S&P puts Georgia-Pacific on watch

Standard & Poor's placed the ratings of Georgia-Pacific Corp. on negative watch, including the senior unsecured debt at BBB-, due to the announced delay in the partial spin-off of its consumer products and packaging business.

The split into two publicly traded companies was postponed due to weak financial and building products market conditions.

Credit measures have been strained since the primarily debt-financed acquisition of Fort James Corp. two years ago, S&P noted, and IPO proceeds were expected to be used to reduce debt.

Barring any new initiatives to bolster credit quality or any significant changes in capital structure, S&P expects to lower Georgia-Pacific's ratings by one notch to non-investment grade and assign a negative outlook.

The company is expected to repay or refinance its significant near-term debt maturities, including a $650 million bridge financing maturing in August 2003, and maintain adequate liquidity. GP also has $1.3 billion of short-term accounts receivable financing due in December.

S&P takes Riverwood off positive watch

Standard & Poor's removed Riverwood International Corp. from CreditWatch with positive implications where it was placed on May 9 and confirmed its ratings including its bank debt at B and senior unsecured debt and subordinated debt at CCC+. The outlook is stable.

S&P said the action follows Riverwood's announcement that it has terminated the tender offers for its senior unsecured and senior subordinated notes that it had commenced in connection with a planned IPO of $350 million of common stock. The termination results from current equity market conditions that are delaying the timing of the IPO. Riverwood will continue to pursue the IPO subject to market conditions.

The company primarily produces coated unbleached kraft (CUK), a value-added paperboard used in beverage, food, and toy packaging, plus some commodity containerboard. Riverwood has about a 50% share of the CUK market, with its only other significant competitor being MeadWestvaco Corp.

CUK demand is expected to grow gradually in conjunction with rising beverage consumption, particularly outside of the U.S., and extension of multiple packaging applications to noncarbonated beverages, S&P said. Nevertheless, there is some threat from competing paperboard grades and substitutes such as plastics.

The company's cost position has improved significantly during the past few years following restructuring and rationalization of operations, S&P noted. As a result, operating margins have improved to the low-20% area from the mid-teens. Additional modest improvement in operating profitability is expected as the company continues to reduce costs and improve its product mix by shifting linerboard production to higher-margin products.

Riverwood remains highly leveraged with debt of $1.6 billion at June 30, 2002. Total debt to EBITDA is currently 5.6 times and in the absence of an IPO should remain in the 5x to 6x range, with EBITDA covering interest expense about 1.7x, S&P said. Funds from operations to debt has been improving, but remains below 10%.

Moody's cuts Ericsson

Moody's Investors Service downgraded Telefonaktiebolaget LM Ericsson, affecting $5.3 billion of debt including its euro medium-term notes and $600 million revolving credit, both cut to Ba2 from Ba1. The outlook remains negative.

Moody's said it primarily lowered Ericsson because of announcements by several wireless operators that they will withdraw from or scale back investment plans in third generation wireless infrastructure, dimming the outlook for a near-term stabilization in Ericsson's orders.

Also contributing to the downgrade is the increased probability of additional capital contributions to SonyEricsson and the deterioration of Ericsson's receivables portfolio, Moody's said.

Combined, these factors may result in additional cash calls on Ericsson's enriched liquidity position and possible write-offs to its equity, Moody's said.

The negative outlook reflects continued low visibility of the shrinking order patterns by the telecom carriers and execution challenges for Ericsson's cost-saving strategy, the rating agency added.

S&P cuts American Buildings

Standard & Poor's downgraded American Buildings Co. and put the company on CreditWatch with developing implications. Ratings affected include American Buildings' $55 million revolving credit facility due 2004, $81.3 million term loan A due 2004 and $186.1 million term loan B due 2005, all cut to CC from B+, and Vicwest Corp.'s C$84 million 12.5% notes due 2007, cut to CC from B-.

S&P said the downgrade follows American Buildings' announcement that it did not make the interest payment on Vicwest's subordinated notes due Sept. 10.

The company had previously entered into an amendment with its senior lenders to deal with non-compliance of financial covenants. This amendment contemplated a capital transaction that has not been completed, resulting in an event of default, S&P said. Until the event of default is rectified, or the senior lenders otherwise agree, Vicwest is prohibited from paying interest to the holders of its 12.5% subordinated notes.

On a consolidated basis, American Buildings had $26 million of cash at June 30, 2002, S&P added.

Moody's cuts Applied Extrusion

Moody's Investors Service downgraded Applied Extrusion Technologies, Inc. and assigned a negative outlook. Ratings affected include Applied Extrusion's $80 million secured credit facility, cut to B1 from Ba3, and $275 million 10.75% senior unsecured notes due 2011, cut to Caa1 from B2.

Moody's said the downgrades reflect the deterioration in Applied Extrusion's financial profile driven by the erosion in profitability resulting from weakened demand, rising resin costs and unfavorable product mix.

Also contributing are the cash-absorbing nature of the company's business, its very high financial leverage and its operating income which is insufficient to fully cover interest expense.

Moody's said in its view current market conditions as well as continued rumors of the sale of Applied Extrusion create low visibility for the company's performance in the intermediate term.

While the rating acknowledges some improvement in average selling prices realized throughout the period, Moody's said it anticipates that sustained recovery in performance is not likely in the next six to 12 months absent material reductions in operating expenses and/or business realignments.

Moody's said it believes liquidity is weak given the absence of cushion under recently amended covenants, its high financial leverage net of cash currently on hand, and the lack of free cash flow. The company is in negotiations with its banks to modify the facility. Pro-forma for those negotiations, it is our opinion that liquidity would benefit from covenant revisions.

Fitch cuts U.S. Industries 7.125% notes

Fitch Ratings downgraded U.S. Industries, Inc.'s $250 million 7.125% senior secured notes due Oct. 15, 2003 to C from B- and kept them on Rating Watch Negative. U.S. Industries' $125 million 7.25% senior secured notes due Dec. 1, 2006 remain at B- and are still on Rating Watch Negative.

Fitch said the downgrade is in response to U.S. Industries' announcement of an exchange offer to exchange cash and notes with a higher interest rate and longer maturity for all its outstanding 7.125%. The rating on these notes will be lowered to D following the completion of the exchange.

The exchange is considered a distressed debt exchange given the need to complete this exchange to prevent a default in October 2003, the high 90% level of participation necessary for the exchange to be made effective and the substantially lengthened maturity of the new securities, Fitch said.

S&P says Michaels Stores unchanged

Standard & Poor's said Michaels Stores Inc.'s ratings, including its BB corporate credit rating, and positive outlook are unchanged following its Directors' approval to repurchase up to an additional 1.0 million shares of common stock, bringing the total to be repurchased to 1.6 million.

Michaels' credit protection measures are adequate for the rating category, S&P said. S&P added that it believes the current program will be funded primarily with cash flow from operations and that it will not alter the company's credit profile.

Moody's confirms Swift's loan Ba2; notes B1

Moody's Investors Service confirmed Swift & Co.'s ratings, including its $350 million senior secured revolver due 2007 and $200 million term loan due 2008 at Ba2 and $250 million senior unsecured notes due 2009 at B1. The outlook is stable.

The confirmation follows a delay in the closing of Swift's acquisition of ConAgra Foods Inc.'s beef, pork and lamb processing businesses due to a recall by ConAgra of 19 million pounds of beef. Funding for the acquisition has been modified to decrease the senior unsecured notes to $250 million from $400 million and add $150 million of subordinated notes that will initially be held by ConAgra.

Ratings are restrained by high financial leverage relative to low margins characteristic of the business and vulnerability to earnings and cash flow volatility, Moody's said. Ratings also reflect risks associated with Swift's movement to stand-alone operation and the potential that leverage may increase in the future to buy out ConAgra's equity interest and seller notes.

Ratings are supported by the company's scale and position in the industry, diverse customer base and distribution reach, well established business platform and experienced management team, Moody's added.

Swift's pro forma balance sheet at closing would include $692 million of debt and $476 million of equity, with $150 million of the equity sourced from a pay-in-kind (PIK) seller note at its holding company parent, Moody's said. Pro forma EBITDA of about $232 million for fiscal year 2002 would yield debt/EBITDA of 3.6 times and debt/capitalization of 72%. Pro forma EBIT interest coverage is about 2.5 times.

S&P rates Nortek's loan BB-

Standard & Poor's rated Nortek Inc.'s $200 million senior secured revolver due 2007 at BB- and confirmed its B+ senior unsecured debt rating and B- subordinated debt rating. The outlook is stable.

The revolver has a $70 million sub-limit for letters of credit and a $15 million sub-limit for swing line loans. Up to $15 million of the loan is available to Canadian subsidiaries. Security is a first priority, perfected lien on substantially all accounts receivable and inventory.

The rating reflects the company's significant portfolio of building products with leading market shares, offset by competitive, cyclical markets and weak cash flow protection measures primarily because of aggressive use of debt, S&P said.

The stable outlook reflects Nortek's earnings diversity, however, investment opportunities could limit improvement of credit quality ratios appropriate for the next higher rating category, S&P added.

S&P cuts Metallurg

Standard & Poor's downgraded Metallurg Inc. and gave the company a negative outlook. Ratings lowered include Metallurg Holdings Inc.'s $65 million 12.75% senior discount notes due 2008, cut to CCC from CCC+, and Metallurg Inc.'s $100 million 11% senior notes due 2007, cut to CCC+ from B-.

S&P said the downgrade reflects its concerns about Metallurg's continuing weak financial performance and the impact that could have on its liquidity.

The downgrade also reflects concerns about Metallurg's ability to upstream funds to Metallurg Holdings to service scheduled annual interest payments of $5.7 million on the 12.75% notes which become cash payable in 2004.

Metallurg's weak financial profile has been caused by the low utilization rates in the global steel and aluminum industries (which account for 58% of revenue) as well as significantly reduced demand from major customers in the aerospace sector, S&P said.

Although the company's management has taken steps in recent years to improve product mix and has had some success in reducing production costs from pre-bankruptcy levels, conditions in these industries as well as the general state of global economic conditions are expected to remain soft for the near- to medium-term, S&P added. In the second quarter ending June 30, 2002, Metallurg's net loss was $7 million.

S&P lowers Koppers outlook

Standard & Poor's lowered its outlook on Koppers Industries Inc. to negative from stable and confirmed its ratings including its senior unsecured debt at B- and subordinated debt at B-.

S&P said the outlook revision is in response to concerns about Koppers' deteriorating liquidity and recent operating performance in its carbon materials division.

Koppers' liquidity deteriorated following a $10 million dividend payment in the second quarter and is limited by a financial covenant in its bank facility that limits future borrowings, S&P said. Additionally, the firm faces meaningful term loan amortization and debt interest payments in the second half of this year, although these requirements should be manageable based on expected cash flow improvements from seasonal working capital changes.

S&P cuts Bayou Steel

Standard & Poor's downgraded Bayou Steel Corp. and maintained a negative outlook on the company. Ratings lowered include Bayou Steel's $120 million 9.5% first mortgage notes due 2008, cut to CCC+ from B-.

S&P said it cut Bayou Steel because of the likelihood that persistent challenging conditions in its markets will result in additional losses, continue to reduce the company's limited liquidity position and possibly trigger covenant violations under its revolving credit facility.

Bayou is a relatively small minimill steel producer and competition in its markets is intense, stemming from its much larger domestic rival Nucor Corp. as well as imports, S&P said.

Since only about one-third of the company's product line benefited from tariffs implemented under the U.S. government's Section 201 investigation, Bayou's remaining products continue to be affected by high import levels and soft demand, S&P said.

As a result, Bayou has incurred losses on an EBIT basis for the past eight consecutive quarters. Although shipments have recently improved and price increases have been implemented, increases in scrap costs, which make up the bulk of the company's raw material costs, have partially offset selling price increases and squeezed Bayou's margins, S&P added. In addition, recent improvements in selling prices may not be sustainable as demand levels have not been as strong as previously expected.

As of June 30, 2002, Bayou's liquidity was limited to about $30 million in availability (subject to a borrowing base) remaining on its $50 million revolving credit facility, S&P said. The bank agreement requires the company to maintain a minimum net worth of $41 million when availability under the facility falls below $20 million. S&P said it expects that Bayou could be in violation of this covenant in the near term, which could restrict its borrowing capacity.

S&P raises Euramax outlook

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

S&P said the revision reflects Euramax's improved financial performance and strengthening credit protection measures.

Over the last two years, Euramax's focus on internal growth, working capital management, and cost controls has enabled the company to generate modest amounts of free cash flow, which has been used for debt reduction, S&P said. As a result, Euramax's credit protection measures have improved with total debt to EBITDA around 3.3 times as of June 30, 2002, compared with 4.6x in 2000 and EBITDA to interest coverage of around 3.1x compared with 2.1x in the same period in 2000.

S&P puts Encompass Services on watch

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

Ratings affected include Encompass Services' $300 million revolving credit facility due 2005, $130 million term A loan due 2006, $170 million term B loan due 2006 and $100 million term C loan due 2007, all at B, and its $135 million 10.5% senior subordinated notes due 2009 at CCC+.

S&P rates GXS' loan BB-; notes B

Standard & Poor's rated GXS Corp.'s $175 million term loan B due Sept. 1, 2008 and $35 million revolver due Sept. 1, 2007 at BB- and its $235 million senior subordinated notes due Sept. 1, 2009 at B. The outlook is negative.

Ratings reflect the company's good competitive position and recurring revenue streams offset by a narrow business profile and limited financial flexibility, S&P said.

"The outlook reflects GXS' limited track record of both operating as an independent company and sustaining profitability improvements following its recent cost restructuring actions," S&P said.

Pro forma debt to EBITDA is below 4 times and EBITDA margins are in the high 20% area, S&P added.

S&P rates Banco Votorantim notes B

Standard & Poor's assigned a B rating to Banco Votorantim SA's $75 million 7.25% notes due Dec. 12, 2002 and confirmed its existing ratings.

S&P said Banco Votorantim's ratings reflect the implicit support of Votorantim Group, the bank's strong brand-name recognition, conservative management style and efficient decision-making process.

In addition, S&P said Banco Votorantim shows better-than-average asset quality and adequate profitability.

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