Moody's cuts Aquila

Moody's Investors Service downgraded Aquila, Inc. including lowering its senior unsecured Caa1 to B1, subordinate debt to Caa3 from B2 and preferred stock to Ca from B3, affecting $3.7 billion of debt. The outlook is negative.

Moody's said the downgrade reflects weak cash flow generation relative to total debt despite recent asset divestitures; asset sales proceeds which do not reduce debt commensurate with the amount of debt that was incurred to purchase the same assets; liquidity concerns related to unwinding its trading business; and substantial near-term liquidity pressures.

Moody's said it is concerned that asset sales do not allow sufficient cash flow to repay parent debt to a level consistent with the expected cash generation of the remaining businesses. While cash flow from the remaining regulated utilities are expected to be less volatile, Aquila's efforts to unwind its trading business continues to be a substantial drag on its operating performance, and asset sales have not resulted in debt reduction to a level that is consistent with its ratings.

The negative outlook reflects the strain on the company's liquidity in the near term, with a need to refinance its syndicated bank credit facilities this month, and a reliance upon asset sales to meet its obligations over the next year, Moody's said.

Fitch puts Reliant on positive watch

Fitch Ratings put Reliant Resources, Inc. on Rating Watch Positive including its senior unsecured debt at CCC+. The company was previously on Rating Watch Evolving.

Fitch said the rating action Reliant's announcement that it has successfully completed a $6.2 billion secured financing package which replaces $5.9 billion of existing unsecured credit facilities, including the $2.9 billion Orion Power bridge loan which expired on March 31, 2003. The new credit facilities also provide RRI with $300 million of incremental liquidity to support cash margining requirements.

In addition to eliminating the significant uncertainty surrounding Reliant's near-term liquidity position, the revised credit agreement should provide Reliant with the flexibility to access the debt capital markets over time, Fitch said. Importantly, terms and conditions do not place any immediate pressure on Reliant to sell assets and/or tap alternative sources of capital as Reliant will not be required to make any mandatory principal payments prior to May 15, 2006.

Fitch expects to resolve the rating watch and refine Reliant's rating in the near term, including the assignment of a new senior secured credit rating.

Moody's cuts Fleming

Moody's Investors Service downgraded Fleming Companies, Inc. including cutting its $800 million secured credit facility to B3 from B2, $355 million 10 1/8% senior notes due 2008 and $200 million 9¼% senior notes due 2010 to Caa3 from Caa2, $400 million 10 5/8% senior subordinated notes due 2007 and $150 million 5¼% convertible senior subordinated notes due 2009 and $260 million 9 7/8% senior subordinated notes due 2012 to C from Ca.

Moody's said the action was prompted by Fleming's decision to file for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

The ratings consider estimated recovery levels for the several classes of debt.

However, the negative rating outlook reflects the uncertainties of recovery for creditors as the company attempts to reorganize.

Fitch cuts Fleming

Fitch downgraded Fleming Cos. Inc. including lowering its secured bank facility to DD from B, senior unsecured debt to D from CCC and senior subordinated debt to D from CC.

Fitch said the action follows Fleming's filing under Chapter 11 of the U.S. Bankruptcy Code and follows a series of downgrades concurrent with the decline in Fleming's financial position.

The bank facility rating reflects the expectations for recovery on the $975 million facility which is secured by, among other things, inventories and accounts receivable, which totaled approximately $1.6 billion at year-end 2002, Fitch said.

The senior unsecured and subordinated note ratings reflect the limited recovery that can be anticipated by bondholders.

S&P cuts Fleming

Standard & Poor's downgraded Fleming Cos. Inc. to D including its senior secured debt, previously at CCC, senior unsecured debt, previously at CC and subordinated debt, previously at C.

S&P said the downgrade is based on Fleming's announcement that it has filed a voluntary petition for reorganization under Chapter 11 of the U.S Bankruptcy Court.

Moody's upgrades Merrill Corp.

Moody's Investors Service upgraded Merrill Corp. including raising its $43 million senior secured term loan A due 2005 and $120 million senior secured term loan B due 2005 to B3 from Caa1. Moody's assigned a Caa2 rating to Merrill's $25 million class A senior subordinated notes due 2009 and $121 million class B senior subordinated notes due 2009. The outlook is stable.

Moody's said the upgrade reflects Merrill's improved cost structure, stabilized business mix and greater financial flexibility provided by the recapitalization completed in the third quarter of 2002. The recapitalization included the exchange of new senior subordinated notes for the old issue and a $18.5 million capital infusion via new senior discount notes by its major shareholders, with proceeds applied to past due interest and to a $20 million prepayment to the senior secured bank facility.

The ratings reflect Merrill's difficult operating environment with decreasing revenue base, weak balance sheet as evidenced by high financial leverage with total debt to EBITDA of about 5.3x and 6.1x adjusted for leases and a shareholders deficit of about $161 million and goodwill of $66 million as of the third quarter reported October 2002, Moody's said.

While, for each of the last three years ending Jan. 31, 2002 the company's operating income was positive, its interest expense exceeded operating income. For the year ended Jan. 31, 2003, operating income is expected to have exceeded interest expense, Moody's added.

For fiscal 2003, Merrill's EBITDA coverage of interest should be around 1.6x. Debt to EBITDA coverage is expected to be around 5.3x. While these are reasonable, fixed charge coverage has recently been just over 1.0x, Moody's said. Although the low fixed charge coverage is a concern, Moody's believes the company can adjust its costs and capital expenditures to reduce the likelihood that it goes into technical default under its covenants.

S&P puts Booth Creek on watch

Standard & Poor's put Booth Creek Ski Holdings Inc. on CreditWatch with negative implications including its $110 million 12.5% senior unsecured notes due 2007 at CCC+.

S&P said the watch placement is due to increased concerns about the company's liquidity position and its ability to meet upcoming financial obligations.

The CreditWatch listing reflects increased concerns on Booth Creek's tightening liquidity caused by unfavorable skier visit trends. Snowfall levels at the company's three largest ski resorts, which are located on the West Coast, were substantially below historical average and significantly affected skier visits, S&P noted. Increased visitations to the company's smaller East Coast ski resorts were unable to offset the dramatic decline. For the fiscal quarter ended Jan. 31, 2003, overall skier visits declined by 13% compared to a year ago. Furthermore, ski conditions at the West Coast ski resorts remain unfavorable, and will likely intensify the pressure on the company's revenue and cash flow.

Liquidity is tight as illustrated by a cash balance of only $1.9 million at Jan. 31, 2003. While the company had about $17 million availability under its $25 million revolving credit facility, the company was not in compliance with bank covenants as of that date, S&P said. Booth Creek recently made its March interest payment under its 12.5% senior notes. The company has another $5 million interest payment due on September 15 and about $5 million in required principal payment and operating leases due over the course of 2003.

S&P keeps American Airlines on developing watch

Standard & Poor's said AMR Corp. and its American Airlines Inc. subsidiary remain on CreditWatch with developing implications. Both are rated CCC.

S&P's continuing watch is in response to American's announcement that it reached tentative concessionary agreements with all of its unions in a last-ditch effort to avert bankruptcy.

American's tentative agreements with its unions, if ratified and accompanied by supplier and lessor concessions and new secured financing being sought, should avert bankruptcy, as long as the effect of the Iraq war or terrorism does not worsen significantly, S&P said. AMR and American would still be burdened with a heavy debt load and difficult revenue environment, but the $1.8 billion of labor cost concessions should, over time, narrow its losses substantially.

The concessions would not all take effect immediately, as savings from work rule and benefit changes will take time to appear. Accordingly, it will be important to finalize new secured financing from the bank group that was also reviewing possible debtor-in-possession financing of at least $1.5 billion, S&P said.

Moody's cuts Air Canada

Moody's Investors Service downgraded Air Canada, Inc. including lowerings senior unsecured debt to C from B3 and subordinated bonds to C from Caa2.

Moody's said the new ratings reflect Air Canada's announced filing for bankruptcy protection under the provisions of the Companies' Creditors Arrangement Act and Moody's assessment of the limited recovery that can be expected by unsecured debt holders.

Air Canada's bankruptcy was precipitated by declining liquidity and an inability to come to an agreement with its labor groups on reductions in costs, Moody's noted. The company has been weakened financially by declining demand and low yields as well as the burden created by debt generated in the course of its acquisition of Canadian Airlines, Inc. The company faced a continued poor revenue environment and an inability to reduce its cost base meaningfully. Pension related costs and the need for larger cash contributions to fund the company's pension plans also place increasing pressure on earnings and more importantly on the company's limited liquidity.

Moody's anticipates that some government assistance may be available to the airline if necessary as it is an important part of Canada's transportation infrastructure but that this support will be directed toward maintaining necessary service and is not expected to increase recovery to unsecured debt holders.

With much of the company assets pledged to support secured debt obligations or monetized through sale-leaseback transactions, recovery for unsecured debt holders will depend on the value of the company's non-aircraft and less liquid assets, Moody's said. Moody's notes that the value of some of these assets, such as Aeroplan, the company's frequent flier program, is highly dependent on Air Canada's successful emergence from bankruptcy.

S&P cuts General Chemical, on watch

Standard & Poor's downgraded General Chemical Industrial Products Inc. including cutting its $100 million 10.625% senior subordinated notes due 2009 to C from CCC and $85 million revolving credit facility due 2004 to CC from B-. The ratings were also put on CreditWatch with negative implications.

S&P said the action follows General Chemical's disclosure that it will not make the May 1 interest payment on its subordinated notes as a condition of the forbearance agreement that it has entered into with its senior bank lenders.

The ratings on the 10.625% notes will be lowered to D in May if the payment is missed, as anticipated.

During May 2001, the company amended the covenants in its bank credit agreement and remained in compliance with these covenants through the end of 2002, S&P noted. At that time, covenants beyond 2002 were not amended.

Due to the ongoing effect of lower soda ash prices, rising energy costs, and the weaker economic environment, the company does not believe that it will be in compliance with covenants at March 31, 2003, S&P said. As a result, on March 25, 2003, the company entered into a forbearance agreement with its bankers effective through July 30, 2003.

The company intends to restructure its debt with its senior lenders and representatives of the subordinated note holders over the next several months.

S&P cuts Horizon PCS

Standard & Poor's downgraded Horizon PCS Inc. including cutting its senior secured debt to CCC- from CCC+ and senior unsecured debt to C from CCC-. The outlook is negative.

S&P said the downgrade is based on Horizon's anticipation that it could violate bank maintenance covenants by as early as first quarter 2003 and, independent of the covenant issue, the very tight liquidity in the near term that could potentially result in a bankruptcy filing.

Given continuing challenges relating to the company's large mix of subprime credit subscribers, competition, and the weak economy, Horizon is at substantial risk of violating its maximum EBITDA loss and minimum revenue covenants, especially as these quarterly tests become even more restrictive starting this year, S&P noted.

Horizon's current liquidity, which after adjusting for minimum cash that must be maintained on the balance sheet and lack of full access to its bank revolving credit facility, is unlikely to cover funding needs for operating cash losses, cash interest expense, and capital expenditures of between $80 and $90 million that the company expects for 2003, S&P said. To deal with this liquidity issue, Horizon has started the process of renegotiating or restructuring its equity, debt, and other contractual obligations and indicated that bankruptcy filing could follow should these efforts be unsuccessful.

S&P cuts Air Canada

Standard & Poor's downgraded Air Canada including cutting its $300 million 10.25% notes due 2011, $300 million floating-rate rate notes series A due 2005, C$230 million 7.25% debentures due 2007, C$175 million 6.75% debentures due 2004, C$250 million 9% debentures due 2006, €100 million 10.25% senior unsecured notes due 2011, €102.258 million 6.625% notes due 2005 and €150 million 10% notes due 2006 to D from CCC+.

S&P said the downgrade follows Air Canada's bankruptcy filing.

S&P noted Air Canada faced an acclerated deterioration in its revenue stream subsequent to the onset of the war in Iraq, and fears related to the SARS virus, particularly in Asia Pacific markets.

These events exacerbated Air Canada's already-weakened operating position related to heightened domestic competition, depressed business traffic, and increased fuel costs, S&P said.

The airline had limited access to capital markets and faced forthcoming debt maturities. Its plans to shore up liquidity through the partial sale of its Aeroplan division had been recently delayed. Efforts to achieve cost savings through labor concessions and government relief related to airport fees, security charges, and other taxes had been largely unsuccessful, S&P said.

S&P cuts Mission Resources

Standard & Poor's downgraded Mission Resources Corp. including cutting its $225 million 10.875% senior subordinated notes due 2007 to CCC- from CCC+. The outlook is negative.

S&P said the downgrade reflects that Mission has limited near-term liquidity and is highly reliant on higher-than-average commodity prices to fund its debt service and reserve replacement expenses. Mission's liquidity consists primarily of about $16 million of cash balances, pro forma for Mission's newly implemented and fully drawn $80 million senior secured credit facility. Proceeds from the credit facility were primarily used to acquire the notes.

To obtain additional liquidity, Mission's financial flexibility is diminished, as it has granted the lenders under its new credit facility a security interest in its reserves, excluding Mission from using these assets as a potential source of security for future financings, S&P noted. While Mission has a carve-out for a working capital facility, such a facility is at the lenders' discretion.

Based on normalized oil and gas prices, S&P said it believes that Mission's discounted future cash flows related to proved oil and gas reserves is weak and insufficient to cover total debt outstanding of about $208 million, potentially leaving the bondholders with an incomplete recovery if the company were to file for bankruptcy.

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