S&P cuts Qwest

Standard & Poor's downgraded Qwest Communications International Inc. by two notches and put the company on CreditWatch with negative implications; it had previously been on CreditWatch with developing implications. Ratings lowered include Qwest Communications' senior unsecured debt, cut to CCC+ from B, Qwest Capital Funding Inc.'s senior unsecured notes and senior unsecured bank loan, cut to CCC+ from B, Qwest Corp.'s senior unsecured debt, cut to B- from B+ and LCI International Inc.'s senior unsecured debt, cut to CCC+ from B.

S&P said the action is in response to Qwest's weakened operations, a result of lower than expected performance for its telephone operations in the second quarter of 2002.

The 33% sequential decline in EBITDA in the second quarter was due to a number of factors, including heightened competition and a continued weak economy, S&P said.

Because of its weakened operations, the company revised its operating cash flow guidance for 2002 to between $5.4 billion and $5.6 billion from the previous guidance of between $6.4 billion and $6.6 billion. This was the second revision of guidance for 2002, from the initial guidance of between $7.1 billon and $7.3 billion given in December 2001.

The lower cash flow expectations for 2002 are also attributable to the company's continued relatively high cost structure, despite cost reduction measures implemented in the first half of 2002, S&P added. This cost structure was designed for a much higher level of revenue and concomitant operating cash flow than has materialized. Moreover, performance for the data and IP services business was particularly disappointing for the first half of 2002.

Given current performance expectations, the company anticipates being out of compliance with the third quarter 4.25 times debt-to-EBITDA test under the bank facility at Qwest Capital Funding Inc., absent receipt of amendments or waivers from the banks, S&P said. The company is in negotiations with its bank group to amend its bank facility, including the financial covenants and maturity. In conjunction with these amendments, Qwest has stated that it is seeking a senior secured bank facility of $500 million or more at its directories subsidiary to increase liquidity, the receipt of which is contingent on receipt of the amendments for the existing credit facility.

Although the recently announced agreement for the two-stage sale of the company's directories business for $7.05 billion is a positive development, the negative CreditWatch listing reflects significant concern about future operating performance, as well as the potential for restructuring the public debt, S&P added.

Moody's puts HealthSouth on review

Moody's Investors Service put HealthSouth Corp. on review for possible downgrade, affecting $3.5 billion of debt including its senior notes at Ba1 and convertible subordinated debentures at Ba2.

Moody's said it began the review after HealthSouth announced significant Medicare reimbursement changes in its outpatient rehabilitation business as well as its board-approved plan to perform a tax-free separation of its outpatient surgery center business.

Moody's said the potential cash flow impact from both of these new developments provides significant concern.

However, details surrounding the transaction are uncertain at this time, the rating agency added.

S&P puts HealthSouth on watch

Standard & Poor's put HealthSouth Corp. on CreditWatch with negative implications. Ratings affected include HealthSouth's $568 million 3.25% convertible subordinated debentures due 2003 and $350 million senior subordinated notes due 2008 at BB+ and its $250 million 6.875% senior notes due 2005, $250 million 7% senior notes due 2008, $375 million 8.5% senior unsecured notes due 2008, $200 million 7.375% senior notes due 2006, $400 million 8.375% senior notes due 2011, $1 billion 7.625% notes due 2012 and $1.25 billion senior unsecured revolving credit facility due 2007, all at BBB-.

S&P said the watch placement is in response to HealthSouth's announcement that unforeseen changes in Medicare reimbursement rules may have a significant impact on its EBITDA and cash flow.

Furthermore, the proposed separation of its surgery center division, as a way to isolate that business from now-significant concerns regarding government reimbursement of the outpatient business, has the potential to reduce the size and diversity of its health care revenue streams and contribute to a more risky business profile, S&P said.

Healthsouth announced that it expects to be adversely impacted by a change in Medicare reimbursement for outpatient therapy services, which became effective July 1, 2002, S&P said. Outpatient therapy provided to two or more people at the same time will be reimbursed as group therapy rather than as individual therapy, regardless of whether the patients received the same therapy or not. The company disclosed that this change has the potential to adversely impact EBITDA by $175 million.

HealthSouth may be able to blunt the full impact by implementing various operating changes, S&P said but added that there is a risk of a further negative impact should private insurance companies adopt a similar change with their reimbursement policies.

S&P cuts Wickes

Standard & Poor's downgraded Wickes Inc. and kept its outlook at negative. Ratings lowered include Wickes' $100 million 11.625% notes due 2003, cut to CCC- from CCC.

S&P said its action was in response to Wickes' "marginal liquidity."

Wickes had about $5 million of availability under its revolving credit facility (net of the $25 million minimum availability requirement) as of June 29, 2002, current debt maturities of $10 million, and $64 million of senior subordinated notes that mature in December 2003, S&P noted.

The company has faced a challenging operating environment as lumber price declines have impacted sales and earnings, S&P said. Although Wickes has improved its cost structure in recent quarters, the rating agency said it believes the company will need to obtain additional sources of liquidity to meet its debt maturities through 2003.

S&P cuts Elgin National

Standard & Poor's downgraded Elgin National Industries Inc. and put the company on CreditWatch with negative implications. Ratings lowered include Elgin National's $85 million 11% senior notes due 2007, cut to CCC from B.

S&P noted that as a result of weaker-than-expected cash generation, caused by declining industrial markets and soft coal power plant construction markets in the U.S., there is a high likelihood that Elgin may be in violation of its bank credit agreement at the end of the third quarter on Sept. 30, 2002 and will need to obtain a waiver or amendment.

Should Elgin violate its bank credit agreement, its senior lenders may require the company to restructure its senior debt, which may restrict the company from making its $4.6 million, Nov. 1, 2002, interest payment, S&P said.

Even if the company is able to obtain a waiver or amendment from its lending group, Elgin's debt obligations remain onerous, and its financial flexibility is limited. As of June 30, 2002, Elgin's liquidity was very limited because it had $5.7 million in availability under the company's $23 million revolving credit facility, S&P added.

S&P says Level 3 unchanged

Standard & Poor's said its ratings on Level 3 Communications Inc. are unchanged at CCC for the corporate credit rating with a stable outlook.

S&P's announcement follows Level 3's amendment of its bank agreement.

The financial flexibility afforded by the removal and modification of certain covenants and allowance to pursue acquisitions under the amended agreement is more than offset by the negative impact on liquidity of the reduction in available bank credit to $150 million from $650 million, S&P said. Given poor fundamentals of the long-haul data business and the company's substantial leverage, this reduction in liquidity further erodes Level 3's already limited margin of safety against execution risks.

Moody's cuts Focal Communications

Moody's Investors Service downgraded Focal Communications Corp. including cutting its $124 million senior step-up notes due 2008 and $114 million 11.875% global senior notes due 2010 to Ca from Caa3. The outlook is negative.

Moody's said the downgrade reflects its concern that Focal's operating performance is falling short of the rating agency's earlier expectations and may lead to a near-term prospective breach of its senior secured credit facility covenants and a liquidity position that Moody's expects will face increasing pressure by year-end 2002.

Excluding non-recurring items, Focal's second quarter 2002 revenues exceeded its minimum revenue covenant by less than 2%, Moody's noted. A tight covenant cushion of between zero to 2% is contemplated by management's guidance for the last two quarters of 2002. Focal has not demonstrated positive cash flow results in 2002, yet starting with the first quarter of 2003, the company faces a senior secured leverage test of four times and a total leverage test of 10 times.

The company is presently in discussions with its banks concerning the potential modification of the terms and conditions of its $225 million bank credit facility. Focal is presently in full compliance with the terms of its bank facility.

At the end of June 2002, Focal recorded liquidity of $113 million, comprising $76 million in cash equivalents and $37 million undrawn under its bank facilities, Moody's added. Focal's unrated bank facility is a purchase money facility tied to the purchase of telecommunications equipment and not available to fund the company's working capital requirements.

Moody's estimated that during the second half of 2002 Focal will spend $15 million for capital expenditures and $24 million in interest expense. Accordingly, by year-end 2002 Moody's expects Focal to have sufficient liquidity to support approximately two additional quarters, based upon its existing liquidity and recent burn rate.

Fitch says GenTek bank loan cut to CC, not D

Fitch Ratings said it cut GenTek Inc.'s senior secured bank facility to CC from CCC and its senior subordinated notes to C from CCC-, correcting an earlier announcement in which it said it was cutting the bank facility to D.

Moody's raises Equitable Life

Moody's Investors Service upgraded Equitable Life Finance's subordinated debt to Caa2 from Caa3 and applied a developing outlook.

Moody's said a restructuring of Equitable Life Finance's parent Equitable Life Assurance Society agreed in March removes substantial uncertainty but added that "substantial elements of risk" remain.

During run-off the company needs to prudently manage its solvency through a variety of economic scenarios, the majority of its remaining business are entitled to a fixed guaranteed accrual rate of 3.5% necessitates a matched investment position and active reinvestment policy and there is potential for further external litigation or regulatory intervention, Moody's said.

Moody's upgrades Gala

Moody's Investors Service upgraded Gala Group Holdings plc including raising its £155 million senior unsecured notes to B2 from B3 and Gala Group Ltd.'s £320 million senior secured bank facilities to Ba3 from B1. The outlook is stable.

Moody's said the upgrade recognizes Gala's strong operating performance and success in deleveraging (on a Debt/EBITDA basis) over the past nine months.

For the 12 months to July 6, 2002, Net Debt/EBITDA decreased to 3.3x from approximately 4.3x for the full year ending Sept. 25, 2001, Moody's noted.

Gala's revenue and EBITDA levels have increased consistently over recent quarters while principal payments on the company's senior bank facilities have allowed for a reduction in net debt, the rating agency said. Over the 40-week period ending July 6, 2002, cash flow generated from Gala's businesses allowed the company to reduce net debt levels by approximately £26.4 million.

Moody's raises Euramax

Moody's Investors Service upgraded Euramax International, Inc. including lifting its $135 million 11.25% senior subordinated notes due 2006 to B2 from B3.

Moody's said the upgrade reflects a more favorable outlook for the company's profitability and cash flow as sales among key customers and markets stabilize at higher levels.

In the six years that Euramax has operated as an independent company, it has consistently generated positive free cash flow and retired approximately $135 million of acquisition debt, Moody's noted. Operating improvements and a halt to debt-funded acquisitions over the last two years have further improved the company's debt protection measures. Lastly, liquidity, while currently rather limited, is expected to improve to more comfortable levels over the next several quarters.

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