Moody's rates Lennar's new notes at Baa3

Moody's Investors Service assigned a Baa3 rating to Lennar Corp.'s new $350 million of 5.95% senior notes due 2013 and confirmed other ratings, including the 0% convertibles due 2018 at Baa3 and 0% convertibles due 2021 at Ba2. The outlook is stable.

The ratings, recently upgraded, reflect improving financial results, a long and consistent history of revenue and earnings growth, strong liquidity, successful acquisitions, diversification, a large equity base and significant management ownership.

At the same time, the ratings consider financial and integration risks that accompany an active acquisition policy, ongoing share repurchase program, substantial off-balance sheet joint venture and partnership debt, and larger-than-industry-average lot position.

Going forward, the ratings outlook will depend largely on Lennar's capital structure discipline, Moody's said.

Fitch cuts Fleming ratings

Fitch Ratings downgraded Fleming Cos. Inc. senior unsecured debt to B+ from BB- and senior subordinated debt to B- from B due to weakness in operating performance, a reduction in anticipated proceeds from its retail assets and termination of the agreement with Kmart Corp.

In addition, the ratings were put on negative watch until further clarity is provided as to the financial implications of the termination of the Kmart relationship.

Recent results reflected a 17% increase in distribution revenues due to new business from acquisitions and some significant new customers but operating profitability softened due to heightened competition, a weak economy and rising overhead costs.

In September, Fleming announced plans to divest its retail business and apply the expected $450 million in proceeds to debt reduction but later lowered the forecasted proceeds. While this is partially offset by a higher retention of the distribution business, proceeds available for debt reduction in 2003 will be lower than expected.

The announcement of the termination of Fleming's agreement with Kmart is likely to result in significant one-time costs, along with the loss of about $3 billion in revenues, Fitch said.

Fleming has some financial flexibility to work through the significant changes to its business as it has no debt maturities until 2007. However, Fleming is currently renegotiating its secured bank agreement, which is not slated to mature until 2007.

The new or amended facility is expected to have covenant levels based, in part, on the assets of Fleming that will provide the company with more flexibility. Fitch anticipates that Fleming will be successful in this negotiation.

Moody's cuts AIG outlook

Moody's Investors Service confirmed American International Group Inc.'s ratings but changed the outlook to negative from stable.

The change follows an announcement by AIG that it would take a fourth quarter 2002 pretax charge of $2.8 billion net of ceded reinsurance ($3.5 billion gross of reinsurance) for reserve additions to support commercial insurance coverages written in recent years by its U.S. group.

The shift to a negative outlook reflects several factors, including the magnitude of the charge along with potential future reserve related charges and incremental pressure placed on the parent's ratings of adverse financial developments at in the U.S. group.

Moody's noted that earnings strength and consistency, together with a solid capital position and tight controls on expenses and cash management have long-been hallmarks of AIG, and continue to support its Aaa rating.

Fitch puts AIG on negative watch

Fitch Ratings placed the AAA senior debt rating and other long term fixed ratings of American International Group Inc. on negative watch following AIG's announcement of after-tax reserve charges of $1.8 billion in its U.S. commercial property/casualty operations.

The watch was not driven by the charge, per say, but rather Fitch's concern that over the past several years AIG's risk profile may have increased to levels inconsistent with the AAA senior debt rating, which warrants that a "fresh look" be taken at AIG's credit fundamentals and ratings.

Fitch believes that the $1.8 billion charge is easily absorbed from a corporate-wide perspective. The charge represents just 3% of AIG's consolidated GAAP shareholders' equity as of Sept. 30 and an estimated 16% of 2002 consolidated operating earnings (nine month results annualized).

S&P says Sierra Pacific unchanged

Standard & Poor's said Sierra Pacific Resources' ratings remain unchanged including its corporate credit rating at B+ on CreditWatch with negative implications following the company's announcement that it will accelerate the conversion of about 30% or $105 million of its premium income equity securities through the issue of 13.6 million shares.

Sierra Pacific will save about $26 million in interest over the original November 2005 term to maturity, S&P noted.

But it said Sierra Pacific remains on CreditWatch due to the risk that it may be unable to refinance its upcoming $200 million debt maturity in April 2003.

Moody's rates Rite Aid notes B3

Moody's Investors Service assigned a B3 rating to Rite Aid Corp.'s $200 million senior secured notes due 2011 and confirmed its existing ratings including its $1.9 billion secured bank facility at B2, $2.0 billion of senior notes in 10 at Caa3, $20 million 7% redeemable preferred stock at C and speculative grade liquidity rating at SGL-3. The outlook is stable.

Increasing cash flow and more efficient asset management, which has modestly improved the company's ability to cover fixed charges and necessary investment over the next year, support the rating, Moody's said.

But it added that an upgrade of the fundamental ratings is unlikely unless the company makes further progress at refinancing the debt due between 2005 and 2007.

Moody's said the ratings continue to reflect its opinion that Rite Aid's current level of operating performance will not support a $4 billion debt burden over the long term.

Given weak market sentiment for providing capital to highly leveraged retailers, the need for material operating improvement over the next 18 months continues to pressure the company, Moody's added.

Moody's believes that store repair and maintenance should at least equal depreciation over the longer term, so the company must soon demonstrate the ability to support all obligations from internally generated cash flow, including a normal level of capital investment.

S&P rates Rite Aid notes B-

Standard & Poor's assigned a B- rating to Rite Aid Corp.'s proposed $200 million senior secured notes due 2011 and confirmed its existing ratings including its senior secured debt at BB-, senior unsecured debt at B- and subordinated debt at CCC+. The outlook is positive.

The senior secured notes are rated one notch below the corporate credit rating because the issue is secured by a second priority lien on inventory, accounts receivable, and other assets of Rite Aid's operating subsidiaries, S&P said, adding that it does not see enough intrinsic value in this collateral to indicate that this debt would receive materially better protection than unsecured senior debt.

Rite Aid's ratings reflect the challenges it faces in improving operations at its drug stores amidst intense competition, S&P said. The ratings also reflect the company's significant debt burden and thin cash flow protection.

Although Rite Aid is a dominant player in the drug store chain industry, ranking second in terms of units, credit protection and profitability measures are weak due to previous management's poor execution of a rapid growth strategy, S&P added.

The company's operating performance has been improving since fiscal 2000 due to strategies put in place by new management.

Rite Aid's recurring EBITDA margin increased to 6.1% in fiscal 2002 (ended March 2, 2002) from 5.7% in fiscal 2001, and to 7.1% in the first nine months of fiscal 2003 from 6.0% in the first nine months of fiscal 2002, S&P said. Still, Rite Aid needs to continue taking aggressive steps to improve store execution and operating efficiencies, as its profitability measures remain significantly below those of its chief rivals, Walgreen Co. and CVS Corp. Walgreen's EBITDA margin was 9.1% for fiscal 2002 (ended August 2002), and CVS's margin was 9.3% for the nine months ended Sept. 31, 2002.

Rite Aid's credit protection measures are currently adequate for the rating category. EBITDA coverage of interest was about 1.7x in the first nine months of fiscal 2003, up from less than 1.0x during fiscal 2001, S&P said. Nevertheless, leverage is high with total debt to EBITDA at 6.4x so that any operating difficulties could quickly diminish credit protection measures.

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