Fitch downgrades Kmart, outlook negative

Fitch downgraded Kmart Corp., including lowering its bank facility to BB- from BB+, its notes and debentures to B+ from BB+ and its convertible preferred securities to B- from BB, affecting $.38 billion of debt and $890 million of preferreds. Fitch also lowered its outlook to negative from stable.

Fitch said the downgrades reflect Kmart's "weakened operations that have produced materially lower cash flow and higher financial leverage in 2001. Kmart's sales momentum turned negative during the latter part of 2001 as a price cutting initiative in consumable items failed to generate additional store traffic while competition remained fierce. As a result, the company's credit protection measures will be considerably worse than Fitch had anticipated."

However Fitch said it is "comfortable" with Kmart's near-term liquidity, saying the company should have sufficient bank facility capacity to cover any cash flow shortfall.

The rating agency anticipates Kmart will be successful in renewing its bank facility, which matures in December 2002. However it warned Kmart will likely have to pay higher rates, comply with more restrictive convenants and possibly offer security.

S&P revises America West CreditWatch to developing

Standard & Poor's revised its CreditWatch status on America West Holdings Corp. and its America West Airlines Inc. unit to developing from negative. Affected ratings include America West Airlines' senior unsecured debt, rated C, its equipment trust certificates, rated CCC, and various passthrough equipment trust certificates, excluding those insured by AAA rated Ambac Assurance Corp. which are not on CreditWatch.

S&P said it changed the CreditWatch following conditional approval of $380 million in federal loan guarantees for America West.

"Following finalization and receipt, America West's ratings would likely be raised, because proceeds would provide the company with enough liquidity to allow the company to avert a Chapter 11 bankruptcy filing," S&P said. "Without the loan, the company would be forced to file for bankruptcy."

Moody's rates new Charter notes B2

Moody's Investors Service assigned a B2 rating to Charter Communications Holdings, LLC's planned offering of senior unsecured notes and Ba3 ratings to the new senior secured bank credit facilities of subsidiaries Charter Communications Operating, LLC and CC VIII Operating, LLC. Moody's also confirmed the existing ratings of Charter Communications Inc. and its subsidiaries. The outlook remains stable. Ratings affected include Charter Communications Operating's replacement $1.34 billion revolver (increased $90 million) and $1.11 billion term loan A (increased $110 million), CC VIII's $550 million replacement (increased $100 million), Charter Communications Inc.'s senior debt at B3, Charter Communications Holdings' senior debt at B2, Charter Communications Operating's senior secured bank debt at Ba3, CC VIII Operating's senior secured bank debt at Ba3, Falcon Cable Communications, LLC's senior secured bank debt at Ba3, CC VI Operating, LLC's senior secured bank debt at Ba3, Avalon Cable LLC's senior debt at B2, and Renaissance Media LLC's senior debt at B2.

Moody's said the ratings reflect Charter's "very high financial leverage and low interest coverage; expectations of continued capital consumption as significant expenditures are made through 2002 and into 2003 to complete the company's network upgrade; uncertainty about the potentially adverse impact on the company's operations and tempered cash flow growth expectations given a prolonged economic downturn and a heightened competitive environment; and concerns about the prospect of renewed consolidation in the sector."

However Moody's also noted the value of Charter's large asset base, its technologically advanced and substantially upgraded network, "expectations of meaningful cash flow growth over the ensuing rating horizon," and good liquidity and access to the capital markets in addition to "some implicit support" from Paul Allen.

Fitch upgrades United Defense

Fitch upgraded United Defense Industries Inc.'s senior secured rating to BB from BB-. The outlook is positive.

Fitch said it took the action after United Defense repaid $163 million of senior secured debt with proceeds from its initial public offering.

With the IPO and debt reduction, United Defense's total debt to EBITDA improved to about 2.7 times from 3.7x at Sept. 30, 2001, Fitch said. Pro forma interest coverage strengthened to an estimated range of 3.5 to 4.0x.

The rating agency noted that the company's operating performance for the nine months to Sept. 30, 2001 was moderately below expectations but said the unfavorable changes "appear to be primarily attributable to timing differences."

S&P downgrades Advantica, on negative watch

Standard & Poor's downgraded Advantica Restaurant Group Inc., including lowering its $529.6 million of 11.25% senior unsecured notes due 2008 to C from CCC+ and its senior secured bank loan to CCC+ from B. All ratings were placed on CreditWatch with negative implications.

S&P took the action after Advantica announced it will exchange up to $204.1 million of new 12.75% senior notes for $265 million of existing 11.25% senior notes at the rate of $770 principal of new notes for each $1,000 principal of old notes. On completion of the transaction, S&P said it expects to lower the senior unsecured notes to D.

Under S&P criteria, a default includes an exchange in which the total value of securities and cash offered is materially less than the originally contracted amount.

In addition, S&P considers Advantica's offer coercive because the unexchanged old notes will be structurally subordinated to the new notes.

S&P rates new Xerox notes BB

Standard & Poor's assigned a BB rating to Xerox Corp.'s planned offering of senior notes due 2009 and affirmed the existing ratings including its senior unsecured debt at BB, subordinated debt at B+, preferred stock at B and the BB senior unsecured debt of Xerox Credit Corp. and Xerox Capital (Europe) plc.

S&P said its ratings reflect Xerox's "good position" in its core document processing business, sizable revenue base and broad product line-up, offset by highly competitive industry conditions and diminished growth expectations.

The rating agency said it expects Xerox to achieve "substantial, ongoing" debt reductions and to successfully renegotiate its bank facility due in October.

Fitch rates new Xerox notes BB

Fitch assigned a BB rating to Xerox Corp.'s planned offering of senior unsecured notes due 2009 and affirmed the company's BB senior unsecured debt and B+ convertible trust preferreds. The outlook is stable.

Fitch said the stable outlook reflects "the substantially improved liquidity situation and improved operational results as the company continues to execute on its turnaround strategy."

Fitch notes Xerox's improved liquidity, progress in selling assets and cutting costs, strong technologically competitive product line and business position, continued effort to improve working capital management, and commitment to continue cost cutting program beyond the initial $1 billion.

However Xerox's credit protection measures are strained, and the company must refinance its $7 billion revolver due October 2002, faces an ongoing Securities and Exchange Commission investigation into its accounting and must deal with overall weaker economic conditions.

"Although the company's financial flexibility has improved with forecasted flat to down revenues, it is crucial that Xerox executes its cost cutting programs in order to return the core operations to profitability," Fitch said.

Moody's upgrades Express Scripts

Moody's Investors Service upgraded Express Scripts, Inc. including its $255 million senior credit facilities, raised to Ba1 from Ba2, and its $250 million 9.625% senior notes due 2009, raised to Ba1 from Ba2. The outlook is stable.

Moody's said it upgraded Express Scripts in response to its "strong operating performance and significant reduction in leverage in recent years as well as the expectation that acquisition activity over the near to intermediate term will not include anything of significant magnitude."

Also included in the upgrade is Express Script's growth into one of the leading PBMs, expected strong growth in its industry and the benefit expected from the federal government's discount card for the elderly and from the potential Medicare prescription drug plan, Moody's said.

Moody's also believes there is opportunity to continue growing operating profits per script through cross selling of higher profit services.

Moody's downgrades American Commercial Lines

Moody's Investors Service downgraded American Commercial Lines LLC's $410 million senior secured bank facility to B3 from B1 and its $295 million 10¼% senior unsecured notes to Ca from B3. The outlook is negative.

Moody's said it took the action after American Commercial said it is in discussions with senior note holders and senior secured bank lenders over financial restructuring.

The rating agency said its action also reflects the company's record of poor operating results.

Moody's noted that reports say Samuel Zell through both his private investment firm and Danielson Holdings Corp. controls slightly more than half of the $295 million senior note issue. Moody's said it believes a restructuring, possibly incorporating Danielson Holdings' tax position, will be attempted before the 30-day grace period for paying the coupon on the notes expires.

S&P cuts Simonds to D

Standard & Poor's downgraded Simonds Industries Inc. Affected ratings include the company's $100 million of 10¼% senior notes due 2008, lowered to D from C.

S&P said it took the action after Simonds failed to make the interest payment due Jan. 1 on the 10¼% notes.

Moody's put Georgia-Pacific on review for possible downgrade to junk

Moody's Investors Service placed Georgia-Pacific Corp.'s Baa3 senior unsecured debt ratings and Prime-3 short term rating for commercial paper under review for possible downgrade. The ratings review is based on our expectation that weakness in the company's packaging, building materials and paper businesses will continue over the near term, stressing debt protection measurements and inhibiting a planned reduction in debt. In addition, the ratings review reflects uncertainty about the size, scope and ability to complete currently contemplated asset sales and longer term uncertainty surrounding the company's asbestos liability.

Georgia-Pacific's debt increased significantly (to around $16 billion) with the acquisition of Fort James in late 2000. The company's existing ratings have anticipated that the company would use a combination of cash from operations and asset sales to reduce debt to at or below $9.5 billion by mid to late 2003, restoring debt protection measurements to levels consistent with the ratings. While the company has been successful at reducing debt with asset sales and cash from operations thus far (total debt at around $12.4 billion at the end of the year), further debt reduction may prove much more difficult over the near term. Cash from operations is lower than previously anticipated, reflecting the weakness is paper, packaging and building products markets, and asset sales for non-core business may become much more difficult. Absent a significant asset sale, debt may remain well above the company's targeted level through 2003, Moody's said.

The company has acknowledged that it is in negotiations to sell all or a portion of its building products business to Willamette (A3), and proceeds from the sale of this business would be substantial. While we recognize that Georgia-Pacific might obtain debt relief from the sale of assets to Willamette, we believe the timing and amounts associated with such a sale are highly uncertain at this point, Moody's said. The company has had some difficulty meeting the terms of its bank agreements, the rating agency added, and obtained an amendment to financial covenants in December 2001. While the revised terms of the bank agreements should provide adequate flexibility through 2002, there is some concern that liquidity may become more of an issue over the intermediate term. Moody's said the review will assess the outlook for the company's core businesses, the ability to reduce leverage with cashflow over the near term, the prospects for additional asset sales that can be used to reduce leverage, a revised debt target related to asset divestitures, and the ability to manage asbestos liability over the long term review will assess the outlook for the company's core businesses, the ability to reduce leverage with cashflow over the near term, the prospects for additional asset sales that can be used to reduce leverage, a revised debt target related to asset divestitures, and the ability to manage asbestos liability over the long term.

S&P rates Cleveland Electric trust preferreds BB+

Standard & Poor's assigned a BB+ rating to Cleveland Electric Illuminating Co.'s recent issue of $100 million of trust preferred securities.

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