S&P cuts Allegheny Energy to junk, on watch

Standard & Poor's downgraded Allegheny Energy Inc. to junk and put it on CreditWatch with negative implications, affecting $5 billion of debt. Ratings lowered include Allegheny Energy's senior unsecured debt, cut to B+ from BBB-, Allegheny Energy Supply Co. LLC's senior unsecured debt to BB from BBB, West Penn Power Co.'s senior unsecured debt to BB from BBB, Monongahela Power Co.'s senior secured debt to BBB- from A- and senior unsecured debt to B+ from BBB- and Potomac Edison Co.'s senior secured debt to BBB- from A- and senior unsecured debt to B+ from BBB-.

S&P said the action follows Allegheny Energy's announcement that its principal credit agreements are under technical default.

The CreditWatch will remain in place pending the outcome of the company's negotiations with its banks, S&P added.

S&P noted that Allegheny planned to issue between $400 million and $600 million of equity and convertible debt in September to reduce financial leverage and bolster liquidity. However, the company did not follow through with its plans because of a sharp drop in its stock price and administrative obstacles.

Allegheny then indicated to S&P that as an interim measure it planned to have an additional $400 million bank loan in place by October to provide liquidity but for reasons unclear to S&P the schedule was postponed to early December.

In the meantime, Allegheny's liquidity has become increasingly constrained, S&P said. The company had $450 million of liquidity as of June 1, and as late as Sept. 30, the company indicated to S&P that it still had $230 million in cash and available credit lines.

Even though this liquidity level is low, Allegheny indicated to S&P that this should be adequate for posting an estimated $60 million of collateral following another rating agency's credit rating downgrade last week, $16 million of cash flow consumed in the normal course of business between now and the end of the year, and $54 million of dividend to paid in December, the rating agency said.

However, on Oct. 8, Allegheny stated that it refused to post additional collateral to its trading counterparties, which led those counterparties to declare Allegheny to be in default under their respective trading agreements, S&P noted. This then triggered the cross-default provisions under its principal bank credit agreements and other trading agreements. Subsequent conversations with management revealed that Allegheny had to implement drastic cash conservation measures because its banks pressured it not to make any more draws under its existing credit revolvers, S&P said.

S&P raises Gala Group

Standard & Poor's upgraded Gala Group Holdings plc. The outlook is stable.

Ratings raised include Gala Group's £155 million 12% bonds due 2010, raised to B from B-.

S&P confirms Applied Extrusion, outlook negative

Standard & Poor's removed Applied Extrusion Technologies Inc. from CreditWatch with developing implications, confirmed its ratings and assigned a stable outlook. Ratings affected include Applied Extrusion's $275 million 10.75% notes due 2011 at B and $50 million revolving credit facility due 2004 at B+.

S&P said it removed Applied Extrusion from CreditWatch after the company said it had completed a review of its strategic options, which indicates that the company will not be sold at this time.

Applied Extrusion had hired a financial advisor in July 2002 to evaluate options to maximize shareholder value, including expressions of interest made by third parties to acquire the company, S&P noted.

S&P said the negative outlook reflects its view that if Applied Extrusion's operating performance weakens further or liquidity and financial covenant pressures increase, the ratings could be lowered.

Liquidity is supported by cash and equivalents of about $30 million as at June 30, 2002, and sufficient availability under its recently established $50 million two-year revolving credit facility (subject to a borrowing base), S&P said. Financial covenants tighten meaningfully on a quarterly basis, providing limited headroom under the amended credit agreement. The absence of improved operating performance could result in a weakened liquidity position.

S&P raises AmeriSource-Bergen outlook

Standard & Poor's raised its outlook on AmeriSource-Bergen Corp. to positive from stable and confirmed its ratings. Affected by the action are the company's bank loan at BBB-, senior unsecured debt at BB-, subordinated debt at B+ and preferred stock at B.

S&P said the action is in response to good operational and financial progress since the merger of AmeriSource and Bergen.

The merger improved both AmeriSource's and Bergen's already strong business positions in pharmaceutical distribution, S&P noted. The companies match up well geographically, given AmeriSource's strong presence in the eastern U.S. and Bergen's presence in the West. There is little customer overlap, as AmeriSource's strength in hospital distribution added to Bergen's presence in alternate-site distribution.

The combined company should gain purchasing power and boost operating efficiency through a rationalization of its distribution network, S&P added. Still, the integration of systems and business cultures could prove challenging. The company expects to achieve $150 million in annual synergies within three years of the August 2001 closing.

AmeriSource-Bergen's EBITDA coverage of interest was a solid 6 times for the first nine months of fiscal 2002, tracking well ahead of pro forma coverage at the time of the merger, S&P noted. The results reflect earlier-than-expected merger synergies, improved capital management, and wider operating margins. Free cash flow generated from more efficient use of capital should enable the company to repay debt at a moderate pace.

Moody's cuts Magellan Health

Moody's Investors Service downgraded Magellan Health Services, affecting $1 billion of debt. Ratings lowered include Magellan's secured bank facility, cut to Caa1 from B3, senior unsecured notes, cut to Caa2 from Caa1 and subordinated notes, cut to Ca from Caa2. The outlook is negative.

Moody's said the downgrade follows Magellan's announcement that in lieu of its previous refinancing efforts, it has retained Gleacher Partners to help with other options to reduce debt, including restructuring alternatives.

Magellan also intends to seek appropriate covenant waivers from its existing bank lenders, Moody's said.

Moody's said that without the refinancing Magellan's restructuring efforts may result in less than full recovery for some of its financial stakeholders.

In addition, Moody's said it believes that Magellan's inability to finalize refinancing plans may cast additional uncertainty on the successful renewal of its contract with Aetna, which, under a restructuring scenario, might limit recovery value.

S&P rates Wynn Las Vegas loan B, notes CCC+

Standard & Poor's assigned a B rating to Wynn Las Vegas LLC's planned $1 billion senior secured bank debt and a CCC+ rating to the $340 million second mortgage notes due 2010 to be issued by Wynn Las Vegas LLC and Wynn Las Vegas Capital Corp. The outlook is developing.

Proceeds from the proposed bank facility and second mortgage notes, together with an expected IPO, a $188.5 million furniture, fixtures, and equipment loan facility and owner equity contributions will be used to help fund the construction of the company's $2.4 billion casino resort on the Las Vegas Strip, Le Reve, S&P noted. The bank facility and second mortgage note issue are contingent upon the successful IPO or an alternative equity infusion of a like amount, which is expected to be more than $400 million in net proceeds.

Pro forma for the offering and assuming peak borrowings, Wynn Las Vegas will have in excess of $1.5 billion in total debt and $130 million in interest expense.

The ratings reflect Wynn Las Vegas' high amount of debt, the execution risk in building, designing, and operating a property of this size, the competitive market environment and reliance on a single source of cash flow, S&P said. In addition, since the property will target a higher-end customer, the status of the economy in 2005 could materially affect operating results after the opening.

These factors are somewhat mitigated by the significant equity component of the project's funding, Steve Wynn's success in developing and operating properties on the Las Vegas Strip, the lack of new property openings expected over the next few years, and Le Reve's close proximity to the city's major convention centers, S&P added.

S&P said it believes the quality of Le Reve's amenities, the lack of new property openings over the next few years, and experienced operating management will likely drive hotel room rates and gaming volumes to levels consistent with other top-performing Las Vegas Strip operators over time.

But it said risks exist if the ramp-up is slower-than-expected, as certain required financial benchmarks are calculated using run-rate cash flows.

Moody's confirms Eye Care Centers

Moody's Investors Service confirmed its ratings on Eye Care Centers of America, Inc. including its $35 million senior secured revolving credit facility due 2003, $67.3 million acquisition facility due 2003 and $23.5 million term loan facility due 2003 at B2 and its $100 million 9.125% senior subordinated notes due 2008 and $49.7 million senior subordinated floating rate notes due 2008 at Caa1. The outlook is stable.

Moody's noted that Eye Care Centers is currently seeking to refinance its credit facilities, with a new $35 million revolver and $100 million term loan. Should this transaction be completed as planned, Moody's would withdraw its ratings on the company's existing bank credit facilities.

Moody's also said it would look again at its outlook on the company if the refinancing is successful since the current outlook is "materially constrained" by liquidity pressures, including approximately $100 million in maturing bank lines over the next 12-15 months.

Given current business trends, Moody's said a positive outlook may be warranted in the absence of liquidity concerns.

The company's operating performance over the past few quarters has greatly improved, and the optical retail industry has rebounded from delayed purchases in 2001 caused by economic weakness and consumers considering surgical corrective procedures, Moody's noted.

S&P puts JDN Realty on positive watch

Standard & Poor's put JDN Realty Corp. on CreditWatch with positive implications. Ratings affected include JDN's $75 million 6.8% senior unsecured notes due 2004, $85 million 6.95% senior unsecured notes due 2007 and $75 million 6.918% mandatory par put remarketable securities due 2013 at B and its $75 million 9.375% class A cumulative redeemable preferred stock at B-.

S&P said the action follows the announcement that JDN will merge with Developers Diversified Realty Corp. and reflects the potential for JDN's unsecured noteholders to benefit from a much larger portfolio of dominant retail assets, assets that will be largely unencumbered, as well as DDR's better access to the capital markets.

Preliminary indications suggest that this $1.02 billion transaction will be funded with exchange of $388 million of common equity and $50 million of preferred stock and the assumption by DDR of $584 million of JDN's debt, S&P said.

Atlanta-based JDN owns and manages a portfolio of 99 shopping centers aggregating 11.4 million square feet. These properties are located primarily in the southeastern U.S. By comparison, Cleveland-based DDR owns a nationwide portfolio that is more than four times the size of JDN's, with 361 shopping centers aggregating 62.1 million sq. ft. The two portfolios share similar characteristics. Both are relatively new (average age is approximately 10 years) and well occupied (93% and 95%, respectively). The tenant base and lease structures are also similar. Both portfolios tend to be anchored primarily by leading value-oriented retailers such as Wal-Mart Stores Inc., Lowe's Cos. Inc., Kohl's Corp., TJX Cos. Inc., and Bed Bath and Beyond Inc. These anchor tenants are typically signed to long-term leases, with no more than 5% of total anchor base rents in either portfolio expiring in any single year. This combination of credit-quality tenants and long average lease tenor provide both portfolios with a stable income stream.

However, DDR's assets tend to be better located relative to JDN and have significantly stronger demographic profiles, S&P said.

Moody's rates VCA-Antech loan B1, confirms notes, raises outlook

Moody's Investors Service assigned a B1 rating to Vicar's new $143 million secured term loan C, confirmed the ratings of Vicar and its parent VCA Antech, Inc. and raised the outlook to stable from negative. Ratings confirmed include Vicar's $50 million senior secured revolving credit facility and $143 million senior secured term loan due 2008 at B1 and $170 million 9.875% senior subordinated notes due 2009 at B3.

Moody's said it does not expect debt protection measures to change significantly over the next 18 to 24 months. While VCA does generate positive cash flow, Moody's expects cash from operations to be primarily invested in growth activity rather than used for de-leveraging.

While the rating outlook is stable, VCA is relatively weak in its rating category as a result of its very high level of intangible assets supported by debt, Moody's said. Intangibles of about $320 million represent almost 70% of assets, while debt is equal to about 80% of total assets.

As a result, Moody's said it is concerned about the company's ability to overcome issues which indicate a deterioration in the enterprise value which supports the debt.

S&P rates Huntsman loans B+, BB

Standard & Poor's assigned a B+ rating to Huntsman Co. LLC's $938 million term loan A due 2007 and $450 million term loan B due 2007 and a BB rating to its $275 million priority revolving loan facility due 2006. The outlook is positive.

S&P said the priority revolving loan is rated two notches above the corporate credit rating to reflect the strength of the collateral package.

Pro forma for the completed restructuring actions, Huntsman will have nearly $1.6 billion of debt outstanding, S&P said.

The completion of Huntsman's financial restructuring reduces debt by approximately $775 million through the exchange of existing notes for equity in a new holding company. This closes a difficult chapter that began with the lapse of interest payments during December 2001 and substantially improves Huntsman's financial position, S&P said. The restructured financial profile will also benefit from an extended debt maturity profile, and access to the new revolving credit facility.

Huntsman is expected to generate profitability consistent with broader cycle trends in the U.S. petrochemical industry and its past results, S&P commented. Accordingly, EBITDA margins are likely to reach the attractive high-teens percent range at the top of cycle peaks, but decline sharply to the single-digit level during periods of oversupply.

Importantly, Huntsman is nearing completion of a cost rationalization program that has eliminated unattractive assets, focused R&D spending, and eliminated approximately 1,100 staff positions, S&P said. These efforts should add incrementally to the company's performance at the top of the cycle and allow for somewhat stronger performance at the bottom.

Pro forma for the debt restructuring and refinancing plan, Huntsman's balance sheet will be highly leveraged with a ratio of total adjusted debt to total capitalization near 95%; total adjusted debt to EBITDA will be in the 6 times area, S&P said. Management plans to gradually improve the financial profile as the chemical cycle improves. Capital spending is expected to be substantially below historical levels to maximize cash flow available for debt reduction. At the current ratings, the key ratios of total debt to EBITDA and EBITDA to interest coverage are expected to approach 4.5x and 2.5x, respectively, over the next couple of years.

Moody's cuts Fertinitro

Moody's Investors Service downgraded FertiNitro Finance Inc.'s $250 million secured bonds guaranteed by parent company Fertilizantes Nitrogenados de Venezuela, Fertinitro, CEC to Caa2 from B2. The outlook is negative.

Moody's said it lowered the ratings because it expects a default will occur in the near term without specific sponsor support actions or refinancing of the current debt.

The project continues to perform far short of expectations, Moody's said. Even if its operating problems can be resolved for the longer term, market prices for ammonia and urea are sufficiently depressed that Moody's said it does not believe that the project can generate sufficient cash to meet its debt obligations without a substantial improvement in prices.

Fertinitro used $17 million of the $20 million in available sponsor support as part of the funding needed to meet its October debt payment, Moody's noted. While Fertinitro has a $60 million line of credit, which it may be able to utilize to meet the April 2003 debt service payment, any borrowings under the facility would be due and payable on April 20, 2003, the current expiry date of the facility.

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