Moody's rates new Charming Shoppes convertible at B2

Moody's assigned a B2 rating to the proposed $130 million senior convertible notes due 2012 of Charming Shoppes Inc.

But Moody's cut the company's senior unsecured issuer rating to B2 from B1 and put the B2 rated $96 million convertible subordinated notes due 2006 on review for possible downgrade.

The company's senior implied rating of Ba3 was confirmed.

Moody's does not rate the company's secured $300 million revolving credit and $75 million term loan facility.

The ratings reflect Charming's high leverage measures and modest operating profitability.

Leverage increased since the acquisition of Lane Bryant in August 2001, Moody's noted.

Debt protection measures have suffered from higher leverage but also from economic and weather conditions that negatively affected many apparel retailers since the latter half of 2001 and which caused Charming to record a normalized operating loss in fourth quarter 2001.

The normalized EBITDA margin for the year, adding back certain non-recurring restructuring and other expenses, was about 5.5%, and is likely to remain below the 8.8% margin in 2000. The recent margin is relatively low for apparel retailers, which typically have high top line and margin volatility, and therefore leaves little room to absorb surprises.

Moody's believes Charming's risk of volatility may be somewhat moderated relative to other apparel retailers by its focus on larger sized customers but that the company is still subject to changes in fashion, competition and economic pressures.

The ratings are supported by Charming's history of prudent financial management, Moody's said.

While the company has been acquisitive, it has also consistently generated positive cash flow that has been used to reduce debt and partially pay for future acquisitions.

Ratings also reflect the buildup in shareholder equity due to retained earnings and the use of stock for acquisitions, the expectation that operating and leverage measures will begin to show a turnaround by mid- to late-2002 and the well-recognized brand names which helps promote customer loyalty.

The rating outlook is negative, Moody's said, as the near-term performance outlook for apparel retailers remains negative.

Against this backdrop, Charming is undergoing a number of operational challenges that include the absorption of Lane Bryant, closing or converting of a number of store locations and expanding the presence of Lane Bryant into strip malls.

Additional risks could arise from changes to the fashion image, target audience or product sourcing of the Catherine's and Lane Bryant concepts, increased competition and future acquisitions before existing operations are fully integrated.

The B2 rating on the proposed senior convertible notes reflects a subordinated position in the capital structure and lack of meaningful covenants or protections.

The notes are obligations of the parent company, which has no meaningful operations of its own, and do not have guarantees from operating subsidiaries. As a result, they rank below the subsidiaries' senior unsecured obligations, including vendor payables.

The B2-rated subordinated convertible notes are subordinated to the senior notes and will be downgraded if they are not converted or redeemed in the near future, which Charming has indicated is its intention.

The senior unsecured issuer rating was changed to B2 to more appropriately reflect the risk of an unguaranteed obligation at the holding company.

Charming's income from its credit portfolio is showing the benefit of lower rates, but Moody's believes that benefit may be at least partly offset by a higher loss experience. The company disclosed that income from its receivables portfolio was diverted to finance a loss account to benefit holders of its securitzation's debt.

The ratings contemplate that normalized operating profit margins will improve from the low 5.5% normalized EBITDA margin reported for the year ended February 2002.

Charming's coverage levels are likely to remain modest for its rating category, Moody's said, with EBITDAR to interest plus rents of about 1.5 to 1.7 times.

S&P cuts ITC DeltaCom to D

Standard & Poor's lowered the rating on ITC DeltaCom Inc.'s 4.5% convertible subordinated notes due 2006 and 9.75% senior unsecured notes due in 2008 to D from CC due to the missed interest payments on those notes.

Also, S&P cut ITC's corporate credit rating to D from CC.

In addition, S&P lowered the rating on ITC's $160 million senior secured credit facility to C from CC and kept it on negative watch.

The C ratings on the company's 11% senior unsecured notes due 2007 and 8.875% senior unsecured notes due 2008 remain on negative watch.

On May 14, ITC announced that it would miss the scheduled June 1 interest payment on the 11% senior unsecured notes, and S&P said the rating on this issue will be lowered to D on non-payment.

The next scheduled interest payment on the 8.875% senior unsecured notes is Sept. 1.

ITC is in negotiations to restructure its debt to alleviate the liquidity constraints, S&P noted, and as of March 31, the company's cash balance was about $25 million.

S&P rates Calpine's bank loan BBB-

Standard & Poor's assigned a BBB- rating to Calpine Corp.'s new $1 billion senior secured term B and new $1 billion senior secured revolver. The default risk of the new loans are BB, the same as Calpine's corporate credit rating, however, the loan is rated two notches higher due to strong prospects for recovery in a default scenario.

The loans, according to S&P, are secured by basically all assets. More specifically, the credit facilities are secured by a first-perfected security interest on Calpine's equity in its gas reserves through a pledge of 100% of the stock of subsidiaries holding the reserves; Calpine's equity in its gas reserves in Canada through a pledge of 65% of the stock of Calpine Canada Energy Ltd.; Calpine's equity investment in 81 power plants in the U.S. through a pledge of 100% of the stock of the subsidiaries holding the plants; Calpine's equity interest in three power plants in Canada through a pledge of 65% of the stock of Calpine Canada Energy Ltd; note receivables from PG&E Corp. associated with Calpine's Gilroy plant; Calpine's interest in the Saltend Energy Centre in the U.S., through a pledge of 65% of the stock of Calpine Canada Energy Ltd.; and Calpine's pledge of 100% of the stock of the various holding companies, under which the U.S. and Canadian gas reserves sit, and the pledged power plants.

In a default scenario, the value of the recovery is $4.1 billion, 200% over-collateralization of the loans.

"Calpine's capital structure, which relies heavily upon debt, is a principal determinant of Standard & Poor's non-investment grade rating on Calpine," S&P said. "That revenue is derived from highly volatile commodities of electricity and natural gas exacerbates the risk. Its new reliance upon bank facilities for liquidity, instead of the capital markets, is potentially risky. Banks could exert increasing control over Calpine's financing and operations in a stressed scenario that would favor them over the unsecured lender base, which provides the bulk of Calpine's capitalization."

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