S&P cuts Kmart ratings, keeps on negative watch

Standard & Poor's on Monday lowered its ratings on Kmart Corp., including cutting the convertible preferred stock rating to CCC- from B, and placed the ratings on watch with negative implications. The rating actions are based on heightened concerns about Kmart's loss of financial flexibility in recent weeks, S&P said. Kmart's drop in stock price has accelerated substantially since the beginning of 2002. While the company has faced ongoing challenges to its franchise, as reflected in recent operating and financial results, a recent loss of supplier and investor confidence is troubling. Kmart had been expected to renegotiate its $1.5 billion revolving credit facility in mid-February, however, it is now reviewing its prospective liquidity position and business plan for 2002 and 2003, and is considering supplemental financing.

Moody's puts Fleming on review for possible downgrade

Moody's Investors Service on Monday placed all ratings of Fleming Cos. Inc. under review for downgrade, including the $150 million 5.25% convertible senior subordinated notes due 2009 rated B2. Moody's said the review was prompted by its decision to downgrade all ratings of Kmart Corp. (senior implied rating lowered to B2 from Ba2) and to leave the Kmart ratings under review for possible further downgrade.

Kmart is Fleming's most important customer with more than 20% of sales, Moody's noted. Fleming reports that Kmart is current, Moody's said, and in a worst case, Moody's believes that Fleming has sufficient liquidity resources to absorb a sizable accounts receivable write-off but franchise difficulties at Kmart would represent a setback for Fleming's business plan. The review will consider the effects of Kmart's decreased credit quality on Fleming's operations, balance sheet and business plan as well as Fleming's contingency plans, Moody's said. The ratings currently consider that the Kmart relationship provides a solid foundation to grow sales, increase profits and build cash flow. Decreased confidence in Kmart may impact Moody's view that significant debt protection measure improvements resulting from higher revenue and increased purchasing efficiencies can reliably be expected over the intermediate term.

S&P affirms L-3 ratings, revises outlook to stable

Standard & Poor's on Monday revised its outlook on L-3 Communications Corp. to stable from positive, but affirmed the company's BB corporate credit and B+ senior subordinated debt ratings following the announcement that L-3 is acquiring most of Raytheon Co.'s Aircraft Integration Systems division for $1.1 billion cash. The transaction initially will be debt-financed, with L-3 looking to issue some equity in the first half of 2002. S&P said program diversification and healthy contract backlogs should sustain current profitability Significant additional borrowings related to the pending large acquisition have substantially consumed financial flexibility at the current rating. Ratings on New York City-based L-3 reflect a slightly below-average business risk profile and somewhat elevated debt levels, but credit quality benefits from an increasingly diverse program base and efficient operations, S&P said.

Moody's puts Simon Property on review for possible downgrade

Moody's Investors Service on Monday placed the ratings of Simon Property Group, including the senior unsecured at Baa1 and preferred stock at Baa2, under review for possible downgrade following an announcement on Sunday by Simon, The Rouse Co. and Westfield America Trust of a definitive agreement to jointly acquire and split the U.S. regional mall portfolio of Rodamco North America. As a part of this transaction, Simon will obtain Rodamco's ownership interests in 13 high-end regional malls, four of which were already partly owned through joint ventures, located in markets of existing Simon assets, for about $950 million in cash and $570 million in assumed mortgage debt and preferred stock. Simon will initially fund the cash portion of the transaction with bank debt. Moody's said its review will focus on the structure and timing of the permanent funding for this acquisition, and on the REIT's overall leverage profile that will begin to emerge after the transaction closes in the second quarter of 2002.

According to Moody's, the rating action reflects the possibility that Simon's financial profile will deteriorate as a result of this highly leveraged transaction. The rating agency noted that prior to this announcement the REIT's rating outlook was negative, reflecting high financial leverage and weak coverage ratios for the Baa1 rating, in what Moody's believes will be a challenging retail environment. Moody's said that a rating confirmation would most likely result if Simon is able to mitigate the high debt component in its initial transaction financing while maintaining solid operating performance in a challenged retail environment. A one notch rating downgrade is likely should the REIT emerge from the transaction with a weakened long-term financial profile, Moody's said.

Moody's cuts Covanta senior unsecured rating to Ba3

Moody's Investors Service has downgraded Covanta Energy Corp.'s senior unsecured rating to Ba3 from Ba1 and subordinated rating to B1 from Ba2. The ratings remain under review for downgrade pending the company's immediate actions to improve its liquidity either through the sale of assets or by accessing the capital markets, Moody's said. The downgrade, Moody's said, was in response to increasing concerns stemming the company's diminished liquidity, lack of access to the capital markets, inability to sell its remaining entertainment and aviation services assets, continued delays in the collection of outstanding California utility receivables and inability to meet cash usage covenants under its bank revolving credit agreement. The banks have agreed to waive these covenants through January 2002 but have as yet not agreed to provide any additional liquidity to the company.

On Dec. 21, Covanta announced it was in the process of conducting a comprehensive review of strategic options in light of its limited current cash availability and inability to access the capital markets. Moody's said it is concerned about the company's overall lack of financial flexibility and the limited strategic alternatives available considering continued uncertain market conditions in the energy industry. In addition, Covanta has significant convertible debenture maturities in mid-2002 - $85 million in June and $65 million in October - and may have difficulty refinancing these issues in the capital markets, Moody's said.

S&P upgrades Arkansas Best

Standard & Poor's upgraded Arkansas Best Corp. and changed the positive outlook to stable.

Ratings affected include the company's $50 million 6.25% convertible subordinated debentures due 2011, raised to BBB- from BB+.

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