S&P cuts Navistar

Standard & Poor's downgraded Navistar International Corp. and maintained a negative outlook. Ratings affected include Navistar International's $100 million 7% senior notes due 2003 and $400 million 9.375% senior notes due 2006, cut to BB from BB+, its $250 million 8% senior subordinated notes due 2008, cut to B+ from BB-, and Navistar Financial Corp.'s $200 million 4.75% subordinated exchangeable notes due 2009, cut to B+ from BB-.

S&P said it lowered Navistar in response to weak operating results, diminishing financial flexibility and its expectation that persisting weak demand in the North American truck market will continue for the next several quarters.

The current softness in the medium duty market reflects the weak U.S. economy and the reluctance by leasing companies to commit to new orders until there are more definitive signs of an economic recovery, S&P noted. Class 8 (heavy-duty) truck sales have shown some improvement, resulting mainly from the "pre-buy" of trucks which is the result of the new EPA emission standards which go into effect Oct. 1, 2002. However, this modest up-tick in order activity is expected to be temporary, and a material improvement in the sector is not expected until the middle of 2003.

Navistar continues to focus on its cost competitiveness, emphasizing improvements in labor productivity, being achieved in part through shifting production to lower-cost facilities, S&P said. However, financial performance is not expected to reach previously expected levels in the near term. In addition, a significant reduction in debt is unlikely over the next several years.

S&P said the negative outlook reflects its concerns that material improvement in financial performance could be delayed and that financial flexibility will erode further if the current downturn is prolonged past the middle of 2003.

Moody's lowers Navistar outlook

Moody's Investors Service lowered its outlook on Navistar International Corp. and Navistar Financial Corp. to negative from stable and confirmed its ratings, including its senior debt at Ba1.

Moody's said it revised the outlook in response to weaker than expected demand in Navistar's key class 6 and 7 truck markets during the third quarter ended July 31, 2002; the potential weakness in class 8 demand following the October 2002 implementation of more stringent emission regulations; the growing uncertainty regarding the timing and strength of any rebound in demand during 2003; and, the possible disruption in operating efficiencies that could result from the pending contract negotiations with the UAW.

This potentially more stressful operating environment could lead to another year of negative free cash flow for 2003, a material erosion the company's $454 million liquidity position, and further pressure on the Ba1 rating, Moody's said.

The rating could also come under pressure if Navistar is unable to achieve a significant reversal in working capital requirements during 2003, following what Moody's said it views as a large, but temporary, build up in inventory during the third quarter of fiscal 2002.

Despite operational strengths, Navistar must contend with some formidable challenges, Moody's said. The prolonged downturn in the North American truck market has severely eroded the earnings and cash generation of Navistar's industrial operations, and has also stressed the portfolio quality of Navistar Financial. For the nine months to July, 2002, the industrial operations generated an operating loss of approximately $152 million and a cash burn (after working capital and capex) of $500 million.

Moreover, the industrial company's debt burden (including about $500 million in sale-leasebacks) is high at $1.4 billion, the rating agency said. A significant portion of Navistar's cash burn has been due to a large increase in working capital as inventory was built up in advance of new model launches, and as the company implemented other temporary shifts in production schedules.

S&P cuts Equistar

Standard & Poor's downgraded Equistar Chemicals LP, removed it from CreditWatch with negative implications and assigned a stable outlook. Ratings lowered include Equistar Chemicals' $150 million 7.55% debentures due 2026, $150 million 6.5% notes due 2006, $600 million 8.75% notes due 2009, $500 million senior notes due 2008 and $300 million 8.5% notes due 2004, all cut to BB from BB+ and its $500 million revolving credit facility due 2006 and $300 million term bank loan due 2007, cut to BB+ from BBB-.

S&P said the downgrade, "which was widely anticipated," follows Lyondell Chemical Co.'s announcement that it has completed the purchase of Occidental Petroleum Corp.'s 29.5% ownership interest in Equistar, raising Lyondell's ownership to 71.5%. Millennium Chemicals Inc. retains its 29.5% stake.

The completion of this transaction raises intermediate-term concerns related to Lyondell's increasing influence on the governance of Equistar, particularly to the extent that the transaction strongly suggests that Lyondell may move to gain full control of the venture sooner than previously anticipated, S&P said.

Full ownership by Lyondell would more directly link the credit quality of Equistar to that of Lyondell, S&P noted. In addition, the transaction has the immediate effect of removing the strongest owner from a financial profile standpoint.

The ratings recognize Equistar's average business position as a major petrochemical producer, and an aggressive financial profile, somewhat bolstered by sufficient near-term liquidity, S&P said.

S&P raises Northern Natural Gas to investment grade

Standard & Poor's upgraded Northern Natural Gas Co. to investment grade and kept it on CreditWatch with positive implications. Ratings raised include Northern Natural Gas' $100 million 6.875% senior notes due 2005, $150 million 6.75% senior notes due 2008 and $250 million 7% senior notes due 2011, all raised to BBB- from B+.

S&P said the upgrade follows MidAmerican Energy Holdings Co.'s successful closing on the purchase of the pipeline from energy merchant Dynegy Corp. for $928 million and the assumption of $950 million in debt.

The rating remains on CreditWatch because S&P expects MidAmerican will likely structure its new subsidiary as a ring-fenced, bankruptcy-remote entity whose rating could achieve elevation over its parent rating - much as MidAmerican has done with its other subsidiaries, including Kern River Transmission Co. and its U.S. and U.K. electric utilities.

S&P also expects that MidAmerican will likely reduce the leverage at the pipeline company, which would also support a rating higher than the BBB- rating.

S&P cuts 3 Kmart-related deals

Standard & Poor's downgraded three credit lease transactions related to Kmart Corp. and removed the ratings from CreditWatch with negative implications where they were placed on Jan. 15. Ratings affected are DR Structured Finance Corp. lease trust passthrough certificates series 1993 K-1 classes A-1 and A-2, series 1994 K-1 classes A-1, A-2 and A-3 and series 1994 K-2 classes A-1 and A-2, all cut to C from CCC-.

S&P said the downgrades are in response to underlying lease payment defaults, which have resulted in the undercollateralization of the securities.

S&P added that it expects the undercollateralization will increase going forward and that ultimate principal losses will likely be experienced on one or more classes of the certificates.

In each transaction, Kmart net leased properties that secure the mortgage notes that collateralize the rated securities, S&P said. Fifteen of the leases were rejected in conjunction with Kmart's bankruptcy filing. The rejections resulted in payment shortfalls on the underlying mortgage notes.

S&P says Amkor unchanged

Standard & Poor's said Amkor Technology Inc.'s B corporate credit rating and stable outlook remain unchanged on news that its plan to sell 20 million shares in minority-owned Anam Semiconductor Inc. to Korea's Dongbu Group is postponed following Dongbu and Anam's inability to come to terms on a letter of intent to transfer technology and set purchasing rules with semiconductor wafer buyer Texas Instruments.

The sale of shares had been expected to generate $100 million in proceeds for bank debt repayment, modestly lowering Amkor's total $1.9 billion debt load, S&P noted.

It added that Amkor's liquidity, with $162 million in cash balances as of June 2002 and a $100 million unused revolving credit facility, remains adequate.

Additionally, S&P expects Amkor to remain within requirements for minimum EBITDA and liquidity levels and within maximum capital expenditure levels for the remainder of the company' amended bank facility covenant term expiring in December 2002.

S&P cuts HomeGold

Standard & Poor's downgraded HomeGold Financial, Inc. and kept the company on negative outlook. Ratings lowered include HomeGold's $6.195 million 10.75% senior notes due 2004, cut to CCC- from CCC.

S&P said the downgrade reflects concern over the continuing deterioration of HomeGold's financial performance, which has sustained substantial operating losses in recent years, and, as a result, had a shareholders' deficit of $110.7 million at June 30, 2002.

Fitch cuts some Air2US notes

Fitch Ratings downgraded Air2US's series C enhanced equipment notes to CCC from CCC+ and its series D notes to CC from CCC and put series A through D on Rating Watch Negative.

Fitch said the action reflects concerns that have been heightened by the recent deterioration of the North American air transport markets.

Fitch's concerns include the weakened credit quality of the sublessees and the likelihood that the value of the underlying aircraft collateral has become further impaired. These factors have increased the possibility that scheduled cash flows under the permitted investments could be diverted from the EEN noteholders.

S&P lowers Dayton Superior outlook

Standard & Poor's lowered its outlook on Dayton Superior Corp. to negative from stable. Ratings affected include Dayton Superior's senior secured bank loan at BB- and subordinated debt at B-.

S&P said the revision reflects weaker than anticipated non-residential construction markets and the expectation that the downturn is likely to last well into 2003.

These adverse conditions, plus margin pressure from rising steel prices, could further strain the Dayton Superior's financial profile despite aggressive cost cutting initiatives, S&P said.

A very aggressive capital structure - debt to EBITDA of 5.1 times - is expected to keep cash flow protection measures very weak, S&P noted. EBITDA interest coverage is currently 1.9x with funds from operations to debt below 5%, sub-par for the ratings.

If market conditions worsen in the second of half of 2002, the company could have difficulty meeting financial covenants that progressively tighten over the next few quarters, S&P added.

Fitch cuts GenTek

Fitch Ratings downgraded GenTek Inc. including lowering its senior secured bank facility to D from CCC and its senior subordinated notes to C from CCC-. The ratings remain on Rating Watch Negative.

Fitch said the downgrade follows the recent payment blockage of GenTek's scheduled Aug. 1 interest payment on the 11% senior subordinated notes; the violation of some credit facility financial covenants and default on the credit facility; and potential default on the senior subordinated notes.

GenTek's default on the credit facility came about when the company's independent auditors issued with the 2001 10K filing an explanatory paragraph with respect to GenTek's ability to continue as a going concern, Fitch said.

In addition, GenTek violated certain financial covenants related to the credit agreement at the end of the first quarter and second quarter of 2002, Fitch added.

More recently, GenTek's senior lenders issued a payment blockage notice pursuant to its senior credit facility preventing GenTek from paying interest due to the senior subordinated noteholders. If GenTek is not permitted to make the scheduled interest payment on or before Aug. 31 then it will default on the senior subordinated notes and these noteholders may accelerate payment of the outstanding principal and accrued interest. At that time, Fitch said it will downgrade the rating on the senior subordinated notes to D.

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