S&P upgrades Kia, raises Hyundai outlook

Standard & Poor's upgraded Kia Motors Corp. including raising its $200 million 9.375% notes due 2006 to BB+ from BB and lifted its outlook on Hyundai Motor Co. to positive from stable and confirmed Hyundai's corporate credit rating at BB+. The outlook on Kia is positive.

S&P said the equalization of the ratings reflects the expectation that Kia will continue to gain access to Hyundai's technology, generate cost savings and enjoy other potential benefits through its strategic importance to its parent. Hyundai directly and indirectly owns 46.1% of Kia.

The positive outlooks on the ratings reflect the likelihood of improvement in the credit quality of the two companies over the next few years, backed by their combined leading position in the domestic auto market and their improving brand image overseas, achieved through the introduction of higher-quality new models, S&P added.

Both Hyundai and Kia have generated solid profitability over the past few years, despite increasingly difficult market conditions. Both companies' financial performance has improved on a stand-alone and consolidated basis since the Asian financial crisis in 1997.

The ratings could be raised over the next two-to-three years if Hyundai and Kia can demonstrate considerable improvement in their global market position and earnings from major overseas markets, and reduce their dependence on the domestic auto market, S&P said.

Moody's rates Hilcorp notes B3

Moody's Investors Service assigned a B3 rating to Hilcorp Energy I, LP's proposed $350 million senior unsecured notes due 2010. The outlook is positive.

Moody's said the ratings reflect a sound operating history tempered by the incurrence of substantial debt to buy back partner equity.

Pro-forma leverage and leveraged unit full-cycle costs are very high, but Hilcorp's capacity to incur substantial debt is aided by: its long generally productive history in most of its focus regions; fairly conservative leverage before taking on new debt; planned aggressive debt reduction aided by current very high up-cycle oil and gas prices, attractive prices expected into 2004 and up-cycle hedging of 71% of natural gas and 66% of oil 2003 production (66% and 63% in 2004, respectively). Operating risk is diversified to a degree across numerous mature declining Gulf Coast properties acquired for further exploitation, though 46% of Hilcorp's 86.7 mmboe of reserves are in five fields, Moody's said.

To solidify or boost its ratings, Hilcorp must aggressively reduce debt before strong up-cycle cash flows wane. Moody's expects weaker prices in 2004, noted that prices are inherently volatile in any case and warned that weaker prices would encroach upon its high costs, reserve replacement spending programs, and ability to reduce debt.

Rating restraints include: high direct and indirect leverage and reduced liquidity after Hilcorp's large debt funded buyout of 50% of its equity; a resulting pro-forma (for completed and pending acquisitions) $7.05 of debt per proven developed (PD) barrel of oil-equivalent (boe) reserves; high pro forma leveraged unit full-cycle costs of roughly $21/boe (unit reserve replacement, annualized first quarter 2003 lifting and G&A expenses, and pro-forma interest); the notes' effective subordination to substantial secured bank borrowing base debt, resulting in one-notch between the note and senior implied ratings; and a modest reserve scale, Moody's said.

Moody's rates Euramax notes B2

Moody's Investors Service assigned a B2 rating to Euramax International, Inc.'s proposed $200 million guaranteed senior subordinated notes due 2011 and confirmed its existing ratings including its $135 million guaranteed senior subordinated notes at B2.

Moody's said the assignment and confirmation recognize Euramax's stability of earnings, reasonably strong cash flow, good market position, flexible cost structure and adequate liquidity position.

However, the ratings also recognize the cyclical and competitive nature of Euramax's operations, acquisition risk, susceptibility to sudden unforeseen cost increases and the potential for share repurchases and/or dividend payments over the near term.

The ratings also incorporate the fact that the majority of Euramax's revenues are linked to the residential housing, commercial construction and original equipment markets, which tend to be very cyclical in nature.

Moody's noted that the indenture for the new notes allows share repurchases and/or dividends up to $70 million as long as pro forma leverage (essentially debt/EBITDA) is less than 3.75x on a trailing 12 months basis.

The stable rating outlook reflects Moody's expectation that operating performance will improve over the near term, operating margins will remain at least at current levels and liquidity will remain adequate. Going forward, Moody's believes that share repurchases will be within limits and acquisitions, if they occur, will be moderate in size.

As of March 31, 2003, Euramax's liquidity was reasonable with cash and equivalents of about $12 million and availability under its bank revolver of approximately $37 million. Moreover, on a trailing 12 months basis, leverage was relatively low and coverage was good with debt to EBITDA of about 3.0x, EBITDA to interest of around 3.0x and EBIT to interest of just over 2.3x. Pro forma for the new note offering, leverage and coverage would have been approximately 3.4x and 3.2x, respectively.

Moody's rates Seabulk notes B2

Moody's Investors Service assigned a B2 rating to Seabulk International's proposed $150 million senior unsecured notes. The outlook is stable.

Moody's said the ratings reflect supportive cash flow trends; diversification across domestic and international product tanker, oilfield support vessel and domestic marine towing markets and asset mixes; a large position in long-term West African oilfield support vessel market growth and no exposure to the weak North Sea support market.

This is tempered by high leverage, competitors' fleet modernization programs, significant over-supply and unfavorable secular demand trends in the Gulf of Mexico (GOM) oilfield support vessel market, acquisition risk as Seabulk works to improve its strategic position and the above-average 22-year average age of its oilfield service fleet.

Under strong management since 2000, Seabulk reduced debt by roughly $135 million since then with $91 million of net proceeds from private equity in September 2002, a fleet reduction from 282 vessels in 1998 to 157 today, and free cash flow since 2001. The ratings are further supported by term contract cash flow from seven of 10 product tankers (three operate now under contracts of affreightment), the strong position of Seabulk's double-hulled Jones Act product tankers and no material debt maturities until 2007.

In spite of downturns in the GOM offshore oilfield services market, Seabulk's diversification still generated annualized EBITDA exceeding $100 million in 2000 through 2003. While its regional mix will change, current EBITDA levels appear to be supported by slowly improving offshore exploration and development spending.

The ratings are restrained by: oilfield service vessel oversupply plus reduced levels of available work overall for Seabulk and competitors in the mature Gulf of Mexico market as producers restrain capital spending in that basin in spite of strong producer cash flow; added competition from a rising population of new oilfield service vessels; and significant capital needed to upgrade Seabulk's service vessel fleet.

Furthermore, two of Seabulk's new double hull tankers are under bareboat charter to a B1 rated independent refining firm and its five single hull tankers will be retired in 2007 (1 vessel), 2008 (2 vessels), 2011 (1 vessel), and 2015 (1 vessel), Moody's said.

Seabulk's need to modernize competes with its high leverage. Moody's anticipates 2003 consolidated debt/EBITDA to be roughly 4.2x, consolidated EBITDA/interest to be roughly 3.5x, and debt/capital to approximate 63%. Pro-forma consolidated debt is roughly $461 million.

S&P rates Acetex notes B+

Standard & Poor's assigned a B+ rating to Acetex Corp.'s planned $75 million add on to its $190 million 10.875% senior unsecured notes due 2009 and confirmed the existing ratings including the notes at B+. The ratings were removed from CreditWatch negative where they were placed on June 23 after Acetex announced it will merge with AT Plastics Inc. The outlook is stable.

S&P said the note issue removes the risk associated with the assumption of AT Plastics' heavy debt burden.

Proceeds will be used to extinguish AT Plastics' outstanding borrowings under its senior and subordinated term credit facilities.

S&P said the confirmation also reflects the company's increased measure of product and end market diversity, as well as additional manufacturing capabilities, which were acquired with the AT Plastics business.

However, the combined company, with revenues in excess of $400 million, will still be subject to high leverage, cyclical swings in pricing and profitability for many of its products and exposure to volatile raw material costs through its use of natural gas derivatives, S&P said.

S&P rates Gristede's notes B

Standard & Poor's assigned a B rating to Gristede's Foods Inc.'s planned $150 million senior secured note offering due 2010.

Gristede's plans to use the majority of the proceeds from the note offering to purchase Kings Super Markets Inc. from Marks & Spencer plc for $120 million in cash. The acquisition would expand the company's markets to northern New Jersey from New York City, and provide opportunities for Gristede's to leverage Kings' expertise in perishable and prepared food offerings, S&P said.

The ratings on Gristede's reflect its participation in the highly competitive supermarket industry, its small sales and earnings base compared to other operators, the integration risk related to the Kings acquisition, and the company's high leverage, S&P said. These risks are mitigated, somewhat, by Gristede's leading market position in the New York City market.

Gristede's acquisition of Kings expands its markets into northern New Jersey and provides the opportunity to leverage costs and best practices with Kings, S&P said. There is little store overlap between the two chains, so store closings are expected to be minimal. In addition, Gristede's expects to achieve $7.6 million in cost savings from the elimination of duplicate corporate overhead. Further efficiencies could be achieved through better purchasing power, as the company's sales will increase to about $685 million from about $250 million, and through merchandising initiatives in both chains.

Pro forma lease-adjusted EBITDA coverage of interest is 1.7x for the transaction, and could improve to the mid-2x area over the next three years if the company is able to realize improved sales and cost efficiencies through its planned initiatives, S&P said. Operating margins of 8.1% could also improve to over 10% over the next two years through the realization of these benefits. Lease-adjusted total debt to EBITDA is high at 6.4x.

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