Moody's rates Service Corp. notes B1

Moody's assigned a B1 rating to Service Corp. International's proposed $300 million of 7.7% senior notes due 2009, which are offered in exchange for holders of its 6% senior notes due 2005.

Also, Moody's confirmed Service Corp.'s existing ratings, including the $345 million senior subordinated convertible notes due 2008 at B.

The outlook was revised to stable from positive, reflecting Moody's moderated expectations with regard to Service Corp.'s sustainable cash flow improvements, asset sales/debt reduction and liquidity.

Importantly, Moody's noted these credit attributes continue to be appropriate for the rating category.

However, Moody's no longer believes that current trends will allow for a ratings upgrade over the next six to 12 months.

Profitability has come under pressure, evident in second quarter results in which Service Corp. reported significantly lower profitability, despite having sold or closed several underperforming operations over the last two years.

In addition, the company has postponed plans to sell its French operations. Moody's said it had anticipated that proceeds from this sale would be used for debt reduction in 2002.

Finally, in July, Service Corp. replaced its original $700 million five-year unsecured credit facility (expired in June) with a three-year $185 million senior secured revolving credit facility. The new facility contains a $125 million sub-limit for letter of credit issuance, of which around $86 million is currently in use.

Readily available liquidity, estimated at around $220 million currently, is sufficient relative to known near-term operating and debt service requirements.

Moody's noted that Service Corp.'s contingent commitments include over $296 million of notional off-balance sheet financing in the form of surety bonds (around $202 million potential funding commitment) and a potential liability resulting from ongoing litigation in Florida related to its cemetery operations.

Moody's said it takes comfort in Service Corp.'s proactive management of debt maturities, which can be met with existing cash balances through 2003, and a consistent drive to add higher margin products.

Service Corp.'s ratings benefit from the fundamentally stable nature of its business, leading market share and geographic diversity, backlog of deferred revenues through pre-arranged contracts and pronounced asset disposition activities to date.

While the company has made significant strides in improving its credit profile, it continues to carry a heavy debt and interest burden as it attempts to stabilize and position its business for long-term growth.

Additional restraints to the rating come from increasing life expectancy and higher cremation rates. Although cremation carries higher profit margins, the absolute dollars are much lower than traditional funeral cases, which is problematic given the high fixed cost nature of SCI's operations, as well as its heavy debt service burdens.

Moody's expects pro forma annual cash flow available for debt repayment of about $135-150 million or around 7% of net debt at quarter end June 2002.

In addition, Moody's notes that at the end of 2004, Service Corp. will no longer be able to post new surety bonds in Florida ($20-30 million negative cash flow impact), will likely face higher effective cash tax rates and need to repay or refinance sizable amounts of maturing debt.

Sustained increases in recurring cash flow, further funded debt reductions/maturity extensions and additional rationalization of its operating structure to support growth would be positive trends for this issuer that could lead Moody's to consider positive rating actions.

Failure to demonstrate sustainable levels of higher cash flow and continued improvements in cost structure and leverage, are factors that could lead Moody's to consider negative actions.

The new senior notes will rank equally with all of Service Corp.'s unsecured debt, will be effectively subordinated to senior secured debt and substantially identical to its existing $200 million 7.7% senior notes due 2009.

In addition to the increased coupon and extended maturity date, the most substantial difference between the new notes and the 6% senior notes due 2005 will be covenants that are more restrictive.

In particular, Moody's notes that the 2009s will limit Service Corp.'s ability to incur liens and sell assets with a secured debt restriction of 10% of consolidated net worth, while the related restriction in the 2005s is 10% of consolidated assets. In effect, this provides a higher level of related covenant protection in accordance with the 1993 debt indenture definitions.

S&P puts Omnicare on negative watch

Standard & Poor's placed the ratings for Omnicare Inc. on negative watch, including the 5% convertible notes due 2007 at BB+, to reflect the impact on credit protection and cash flow measures should it complete the acquisition of NCS HealthCare Inc.

Omnicare has corporate credit and senior bank debt ratings of BBB-.

Omnicare has made a tender offer of $3.50 per share to acquire all the outstanding shares of NCS HealthCare Inc. in a competitive bid against Genesis Health Ventures, whose lower offer has been accepted by NCS.

NCS has about $300 million of debt, which is in default. S&P assumes Omnicare will need to satisfy those debt obligations through some debt financing of its own.

The transaction costs may weaken Omnicare's funds from operations to lease-adjusted debt to below 20%, a level considered weak for an investment-grade company.

Furthermore, the acquisition also involves risk that Omnicare may not be realize the benefits from the acquisition to the extent anticipated by management, S&P said.

S&P cuts Loews ratings

Standard & Poor's lowered Loews Corp. corporate credit and senior unsecured ratings to A+ from AA- and subordinated debt to A from A+. The outlook is stable.

About $2.3 billion of total debt was outstanding at June 30, excluding CNA Financial Corp. and Diamond Offshore Drilling Inc. which are included in S&P'sanalysis on an equity basis.

The downgrades follow S&P's reassessment of the company's business profile which no longer supports a AA category rating, including the reduced market value of two of its key subsidiary holdings, despite Loews' very strong financial profile.

Additionally, S&P said it remains uncertain about the future level of financial support that could be given to insurance subsidiary CNA by Loews, due to CNA's weakened financial performance in recent years and the significant equity contribution made by Loews to CNA in 2001.

The ratings are based on Loews' strong cash flow from its Lorillard tobacco operation, flexibility for future business investments provided by a highly liquid balance sheet and moderate financial investment policies.

Additionally, the ratings incorporate some ongoing financial support of Loews' key insurance subsidiary that is undergoing restructuring efforts to improve its financial and competitive position.

Loews is a diversified corporation that operates the fourth-largest U.S. tobacco company, Lorillard Inc., owns about 90% of CNA Financial Corp. (BBB-/stable/A-3) and 53% of Diamond Offshore Drilling Inc. (A/stable), and is engaged in the operation of hotels and the sale of watches, as well as operation of crude oil tankers.

The value of the company's ownership interests in insurance subsidiary CNA, with an estimated market value of over $4.8 billion, and Diamond Offshore, with an estimated market value of over $1.4 billion, has declined considerably over the past several years, yet provides key support for the rating.

However, S&P only began to factor some implicit support for CNA into its ratings for both Loews and CNA in late 2001. This change in methodology followed Loews' substantial equity contribution to CNA of about $1 billion in 2001 in the form of a rights offering by CNA that increased Loews' ownership in CNA to 89% at the time.

Following several years of weakened operating performance, CNA began to show some signs of improvement in 2002 due to improved pricing, yet the timing of full recovery of this business and restoration of lost market value remains unclear, S&P said.

Loews' financial profile remains very strong as demonstrated by its highly liquid balance sheet and strong pretax interest coverage of over 9 times. More than $4 billion of cash and investments in marketable securities generate investment income and support about $2.3 billion of total debt at Loews, excluding CNA and Diamond Offshore debt, which was a modest estimated 20% of total capital at December 2001.

These investments are in low to moderate risk securities including government's and other fixed income, yet there is a smaller more risky equity component as well.

S&P expects Loews' significant cash position, which includes Lorillard cash balances, will be used for investments and share repurchases. Additionally, Loews has access to additional capital as demonstrated in early 2002, through an offering of a tracking stock for Lorillard, called the Carolina Group that raised $1 billion.

Moderate debt levels and substantial cash balances provide flexibility for business investment opportunities within the current rating level.

Risks associated with potential acquisitions are mitigated by a practice of investing in undervalued assets, often in stages, and a successful track record.

A stable outlook reflects expectations that Loews will continue to maintain its strong financial profile and moderate investment strategy despite uncertainties associated with ongoing litigation risk.

Additionally, S&P expects operating performance at its insurance subsidiary will improve and any future capital contributions by Loews to CNA would be modest.

Moody's rates Emmis bank loan Ba2

Moody's assigned a Ba2 rating to Emmis Operating Co.'s new $500 million Tranche B term loan due 2009 and confirmed the existing ratings of EOC and parent, Emmis Communications Corp., including the $143.8 million of 6.25% convertible preferreds at Caa1. The outlook for all ratings remains negative.

Emmis' ratings continue to reflect the risks posed by its high financial leverage and modest cash flow coverage of interest, and the financing and integration risks associated with potential future acquisitions.

While the company's flexibility to pursue debt-financed acquisitions is limited by the leverage covenants in its bank credit agreement, Moody's expects Emmis to be opportunistic as the operating environment improves and consequently revolving credit availability increases.

Given the company's current asset base and the perceived benefits of market duopolies, the company is likely to pursue television acquisitions.

Similarly, Emmis is likely to increase the scale of operations in some of its key radio markets, Moody's said. Considering the leverage levels that the company has operated at, Emmis' acquisition appetite will probably lead it to operate near the maximum leverage allowed by its bank covenants.

In addition, the ratings reflect the risks posed by the company's exposure to the New York economic environment as it represents 14% of total revenue, exposure to the cyclical advertising environment, television broadcast cash flow margins that fall below the company's industry peer group, in part,due to a strategy of acquiring turn-around properties and the highly competitive nature of the company's radio markets.

However, the ratings are supported by the implicit high underlying asset value of the company's station portfolio. Moody's believes that Emmis' assets provide more than ample collateral coverage of debt and afford the company the opportunity to initiate balance sheet repair through portfolio rationalization.

The negative outlook reflects Emmis' continued operation at the edge of the rating category. It has been part of the company's strategy to purchase under-performing assets.

If Emmis pursues a sizable acquisition of challenged properties that are not financed with a prudent mix of debt and equity, a ratings downgrade could be warranted.

If the company remains focused on improving its balance sheet through asset sales and the application of free cash flow to debt reduction, ratings stabilization could occur.

For the 12 months ended May 31 and pro forma for sales of assets and equity, leverage is high with total debt plus preferred-to-EBITDA of 8.6 times, and cash flow coverage of interest is modest with EBITDA minus capex/interest of 1.4 times.

These credit statistics reflect modest recoveries from the 9.0 times leverage and 1.2 times coverage levels the company posted for the period ended Aug. 31, which contributed to the November 2001 change in outlook to negative.

The credit statistics are expected to further improve due to the benefits of expense controls, an increase in its sales effort, political advertising revenue, and the favorable comparisons the company is likely to experience through the remainder of the year.

Notwithstanding difficulties the company may experience beyond the rating horizon, Moody's expects Emmis to be able to comply with its near-term covenant step-downs.

The company drew $52.1 million of its $220 million revolving credit facility as part of the refinancing of the Tranche B term loan. The balance of the facility remains undrawn.

Moody's puts SBC Communications on review

Moody's placed the Aa3 senior unsecured long-term ratings of SBC Communications Inc., as well as the long-term ratings of all of its subsidiaries, on review for possible downgrade.

The review is due to continued weak top line revenue and access line trends in core local wireline segment and Moody's view that the business risk profile for regional bell operating companies is increasing from competitive threats from cable, wireless and long distance operators in addition to the effects of an unfavorable regulatory pricing environment.

The review will focus on the appropriate long-term rating level for SBC considering its evolving competitive position in its home region, balance sheet strength and liquidity, regulatory pressure, potential funding needs relative to access to the term debt or equity markets and continued investment required to support growth.

Moody's indicated that any near-term rating action will be modest, reflecting the company's solid franchise value and good credit fundamentals.

While Moody's is concerned about long-term pressures on SBC's businesses, the rating agency emphasized that SBC continues to maintain a strong market position, fiscally conservative management, and a profitable base of largely unencumbered assets.

Business diversification has helped to insulate SBC from negative pressures in any one particular business segment. SBC is also partially hedged against the growing trend of wireless substitution through Cingular Wireless. Wireless, broadband and long distance data all represent high growth opportunities that could substantially offset slow or negative access line growth, but all these businesses require substantial upfront and ongoing investment.

Therefore, SBC's business risk profile will shift over time as its asset base becomes weighted more toward highly competitive broadband, data, and wireless assets versus stable local access lines.

Fitch rates Anthem convertible BBB+

Fitch Ratings upgraded Anthem Inc.'s senior debt rating to A- from BBB, and assigned a rating of BBB+ to the unsecured subordinated debentures underlying the 6% mandatory convertible. The outlook is stable.

The upgrade reflects a trend of consistent performance improvement at Anthem over the past several years, growing geographic diversification of the company's businesses, strengthening competitive position within various regions and enhanced financial flexibility.

Anthem has shown a stable trend of operating improvements over the past several years.

For 2001, the company reported pretax operating margin of 4.5%, up from 3.5% the previous year, reflecting enrollment growth, a lower medical cost ratio and improvements in administrative efficiency.

Anthem became a publicly traded company in October of 2001 in a very successful demutualization.

The company has recently employed its strengthened financial flexibility through its July 31 acquisition of Trigon Healthcare Inc. in a cash and stock transaction valued at over $4 billion.

Although Fitch considers Trigon to be an excellent strategic fit for Anthem, and has taken a positive view of the overall transaction, the upgrade is driven more by Fitch's ongoing review of Anthem rather than the closure of the transaction itself.

Anthem's ratings continue to be supported by strong balance sheet fundamentals, expanding geographic diversification, solid management team, and strong competitive position in its chosen markets.

These strengths are offset to some extent by the considerable issues facing the health insurance industry, including the rapidly increasing cost of providing healthcare services, as well as regulatory and legal challenges that may affect the extent to which industry participants can manage costs and price their products appropriately.

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