S&P cuts O'Sullivan

Standard & Poor's downgraded O'Sullivan Industries Holdings Inc. and assigned a negative outlook. Ratings lowered include O'Sullivan Industries Holdings' $15 million senior discount notes due 2009, cut to CCC+ from B-, and O'Sullivan Industries Inc.'s $100 million term loan due 2007, $35 million term loan due 2005 and $40 million revolving credit facility due 2005, cut to B from B+, and $100 million 13.375% senior subordinated notes due 2009, cut to CCC+ from B-.

S&P said the downgrade reflects challenging industry conditions in the ready-to-assemble furniture market and expectations for weaker cash flow at the company, which does business as O'Sullivan Furniture. If cash flow statistics decline, the ratings could be lowered.

S&P said it expects the market for ready-to-assemble furniture to contract and competition to intensify. Shipments are expected to decline about 10% in 2003.

While O'Sullivan Furniture has defended its market share against major competition, products from Southeast Asia are gaining consumer acceptance, S&P added. These products now account for about 20% of shipments - market share that has been gained only in the past few years. Further intensifying competition are the bankruptcies of retailers such as Kmart Corp. and Service Merchandise.

With the threat of war in Iraq and high consumer debt, S&P said it expects a soft market for the rest of 2003 that will likely result in a further reduction in company sales and cash flow.

Debt leverage, as measured by funds from operations to total debt, was negative for the 12 months ended Dec. 31, 2002, compared with a five-year average of about 25%, S&P said. While EBITDA coverage was 2.1x for the 12 months ended Dec. 31, 2002, Standard & Poor's is concerned that credit measures may weaken given the current adverse market conditions.

S&P raises M/I Schottenstein outlook

Standard & Poor's raised its outlook on M/I Schottenstein Homes, Inc. to positive from stable and confirmed its ratings including its corporate credit rating at BB-.

S&P said it raised M/I Schottenstein's outlook because of the company's consistent performance and above-average financial measures.

The rating is supported by M/I's good market position, conservative business profile, solid margins, and consistently conservative financial profile. Sales and profitability remain concentrated in the Midwest, primarily Ohio; management, however, has prudently grown the company beyond its largest market and profitability has become more dispersed, S&P noted.

M/I's financial profile is very strong for the rating, S&P said. Higher average home prices, operating efficiencies, and stable overhead as a percent of revenues combine to produce solid overall homebuilding gross margins of 24% and operating margins of 11%. At year-end, debt-to-book capital was slightly more than 20%, and debt-to-EBITDA was less than 1x. Leverage benefited from modest line usage throughout 2002 and a growing equity base due to strong retained earnings.

Moody's raises Northland outlook

Moody's Investors Service raised its outlook on Northland Cable Television, Inc. to stable from negative and confirmed its ratings including its $100 million 10.25% senior subordinated notes due 2007 at Caa3.

Moody's said the outlook change is predominantly in response to Northland's recently announced sale of its Aiken, S.C. systems for approximately $40.2 million, which follows the earlier and smaller announced sale of the company's Port Angeles, Wash. system through which net proceeds approximating $10.4 million are expected to be received.

Taken together, Moody's said it believes the asset sales should allow for a sufficient reduction in bank debt outstandings under the company's unrated senior secured bank credit facilities to permit Northland to remain in compliance with stepped down financial leverage maintenance covenants at the end of this year, which otherwise were expected to have been violated.

The sales also give the company more time to address the operating challenges facing it, including the need to stem further erosion of its subscriber base to competing direct broadcast satellite operators, although this may be difficult to achieve in the absence of gaining alternative sources of liquidity which Moody's believes will be necessary to fund further system upgrades, accelerate the rollout and marketing of new ancillary services, and thereby enhance the value proposition for subscribers, while ultimately growing internally generated cash flow.

S&P cuts DDi

Standard & Poor's downgraded DDi Corp. including cutting its $100 million 5.25% convertible subordinated notes due 2008 to D from CCC-, $100 million 6.25% convertible subordinated notes due 2007 to C from CCC- and $300 million credit facility due 2003 to CCC- from CCC+ and Details Capital Corp.'s $60.054 million 12.5% senior discount notes due 2007 to C from CCC-. Ratings not lowered to D were put on CreditWatch with negative implications.

S&P said the actions follow DDi's failure to make the interest payment on its 5.25% convertible subordinated note due on March 1.

Weak financial performance in the 2002 fourth quarter resulted in covenant violations under DDi's senior credit facility, S&P noted. DDi failed to meet the bank debt covenant for minimum EBITDA in the fourth quarter of 2002, thereby restricting its ability to make the subordinated debt interest payments on the 5.25% notes, which were due on March 1, and the 6.25% notes scheduled in April 2003.

The rating on the 6.25% notes will be lowered to D in April if the payment is missed, as anticipated.

Moody's cuts Trend Technologies

Moody's Investors Service downgraded Trend Technologies, Inc. including cutting its $147 million guaranteed senior secured term loan due 2007 and $59 million guaranteed senior secured revolving credit facility due 2006 to Ca from Caa2. The outlook is stable.

Moody's said the downgrade is based on the estimated recovery of loan principal in the wake of the company's sale for an amount valued at about $69 million to Trend Technologies, LLC, an entity 50% owned by the company's former chief executive.

The ratings downgrade is based on Moody's estimate that the senior secured lenders would realize only 25-30% principal recovery on the $206 million senior secured loans outstanding based on their perfected first security lien on assets, and may recover somewhat more, although not a substantial amount.

Trend Holdings, Inc. and Trend Technologies, Inc. filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Wilmington, Delaware on Nov. 7, 2002. The company was unable to operate profitably in the enclosures business with the dominant share of its plant capacity in the United States and Mexico, and its customer base migrating its business to providers with production facilities in China.

Moody's rates Standard Pacific notes Ba2

Moody's Investors Service assigned a Ba2 rating to Standard Pacific Corp.'s new $125 million senior notes and confirmed its existing ratings including its senior notes at Ba2 and senior subordinated notes at Ba3. The outlook is stable.

Moody's said the ratings reflect the strength of Standard Pacific's major markets in California, moderate homebuilder debt leverage and successful efforts to diversify geographically. However, the ratings consider the risks of having a regional concentration in California, integration challenges from acquisitions, the stock buyback program, and the cyclical nature of the homebuilding industry.

Although Standard Pacific derived 42% of its home closings in 2002 from California (down from 51% in 2001 and 79% in 1996), its profits from California constituted a significantly greater proportion of its homebuilding total, Moody's noted. Fortunately for the company, California as a whole has been extremely strong for a number of years, and even the Northern California market, which suffered a sharp contraction in 2000, has shown some selected signs of strength.

Going forward, the relative profit contribution from California is projected to decline, from rapid growth in several other markets and from entry into new markets.

Homebuilding debt leverage has held pretty steady for the past four years, with homebuilding debt/capitalization ending 2002 at 45.3%, versus 48.8% at year-end 2001, and homebuilding debt/EBITDA coming in at 2.9x (vs. 2.6x), Moody's said. After adjusting the balance sheet for the company's off-balance sheet joint venture indebtedness, homebuilding debt/capitalization would increase by several percentage points.

Moody's rates Hexcel notes B3, raises outlook

Moody's Investors Service assigned a B3 rating to Hexcel Corp.'s planned $125 million senior secured notes due 2008 and confirmed its existing ratings including its $339 million 9¾% senior subordinated notes due 2009 at Caa2 and $26 million 7% convertible subordinated debentures due 2011 at Caa3. Moody's raised the outlook to stable from negative.

Moody's said the new stable outlook recognizes Hexcel's improved financial flexibility owing to the new capital structure, which Moody's believes will be critical to the company's ability to operate at lower risk of financial distress through a prolonged industry downturn.

The rating reflects the highly levered capital structure of the company, although at improved levels and terms due to Hexcel's recently announced financial restructuring program, which includes a $125 million issue of convertible preferred shares, coinciding with continued weakness in the commercial aerospace sector in which the company operates, Moody's added.

Following the proposed restructuring transactions, under which Hexcel intends to replace $180 million of existing senior bank debt and $47 million of convertible subordinated notes due August 2003, overall leverage remains high despite a general reduction in total debt by about $100 million, Moody's said. Leverage will reduce somewhat, as debt will fall from 5.7x actual 2002 EBITDA to 4.8x pro forma 2002 EBITDA.

Additionally, free cash flow available to repay debt is a concern. Although pro forma 2002

free cash flow was approximately 14% of post-transaction debt, Moody's noted that much of the free cash generated was aided by historically low levels of capex and decreases to working capital, owing largely to the company's planned reduction in cost structure in anticipation of depressed commercial aerospace business levels, commenced in 2001. Moody's said it believes that, without such anomalies, free cash flow will more likely represent less than 10% of total debt in the near- to medium-term.

Moody's rates Serologicals' loan B1

Moody's Investors Service rated Serologicals Corp.'s proposed $100 million senior secured term loan due 2008 and $25 million senior secured revolver due 2007 at B1. The rating outlook is stable.

The term loan will be used to fund the acquisition of Chemicon International Inc. Amortization on the term loan is $1 million in fiscal 2003, $10 million in fiscal 2004, and $20 million in fiscal 2005. Security for the facility is all of the company's domestic tangible and intangible assets, and by a 65% pledge of international voting stock.

Ratings reflect the company's relatively small-scale, limited history of operating with debt; integration risks associated with the acquisition, acquisition risk, regulatory risks, moderate pro forma leverage of 2.4 times and significant customer concentration, Moody's said.

"The ratings, however, also recognize the significant barriers to entry in key markets served by the company; the successful integration of previous acquisitions; the benefit of long-term customer contracts; the continued growth of drug research spending, which supports demand for its products; and the company's good, albeit reduced, operating margins," Moody's added.

S&P cuts AES Drax

Fitch Ratings downgraded AES Drax Energy Ltd.'s senior notes to D from C, and removed the rating from Rating Watch Negative. In addition, Fitch maintained the Rating Watch Negative on the CC rating of the senior secured bonds issued by AES Drax Holdings Ltd. and the DD senior secured bank loan rating of its related company, Inpower Ltd.

Fitch said the action follows the non-payment of interest on the Drax Energy notes, which was due Feb. 28. The non-payment of interest will constitute an event of default after a 15-day cure period, and Fitch does not expect the default to be cured within that time.

However, the intercreditor agreement includes provisions preventing Drax Energy noteholders enforcing their security for a period of 90 days following a default. Last December, the senior creditors to the project, which include lenders to Inpower and Drax Holdings bondholders, entered into a standstill agreement which expires on May 31. Drax Energy noteholders will not be able to enforce their security before the end of the standstill agreement.

The downgrade also reflects Fitch's expectation of a low recovery rate for the Drax Energy's noteholders. As part of the standstill agreement, Drax must present a restructuring proposal to the creditors by March 15, which will help clarify recovery potential for all creditors.

S&P cuts Omnova

Standard & Poor's downgraded Omnova Solutions Inc. including cutting its $300 million revolving credit facility due 2004, cut to BB from BB+. The outlook remains negative.

S&P said the downgrade reflects concern that the continuation of difficult business conditions will further delay the expected improvement in the company's financial profile. Profitability and cash flow remain negatively affected by high raw material and energy costs, and soft demand in key markets due to the sluggish economy.

The shortfall in cash flow has contributed to an elevated debt level (adjusted for receivables securitization and leases) and increased leverage, S&P said, although it added that it recognizes Omnova's efforts to reduce costs and expenditures, and to manage cash flow.

The shortfall in cash flow has contributed to an elevated debt level (adjusted for receivables securitization and leases) and increased leverage, with debt to EBITDA about 4.5x, S&P said. Credit protection measures are somewhat weak, with funds from operations to adjusted debt of about 18%.

A gradual recovery in business conditions should result in cash generation that is in excess of internal needs, thereby providing funds for debt reduction. During the business cycle, funds from operations to debt and debt to EBITDA should average 20% and 3.5x, respectively. The ratings incorporate the expectation that share repurchases, debt-financed acquisitions, and capital spending will be moderate.

S&P rates Serologicals loan BB-

Standard & Poor's assigned a BB- rating to Serologicals Corp.'s new $100 million term facility due 2008 and $25 million revolving credit facility due 2006. The outlook is stable.

S&P said the ratings reflect Serologicals' defensible niche markets, moderate debt leverage and acquisitive growth model.

Serlogicals' supplements used in the manufacture of monoclonal antibodies are attractive both from the standpoint of the high margins they command and the regulation-imposed high switching costs faced by their drug company customers, S&P said. The research reagent business, meanwhile, is being expanded mostly through acquisitions. The company most recently initiated the debt-financed $95 million purchase of Chemicon International Inc., the second acquisition in about 15 months in support of the reagent business.

Despite an increase in capital spending to expand capacity of its important EX-CYTE culture media supplement, the company is expected to readily generate free cash flow in excess of debt maturity requirements, S&P added. Still, Serologicals' relatively limited financial resources and ongoing need for scientific innovation contributes uncertainty to its prospects for success considering its desire to grow.

Pro forma for the Chemicon purchase, Serologicals' debt burden would be moderate, with lease-adjusted total debt to capital of just over 40% and total debt to EBITDA at 2.9x.

The BB- rating assigned to the pending credit facilities is one notch higher than the corporate credit rating, S&P noted. The loans are secured by a perfected first priority security interest in all of its tangible and intangible assets and are the company's only debt as of closing.

In a default scenario, S&P said the different production processes and different customers for the company's products mean it is highly unlikely that a single business event would affect all units equally. This suggests that the remaining businesses could be reorganized in bankruptcy or sold to satisfy creditors. Under the stress of default, the resulting enterprise value is in excess of the maximum secured borrowings, assuming a conservative EBITDA multiple and estimating the cash-flow contributions of the more significant businesses. S&P said there is a strong likelihood of full recovery of principal.

S&P raises Hovnanian outlook

Standard & Poor's raised its outlook on Hovnanian Enterprises to positive from stable and confirmed its ratings including its $400 million senior unsecured notes at BB- and $150 million subordinated notes at B.

The ratings and outlook acknowledge Hovnanian's enhanced geographic diversity, successful integration of acquired companies, and consistent improvement to its financial risk profile, S&P said.

The company maintains a solid position in the Northeast (27% of revenues), as one of the largest builders in New Jersey and eastern Pennsylvania. However, during the past several years, Hovnanian has also pursued selective geographic expansion and currently maintains operations in North Carolina, Washington, D.C., Southern California, and Texas.

Growth has been dramatic during the past few years, with homebuilding revenues reaching $2.5 billion in fiscal year 2002, as the company successfully completed select builder acquisitions, while achieving good organic growth, S&P noted. In addition to strong volume gains (deliveries more than doubled during the past two years), Hovnanian has been able to steadily increase prices, as demand for homes has remained particularly strong in more highly regulated markets such as the Northeast and Washington, D.C., where Hovnanian maintains very attractive land positions.

The company's financial measures have been consistently strong and improving, S&P said. The company's homebuilding gross margin for the first quarter 2003, excluding land sales, was up 400 basis points from first quarter 2002, to a solid 24.7% due mainly to higher home prices and improved operating efficiencies. This led to material EBITDA growth (up 90%), and solid coverage, with EBITDA covering interest incurred at 5.8x. Leverage at quarter end stood at 53% debt-to-book capitalization (or 50% net of cash balances), with debt to EBITDA hovering in the 2.0x to 3.0x range (closer to 2.0x).

S&P rates Walter loan BB

Standard & Poor's assigned a BB rating to Walter Industries Inc.'s new $250 million senior secured tranche B term loan due 2010 and $250 million senior secured revolving credit facility due 2008. The outlook is stable.

S&P said Walter's ratings reflect a financial profile that is conservative relative to similarly rated industrial companies as well as the varying degrees of competitive strength associated with several of the company's core businesses. These core businesses have historically produced positive free cash flow.

However, several of the company's non-core businesses produce commodity items that are subject to cyclical swings in demand and face competitive pricing pressures, lending a degree of volatility to that positive free cash flow, S&P noted. Management's stated intention to narrow the company's focus and grow fewer, more profitable businesses should improve the company's business risk profile in the longer term.

Walter maintains a moderately conservative financial profile relative to the overall rating, S&P said. Total debt-to-EBITDA (after adjusting for the captive finance subsidiary and operating lease obligations) is 1.5x and should continue to strengthen as expectations for moderate growth in earnings and modest debt amortization enable a moderation in adjusted leverage (54% debt/total capital). EBITDA/interest coverage measures have been improving, benefiting from lower corporate debt levels and a reduction in variable interest rates. These measures, after adjusting for the captive finance subsidiary, have shown marked improvement, rising from 3.9x in 2001 to 5.0x in 2002.

Moody's upgrades KB Home senior implied

Moody's Investors Service upgraded KB Home's senior implied rating to Ba1 from Ba2 and confirmed its issuer rating and senior notes at Ba2 and its senior subordinated notes at Ba3. The outlook was changed to stable from positive.

The upgrade reflects KB Home's improving financial results and profile, success at reducing its earnings concentration in California, leading share position in many of the markets that it serves, successful track record both in de novo expansions and in integrating acquisitions, strong liquidity, and long history, Moody's said. At the same time, the ratings consider the financial and integration risks that accompany an aggressive expansion strategy, the still-sizable concentration of land inventory values and profits in California, and the large, ongoing share repurchase program.

The upgrade was limited to KB Home's senior implied rating because the company's bank credit facility and term loan are structurally senior to its publicly-rated senior notes and senior subordinated notes, Moody's said.

Going forward, consideration for an upgrade of the company's publicly-rated notes will rest on elimination of their structural subordination to the bank debt, the rating agency added. Consideration for further improvement in the company's senior implied rating will depend on the company's continuing to improve its financial results while further deleveraging the balance sheet.

Moody's rates Dole notes B2, loan Ba3

Moody's Investors Service assigned a prospective B2 rating to Dole Food Co., Inc.'s planned $375 million senior unsecured notes and a prospective Ba3 rating to its new senior secured bank credit facilities. The existing ratings remain on review for downgrade including Dole's senior unsecured debt at Ba1.

Proceeds from the bank credit facilities and public notes will be used to partially fund the leveraged buyout of Dole by its chairman David Murdock. Should the proposed transaction close as presently structured, Dole's senior implied rating will be downgraded by three notches to B1 from Ba1, and other Dole ratings will be adjusted accordingly, Moody's said.

Dole's ratings are constrained by its earnings sensitivity to uncontrollable factors such as swings in commodity prices and weather, the complex and highly-competitive industry in which it operates, as well as the company's high adjusted leverage, Moody's said. The leveraged buyout will result in $1.47 billion in incremental debt being added to Dole's capital structure, in comparison to $125 million in cash equity being contributed.

Dole's ratings are supported by its strong brand and market strength, the diversity of its product portfolio and sourcing locations, strong global logistics capabilities, and an increasing portion of revenues and earnings derived from value-added products, Moody's said.

Ratings also consider a requirement in the bank facilities for Dole to repay debt either with at least $150 million in asset sales or excess cash flow over the next 33 months in order to repay debt, as well as a requirement for David Murdock to contribute up to $50 million in cash equity if certain leverage or asset sale covenants are not met.

The stable outlook on these newly assigned prospective ratings reflects Moody's expectation that Dole will work to reduce leverage and improve its financial flexibility in the years following the transaction. If Dole is successful in reducing its debt and improving its debt protection measures more quickly than anticipated, its ratings could be upgraded. Alternatively, ratings could be pressured if debt reduction slows, or if Dole pursues acquisitions which increase leverage.

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