating diversity.

The purchase of Houghton Mifflin was financed with $615 million of equity and about $1.0 billion in debt. Pro forma EBITDA after amortization of capitalized plate costs divided by interest expense was 2.3x for the 12 months ended Sept. 30, 2002, S&P said.

The company has higher leverage and remains smaller than its peers, which could put it at a competitive disadvantage, S&P added.

S&P cuts Crown Castle three notches

Standard & Poor's downgraded Crown Castle International Corp. and removed it from CreditWatch with negative implications. The outlook is negative. Ratings lowered include Crown Castle's $125 million 9.5% senior notes due 2011, $150 million 10.625% senior discount notes due 2007, $180 million 9% senior notes due 2011, $260 million 11.25% senior discount notes due 2011, $300 million 10.375% senior discount due 2011, $450 million 9.375% senior notes due 2011 and $500 million 10.75% notes due 2011, cut to CCC from B, and $200 million 12.75% senior exchangeable preferred stock, cut to CCC- from CCC+, and Crown Castle Operating Co.'s $300 million term loan bank loan due 2007, $400 million term loan bank loan due 2008 and $500 million reducing revolver bank loan due 2007, cut to B- from BB-.

S&P said the downgrade is due to concerns that weak tower industry fundamentals will make it unlikely Crown Castle will reduce its heavy debt burden in the foreseeable future and contribute to increased liquidity risk starting in 2004.

The company used substantial debt in the past several years to acquire and build towers with the anticipation that steep growth in cash flows resulting from strong carrier demand for towers would help to quickly deleverage, S&P said. With wireless carriers projected to limit tower-related spending at least through 2004 due to capital constraint, flattening demand for wireless services, and availability of additional spectrum capacity resulting from recent network upgrades, the expectation that Crown Castle would be able to achieve substantial debt reduction through increased cash flows has become unrealistic.

Based on assumptions of low-single-digit revenue growth, moderate expansion in EBITDA margin, less than $150 million in annual capital expenditures, and substantially increased interest and dividend payments starting from late 2003 due to two debt issues and an exchangeable preferred stock becoming cash pay, S&P said it projects that the company will not be in a position to generate sustainable free cash flows and start to reduce debt for several years.

Deleveraging is also made more difficult by covenants that limit the ability to upstream cash from two subsidiaries, Crown Castle UK Ltd. and Crown Castle Atlantic Holding Co. LLC, which generate moderate free cash flows. As a result, while consolidated debt-to-annualized EBITDA leverage was about 9.9x at the end of the third quarter of 2002, the ratio increases to about 17x excluding CCUK and Crown Atlantic.

Fitch cuts FertiNitro

Fitch Ratings lowered FertiNitro Finance Inc.'s $250 million 8.29% secured bonds due 2020 to CC from CCC and kept them on Rating Watch Negative.

Without a definitive source of external liquidity, Fitch believes that default on the FertiNitro bonds is probable in the near term, Fitch said.

The rating downgrade reflects the higher degree of uncertainty in FertiNitro's ability to fully cover its upcoming $44 million debt service payment in April, Fitch explained. Since late last year, FertiNitro has been in discussions with its lenders and sponsors on alternatives to address the project's worsening financial situation, which has greatly diminished the project's liquidity.

In addition, the ongoing national strike in Venezuela that has significantly curtailed PDVSA's operations has further eroded FertiNitro's cash balances, Fitch said. FertiNitro relies on PDVSA for its gas feedstock. Due to the prolonged national strike, FertiNitro has been shutdown since mid-December.

S&P says Delta unchanged

Standard & Poor's said Delta Air Lines Inc.'s ratings are unchanged including its corporate credit rating of BB with a negative outlook after the company reported a fourth-quarter 2002 net loss of $363 million (including $133 million of special charges) and a much-higher-than-forecast $1.6 billion after-tax pension charge.

The loss before special items was broadly in line with expectations, and is likely to rank somewhere in the middle of results reported by peer airlines, S&P said. Delta managed to generate positive operating cash flow and fund cash capital expenditures in the quarter.

Management forecasts a first quarter 2003 net loss and will generate operating cash flow only with the aid of an expected $300 million tax refund at the end of March, and assuming no material damage from any U.S.-Iraq war in that quarter, S&P added.

The $1.6 billion after-tax pension charge was more than double the previous estimate of $700 million-$800 million charge, due to the unfortunate timing of measuring pension asset values and the discount rate at Sept. 30, 2002 (the prior estimate was based on July 1, 2002, data). Delta is converting its non-contract employee pension benefits to a cash balance basis from defined benefits plans, which should limit future expenses somewhat.

The charge pushed lease-adjusted debt to capital up to 94%, as calculated by Delta. Liquidity remains fairly good, with $2 billion of unrestricted cash and a $500 million undrawn secured bank line with no financial covenants, due August 2003, S&P added.

S&P rates Eco-Bat bonds B+

Standard & Poor's assigned a B+ rating to Eco-Bat Technologies plc's planned €185 million bonds due 2013. The outlook is stable.

S&P said the senior unsecured debt rating is one notch below the company's long-term credit ratings, reflecting the existence of a secured bank debt line.

S&P said its ratings on Eco-Bat reflect the group's below-average business profile and its aggressive financial profile.

S&P noted it is likely that lead batteries will continue to be used in vehicle ignition because of their durability and favorable price-to-weight ratio. Owing to quality improvements, however, the average life of lead batteries is increasing, which exposes Eco-Bat to risk of a slowdown as the replacement market accounts for about 80% of the group's revenue. Trends such as the gradual increase in car population and the rise in proportion of diesel engines, which require a battery with a higher lead content than petrol driven cars, are favorable to Eco-Bat.

In the first quarter of 2003, Eco-Bat plans to acquire two lead recycling plants in the U.S. from its sister company RSR Corp. After the acquisition, Eco-Bat will still be a small company focused on a limited number of niche products and dependent on a small number of large customers, S&P said. Eco-Bat has, however, demonstrated a track record of profitable growth by acquisition in a very difficult environment where most of its competitors are either loss-making or bankrupt.

Moody's lowers AmeriCredit outlook

Moody's Investors Service lowered its outlook on AmeriCredit Corp. to negative from stable and confirmed its senior debt at Ba2.

Moody's said the outlook change reflects its mounting concern about AmeriCredit's worsening asset quality trends and their potential affect on the firm's liquidity and financial flexibility, increased uncertainty surrounding its future competitiveness given its slower asset growth, and the extent to which these factors could negatively affect the firm's profitability.

Moody's had expected AmeriCredit's asset quality to remain weak during the second half of 2002, and this had been reflected in its rating and outlook.

However, AmeriCredit has experienced surprisingly high losses as a result of both frequency of default and severity of loss, Moody's said. The increase in default frequency relative to expectations raises some questions about the firm's ability to predict and control its borrower quality.

Based on a revised credit quality outlook, it is also likely that some of AmeriCredit's securitization transactions will breach their performance triggers sooner than had been expected, and the breach's duration could exceed prior expectations, Moody's added. These events would cause securitization cash flows to get trapped and could put additional strain on the company's financial flexibility.

S&P puts AmeriCredit on watch

Standard & Poor's put AmeriCredit Corp. on CreditWatch with negative implications.

Ratings affected include AmeriCredit's $175 million 9.25% senior notes due 2009 and $200 million 9.875% senior notes due 2006 at BB-.

S&P cuts Durango

Standard & Poor's downgraded Corporacion Durango SA de CV including cutting its corporate credit rating to SD from CC and its $175 million 13.75% notes due 2009 to D from CC. Other bonds remain at CC.

S&P said the action follows Durango's missed interest payments on its $175 million 13.75% senior notes due 2009. S&P does not expect payment within the 30-day grace period.

S&P said there is high uncertainty regarding timely payment of coupons on the other bonds.

S&P rates Levi Strauss loan BB

Standard & Poor's assigned a BB rating to Levi Strauss & Co.'s $375 million revolving credit facility due 2006 and $375 million term B bank loan due 2006 and confirmed its existing ratings including its senior unsecured debt at BB-. The outlook is stable.

S&P said the bank loan is rated one notch higher than the corporate credit rating. The collateral package includes substantially all of the company's domestic assets, all of the capital stock of domestic subsidiaries, and 65% of the capital stock of foreign subsidiaries. The facilities are also guaranteed by the company's subsidiaries, and the guarantees are of payment, not of collection.

S&P said it applied an enterprise value scenario that assumed a severely stressed cash flow for Levi Strauss and capitalized the company at a distressed multiple. Under this scenario, the distressed enterprise value of the company would be more than sufficient to cover a fully drawn loan facility.

Alternatively, significant downward adjustments were made to the values of accounts receivable and inventory (as well as to property, plant, and equipment) to reflect the stresses inherent in a default scenario. S&P's assessment of the value of the company's collateral package supports full recovery of the loan facility if a payment default were to occur. Furthermore, the security interest in substantially all the company's assets offers reasonable prospects for full recovery of principal.

S&P said it expects credit measures for the fiscal year ended Nov. 24, 2002, to be weak, with lease-adjusted total debt to EBITDA in the 4.0x-4.5x range and adjusted EBITDA interest coverage of about 2.5x.

S&P added that it expects Levi Strauss to continue to spend to support its new mass-market initiative. Due to the additional working capital requirements and inventory investment to support the new initiative, S&P expects credit protection measures to remain relatively unchanged in the near term.

S&P cuts Alaska Communications

Standard & Poor's downgraded Alaska Communications Systems Group Inc. and removed it from CreditWatch with negative implications. The outlook is negative. Ratings lowered include Alaska Communications Systems Holdings Inc.'s $150 million tranche A loan due 2006, $150 million tranche B bank loan due 2007, $160 million tranche C bank loan due 2007 and $75 million revolving credit facility bank loan due 2006, all cut to BB- from BB, and $150 million 9.375% subordinated notes due 2009, cut to B from B+.

S&P said it lowered Alaska Communications because of competitive pressure that has materially weakened the company's business profile, impaired operating performance, and resulted in credit measures that have not met S&P's expectations for the ratings.

Alaska Communications' business risk profile has declined as the company has lost local retail access lines to competition that has taken advantage of regulated low unbundled network element loop rates in the company's key markets, S&P said, adding that it is concerned that, absent regulatory changes, competitive pressure could continue to weigh on Alaska Communications and limit credit measure improvement, amid the weak economy.

Revenue and profitability have also been hurt by the weak economy and expenses and delays in implementing a five-year, State of Alaska telecommunications services contract that became effective in the second quarter of 2002, S&P said. The state contract is for a broad range of services and is expected to generate $18 million in annual revenue, which should make the company's Internet services segment profitable.

However, cash flow benefits from the state agreement may be insufficient to offset further erosion in the local business. Wireless and high margin directory operations provide only marginal additional cash flow diversity and offer limited growth. The unprofitable long distance segment remains a drag on the overall business.

Alaska Communications is managing to deliver modest EBITDA growth with the help of cost savings, S&P said. Credit measures have improved modestly in the past year, with debt to EBITDA now below 5x.

However, given unfavorable regulated rates and competitive pressure, S&P said it believes further improvement may be minimal. Alaska Communications' capital spending needs are high to support business expansion and will be about $75 million in 2002, including $15 million to $20 million to support the company's obligation under the State of Alaska contract.

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