Moody's cuts Edison Mission Energy to junk

Moody's Investors Service downgraded Edison Mission Energy to junk and kept it on review for possible further downgrade. Ratings lowered include Edison Mission Energy's senior unsecured debt, cut to Ba3 from Baa3, Midwest Generation LLC's secured lease obligation bonds, cut to Ba3 from Baa3, Mission Capital, LP's monthly income preferred securities, cut to B2 from Ba1, Mission Energy Holding Co.'s senior secured bonds and senior secured bank credit facility, cut to B3 from Ba2, Edison Mission Midwest Holdings Co.'s bank credit facility, cut to Ba2 from Baa2, and Midwest Funding, LLC's bank credit facility, cut to Ba2 from Baa2. Edison Mission Holdings Co.'s senior secured debt at Baa3 and Brooklyn Navy Yard Cogeneration Partners, LP's senior secured debt at Baa3 was put on review for downgrade.

Moody's said the action reflects Edison Mission Energy's low operating cash flow relative to the amount of consolidated debt, a high degree of structural subordination at Edison Mission Energy relative to the significant amount of project debt that exists at many of the projects, and a growing reliance on merchant revenues, along with Moody's view that power prices will continue to be very weak at least through 2003.

Edison Mission Energy's operating cash flow is expected to represent about 5% of total consolidated debt over the next several years, Moody's noted. About 60% of Edison Mission Energy's consolidated debt is senior to Edison Mission Energy's debt and virtually all of the debt has cash traps in project level debt agreements which could impact the future level of dividends available to service Edison Mission Energy's debt.

Of particular concern are the cash flows coming from Midwest Generation, which, in some years, represent up to 30% of Edison Mission Energy's distributable cash flow, and whose contracted output will decline beginning in 2003, Moody's said. While Moody's believes Midwest Gen's competitive position will enable the electric output from its plants to be sold into the midwestern market, the price it receives is likely to be lower than historical levels due to substantial excess generation capacity in the midwest.

While Edison Mission Energy's debt burden is extremely high relative to its cash flow, its liquidity does not appear to be under serious stress in the near term, Moody's said. Edison Mission Energy has no debt maturities until $173 million comes due in 2004, and Edison Mission Energy's next scheduled debt maturity is in 2008.

Moody's cuts Allegheny Energy to junk

Moody's Investors Service downgraded Allegheny Energy, Inc. to junk and kept it on review for possible further downgrade. Ratings lowered include Allegheny Energy's senior unsecured debt, cut to Ba1 from Baa2, Allegheny Energy Supply senior unsecured debt, cut to Ba2 from Baa2, Allegheny Generating Co. senior unsecured debt, cut to Ba2 from Baa2, Allegheny Energy Supply Statutory Trust 2001 senior secured debt, cut to Ba2 from Baa2, Monongahela Power Co. senior secured debt, cut to A3 from A1, Potomac Edison Co. senior secured debt, cut to A3 from A1, and West Penn Power Co., senior unsecured debt, cut to A1 from Aa3.

Moody's said the action is in response to Allegheny Energy's declining cash flow and earnings, increased reliance upon sales in the merchant power market which Moody's expects to be depressed at least until 2004, and poor results from energy trading which stem from unfavorable long term contracts and hedging arrangements.

The rating action also reflects weak liquidity that results from a significant shortfall of cash from operations in comparison to capital spending and dividends, the liquidity demands of the merchant energy business, and limited availability under committed bank facilities, Moody's said.

The deterioration in Allegheny's financial performance is largely due to weak wholesale power markets and problems with its energy trading activities, Moody's continued.

Allegheny substantially increased its generating presence in the Mid-west through the acquisition of three power plants last year. The power market in the Mid-west suffers more from excess generating capacity than any other region, and there is little expectation that prices will recover before 2004 at the earliest.

Liquidity also appears to be under stress, Moody's said. Allegheny's cash position is approximately $160 million. The company has a $965 million syndicated revolving credit facility with current availability of about $73 million. Bilateral bank credit lines total $335 million, are fully drawn, and $70 million of these lines expire at the end of November.

Moody's lowers Cummins outlook

Moody's Investors Service lowered its outlook on Cummins, Inc. to negative from stable including its senior debt and credit facility at Ba1 and trust preferred securities at Ba2.

Moody's said the revision reflects the risk that operators of class 8 heavy-duty trucks could defer purchases during the next 12 months due to the market uncertainty being created by the Oct. 1, 2002 initiation of more stringent EPA emissions regulations.

Such a deferral of class 8 truck purchases would place additional pressure on Cummins' truck engine operations and further delay any expected improvement in the company's operating performance and debt protection measures, Moody's said.

Ratings effected by the negative outlook are: senior debt rated Ba1, bank credit facility rated Ba1, and trust preferred security rated Ba2.

As a result of the severe, two-year long downturn in the U.S. truck sector Cummins' performance has weakened. For the 12 months to June 2002, operating margins were only 1.6%, debt/EBITDA exceeded 5.0 times, EBIT/interest (excluding restructuring charges) approximated 1.0 times, adjusted debt (including operating leases and securitizations) exceeded $1.5 billion, and cash flow after working capital, capex and dividends resulted in a cash burn of about $57 million, Moody's noted.

S&P confirms Granite, off watch

Standard & Poor's confirmed Granite Broadcasting Corp. and removed it from CreditWatch with negative implications. Ratings affected include Granite's $175 million 10.375% senior subordinated notes due 2005, $110 million 9.375% senior notes due 2005 and $175 million 8.875% senior subordinated notes due 2008, all at CC, and its $150 million 12.75% cumulative exchangeable preferred stock at C.

S&P said the confirmation follows Granite's closing of its $230 million sale of San Jose, Calif. TV station KNTV, which provides a modest short-term boost to liquidity.

But even after the station sale, concerns about mounting financial pressure due to weak cash flow and an onerous debt burden remain, S&P added. The company's cash cushion is thin given that the company's high-cost preferred stock requires cash dividends in October 2002.

Granite's EBITDA margin for the 12-month period ended June 30, 2002, was extremely thin at less than 5%, S&P said. Interest coverage, both including and excluding the non-cash debt-like preferred stock dividend, is fractional. Debt, not including debt-like preferred stock, divided by EBITDA was excessively high at 72.1 times.

The expensive debt-like preferred stock requires cash dividends beginning in October 2002, S&P continued. During the 2002-second quarter, Granite repurchased and retired preferred stock shares for about $53.2 million. Lenders currently prohibit the company from paying cash preferred stock dividends. Should the cash dividends not be paid for three six-month periods, management would be forced to give up two seats on the board of directors.

S&P cuts some UAL ratings

Standard & Poor's downgraded UAL Corp.'s $410 million 12.25% preferred stock series B and $75 million 13.25% Trust Originated Preferred Securities to D from CC. Other ratings are unchanged and remain on CreditWatch with developing implications.

S&P said the action follows UAL's announcement that it has suspended payments on the two series of securities.

S&P puts Kinetic Concepts on positive watch

Standard & Poor's put Kinetic Concepts Inc. on CreditWatch with positive implications. Ratings affected include Kinetic Concepts' $200 million 9.625% senior subordinated notes due 2007 at CCC+ and its $50 million acquisition facility, $50 million revolving credit facility, $120 million tranche A term loan due 2003, $90 million tranche B term loan due 2004, $90 million tranche C term loan due 2005, $95 million senior secured tranche D term loan due 2006 and $30 million senior secured term E loan due 2005, all at B.

S&P said the action follows the announcement that a Texas jury has found in Kinetic Concepts' favor, resulting in the company being awarded $173.5 million in damages relating to its antitrust lawsuit against Hillenbrand Industries Inc. and Hillenbrand's Hill-Rom Co. Inc. unit.

Under Federal law, the damages would automatically be trebled, which would raise the award to about $520 million, S&P noted. The jury verdict and damage award is subject to judicial review by the U.S. District court in San Antonio, Texas.

Although the appeal of any judgment would take some time to resolve, the potential for a settlement of the litigation, which charged Hillenbrand with attempting to monopolize the specialty hospital bed market, brightens prospects for Kinetic Concepts to improve its liquidity and address near-term debt maturities, S&P said. Kinetic Concepts has approximately $30 million of term-loan debt due in 2003, with additional tranches of $86 million and $113 million maturing in 2004 and 2005.

S&P cuts CE Generation

Standard & Poor's downgraded CE Generation LLC to junk, cutting its $400 million 7.416% bonds due 2018 to BB- from BBB-. The outlook is developing.

S&P said it expects that the CE Generation projects will continue to demonstrate exceptional performance and provide sufficient cash flow to service the CE Generation debt.

Nonetheless, indirect reliance upon Southern California Edison through Salton Sea Funding Corp. and greater reliance on merchant cash flows following expiration of the qualifying facility contracts at Saranac and Power Resources LLC expose the portfolio to risks that were not present when the bonds were initially issued. Should Southern California Edison's and Salton Sea Corp.'s ratings improve, the rating on CE Generation will also improve.

S&P noted debt service at CE Generation is subordinate to approximately $566 million of project-level debt.

In addition, $368 million of the project level debt is serviced from cash flows that come from Southern California Edison. Over time, cash flows will increasingly come from the Salton Sea Funding Corp. In addition, CE Generation will increasingly be exposed to merchant risk as QF contracts expire in 2003 and 2009 as well as market price exposure to Southern California Edison's avoided costs after 2007.

S&P cuts Unicco, on watch

Standard & Poor's downgraded Unicco Service Co. and put it on CreditWatch with negative implications. Ratings affected include Unicco's $105 million 9.875% senior subordinated notes due 2007, cut to B- from B, and $45 million secured credit facility due 2002, cut to BB- from BB.

S&P said the action is in response to its concerns about Unicco's weak operating performance and expectations that the firm will not be in compliance with its bank financial covenants for the fiscal year ended June 30, 2002.

Unicco recently disclosed that it will record additional reserves as a result of the company's change in its insurance program effective April 1, 2001. In addition, the weak business environment will continue to hurt the company's credit protection measures, S&P said.

S&P cuts EOTT

Standard & Poor's downgraded EOTT Energy Partners LP including cutting its $235 million 11% senior notes due 2009 to D from CC.

S&P said the action follows EOTT's failure to make the bond interest payment due Oct. 1.

As previously indicated, the company will be utilizing the 30-day grace period and a forbearance on its bank credit facilities to attempt to reach an agreement on restructuring its debt and to resolve outstanding issues with Enron Corp., S&P said. A subsidiary of Enron is the general partner of EOTT.

Since those efforts have been under way for months and have yet to produce any agreements, S&P said it believes it is questionable whether the company will be able to successfully settle all of the necessary issues that will allow it to resume timely payments on its debt.

S&P cuts Encompass

Standard & Poor's downgraded Encompass Services Corp. and kept it on CreditWatch with negative implications.

Ratings affected include Encompass' $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 cut to CCC- from B, and $135 million 10.5% senior subordinated notes due 2009, cut to CC from CCC+.

S&P says Scotts still positive outlook

Standard & Poor's said its BB corporate credit rating and positive outlook remain on The Scotts Co. following its postponement of its proposed equity offering due to adverse market conditions.

While net proceeds from the planned equity offering were expected to be used primarily for debt reduction, S&P said it still expects Scotts to continue to improve its financial profile and reduce debt as a result of the company's initiatives to improve working capital management.

Scotts' ratings could be raised if the company can demonstrate a sustainable improvement in its credit protection measures over time, S&P added.

S&P cuts Guess?

Standard & Poor's downgraded Guess? Inc. and maintained its negative outlook on the company. Ratings cut on include Guess?' $127.5 million 9.5% senior subordinated notes due 2003, cut to B+ from BB-.

S&P said the downgrade follows the rating agency's review of the apparel industry and reflects the continued erosion of Guess?' operating performance and credit protection measures.

The company's performance in recent years has been hurt by a very difficult retail environment, exacerbated by the weakened economy and waning consumer confidence, S&P said. Year-to-date for fiscal 2002, the company has experienced revenue declines and margin pressures in its wholesale and retail operations, resulting in operating losses in both of those business segments and credit protection measures below S&P's expectations.

Credit measures have declined. Adjusted for significant operating leases associated with its retail operations, which account for more than one-half of the company's revenues, total debt to EBITDA was about 3.3 times while EBITDA coverage of interest expense was 2.7x, S&P said.

S&P confirms AES Ironwood, off watch

Standard & Poor's confirmed AES Ironwood LLC including its $308.5 million senior secured bonds rated BB-, removed them from CreditWatch with developing implications and assigned a negative outlook.

S&P said the action is in response to the recent letter agreement AES Ironwood and Williams Cos. Inc. entered into related to Williams' compliance with the guarantee requirements of the tolling agreement. Williams is the guarantor of the payment and performance obligations of Williams Energy Marketing and Trading Co. under the long-term tolling agreement with AES Ironwood.

Under the letter agreement, Williams posted a $35 million one-year (evergreen) irrevocable standby letter of credit issued by Citibank NA. AES Ironwood has accepted the letter agreement and the LOC as meeting the requirement of alternate additional security under the tolling agreement, S&P noted.

S&P added that it does not view the additional security provided by this LOC and the letter agreement to change the project's rating. Mainly, the project is exposed to Williams' payment risk, since Williams is the sole off-taker of the entire output of the facility.

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