Moody's cuts Reliant Resources to junk

Moody's Investors Service downgraded Reliant Resources, Inc. three notches to junk, lowering its issuer and bank loan ratings to Ba3 from Baa3 and Orion Power Holdings senior unsecured bonds to Ba3 from Ba1. Reliant Energy, Inc.'s senior unsecured debt and bank loan ratings were cut to Baa2 from Baa1 and Reliant Energy FinanceCo II LP's senior unsecured debt and bank loan ratings to Baa2 from Baa1. All ratings are on review for possible downgrade including Reliant HL&P senior secured at A3, Reliant Energy Resources Corp.'s senior unsecured Baa2 and P-2 commercial paper rating and Reliant Energy Mid-Atlantic senior secured at Baa3.

Moody's said it lowered Reliant Resources because it considers the company's cash flow from operations is unpredictable relative to its debt load and that its financial flexibility is limited.

The company needs to refinance approximately $2.9 billion of bridge bank debt maturing in February 2003 and $800 million of the $1.6 billion corporate revolver which matures six months later, Moody's noted.

Ratings on both Reliant Resources and Orion Power Holdings had assumed the refinancing of the secured bank debt at Orion Midwest and Orion New York and this has not occurred, Moody's said.

The near-term outlook for Reliant Resources' wholesale business is poor, driven by depressed wholesale prices both here and in Europe, constrained capacity markets, and poor credit conditions in the energy trading sector, all of which will pressure margins and challenge Reliant Resources' ability to generate stable cash flow from operations, Moody's said.

Moody's puts Rayovac on review

Moody's Investors Service put Rayovac Corp. on review for possible downgrade including its $250 million senior secured revolving credit facility due 2004 and $28.3 million senior secured term loan due 2004, both at Ba2.

Moody's said it began the review following Rayovac's announcement that it will acquire the consumer battery operations of Varta AG for $262 million. The company plans to use proceeds from a new $675 million bank credit facility to complete the transaction and refinance its existing credit facilities.

Moody's said its general credit review will focus on the position and standing of Varta and its brands within the combined companies' legal framework and capital structure following Rayovac's acquisition.

In addition, Moody's said it will consider the overall credit profile of Rayovac and the strategic positioning of Varta within its operations. In particular, the rating agency will look at the potential risks related to increased financial leverage, integration expenses, key management roles and cultural fit, branding and product positioning, and working capital requirements.

S&P raises iStar outlook

Standard & Poor's raised its outlook on iStar Financial Inc. and its TriNet Corporate Realty Trust Inc. subsidiary to positive from stable. The rating agency assesses the corporate credit quality of both companies at BB+.

S&P said the outlook change reflects iStar's strong asset-quality performance, demonstrated through both a weak economic environment and a difficult real estate market; substantial capitalization of $1.9 billion in equity; and continued efforts to term out its debt structure.

iStar has continued to reduce marginally the credit risk in its credit tenant leasing (CTL) portfolio, and its mortgage portfolio has performed well since Sept. 11, 2001, and through the current weak economic environment and volatile real estate market, S&P said.

Nevertheless, the ratings continue to reflect the risks inherent in a monoline commercial real estate company, S&P added. The company's real estate exposure to New York properties remains a concern, as well as concentrations in office properties and the West coast.

While the company's non-accrual list is short and the company has not experienced a charge-off in its entire history, there are a number of credits that iStar is monitoring that may pose a potential future problem, S&P added.

S&P also said it is concerned about iStar's high level of secured debt, which would structurally subordinate the unsecured bondholder. It would be prudent for iStar to continue to raise unsecured debt in the capital markets, thereby increasing the ratio of unsecured debt-to-total assets and unencumbered assets-to-unsecured debt.

S&P puts Avaya on watch

Standard & Poor's put Avaya Inc. on CreditWatch with negative implications including its secured debt and unsecured debt at BB-.

S&P said the action is in response to Avaya's continuing weak operating performance and the rating agency's concerns about financial flexibility stemming from ongoing cash-based special charges and potential covenant amendments.

In its announcement of earnings for the quarter ended June 30, 2002, Avaya indicated the prospect for additional softening in demand among enterprise customers for its communications products, S&P noted.

S&P had expected sluggish business conditions to persist for Avaya but said sequential declines in quarterly revenues and contracting EBITDA have resulted in debt protection measures that are sub-par for the rating level.

The company said that EBITDA was $39 million for the June quarter, down from $90 million in the quarter ended March 30, 2002, S&P said. While Avaya has not indicated that it is at risk of covenant violation, it did state that it is in talks with creditors to amend its existing covenants.

In addition to operating performance, S&P said it is concerned additional cash-based charges, outlined in a press release by Avaya on July 26, will put further pressure on its cash balances. Avaya will incur $125 million to $135 million of cash charges, to be paid out over the next several quarters, for reducing headcount and consolidating facilities.

S&P raises New World Pasta's bank loan to B+

Standard & Poor's upgraded New World Pasta Co.'s corporate credit rating to B+ from B, bank loans to B+ from B and $160 million 9.25% senior subordinated notes due 2009 to B- from CCC+. The outlook is stable.

The upgrade reflects improved operating performance due to continued sales volume growth, strong market share and ongoing cost-saving initiatives, S&P said.

Ratings reflect challenging industry conditions and high debt leverage, offset by leading market position and good product portfolio diversity, S&P said.

Rolling 12-month total debt to EBITDA for the period ending March 30, 2002, was 5.1 times and EBITDA to interest for the same time period was 2.1 times.

Moody's confirms International Multifoods

Moody's Investors Service confirmed International Multifoods Corp. including its senior secured bank loan at Ba2 and $200 million eurobond issued by Multifoods but guaranteed by Diageo plc at A1. The outlook is positive.

Moody's said its confirmation follows Multifoods' announcement it will sell its distribution business for approximately $180 million in cash and use the proceeds to reduce debt.

If Multifoods is successful in fully integrating a portfolio of Pillsbury assets acquired in November 2001, implementing a new SAP computer system, and further strengthening its debt protection measures, its ratings could be upgraded, Moody's said. Multifoods' appetite for further acquisitions will also be a key factor in determining the timing of any prospective upgrade.

Moody's said it views the divestiture of this business as strategically sound as it further enhances

Multifoods' strategy of being a branded packaged food company.

It will also help the company reduce its on and off balance sheet leverage, the rating agency said.

S&P sees Magnum Hunter sale as positive

Standard & Poor's said there is no change to Magnum Hunter Resources, Inc.'s ratings or outlook on its announcement that it will sell non-core oil and gas assets for $50 million.

But the rating agency said it considers the transaction as positive and consistent with the company's plan of reducing outstanding bank debt through the divestiture of non-core properties in 2002.

The divested properties are largely comprised of onshore oil & gas reserves originally acquired in the Prize Energy merger, S&P said. The proved reserves are 51% oil and 49% natural gas.

Proceeds from the asset sale will be used to reduce bank debt.

S&P raises LIN outlook

Standard & Poor's raised its outlook on LIN Holdings Corp. to positive from stable. Ratings affected include LIN Holdings' senior unsecured debt at B- and LIN Television Corp.'s senior secured bank loan rating at BB-, senior unsecured debt at B and subordinated debt at B-.

S&P said it revised LIN's outlook based on expectations that LIN will further improve its financial profile following the May 2002 initial public offering of its parent company, LIN TV Corp.

LIN's adoption of a less aggressive financial policy that includes the meaningful use of equity to moderate the financial risk of expected acquisitions, and strengthening advertising demand were also important factors in the outlook revision, S&P said.

Following the IPO, LIN's financial profile improved to a level more appropriate for the ratings. Positive operating momentum could contribute to further financial profile improvement. However, LIN has stated its desire to be a consolidator of middle market TV stations, which could weigh on the financial profile, depending on debt use, S&P added.

Pro Forma cash interest coverage as of March 31, 2002, was above 2.0 times and total interest coverage, including holding company debt, was about 1.4x, S&P said. A 2x bank interest coverage covenant, exclusive of holding company debt, provides modest cushion. Pro forma operating company debt to EBITDA was 4.1x, compared to a 6x bank covenant, and total debt to EBITDA was 7.2x.

S&P upgrades Pacer

Standard & Poor's upgraded Pacer International Inc. and removed it from CreditWatch with positive implications. The outlook is stable. Ratings raised include Pacer's $150 million 11.75% senior subordinated notes due 2007, lifted to B from B-, and its $100 million revolving credit agreement and $135 million term loan, raised to BB- from B+.

S&P said the action reflects Pacer's improved financial risk profile following its June 2002 initial public stock offering.

Ratings reflect Pacer's high (albeit declining) debt leverage and exposure to cyclical pressures (especially in its logistics business), offset by a solid niche position in the transportation and logistics industry and a somewhat variable cost structure, S&P said.

Pacer has built its current business profile through a series of acquisitions that have left the company highly leveraged, S&P said. Although Pacer used the $129 million proceeds from its recent stock offering to pay down debt, its debt to capital (adjusted for operating leases) remains aggressive and is currently in the mid-70% area.

About half of Pacer's debt burden is represented by off-balance-sheet operating leases. Pacer is expected to continue to pursue acquisitions and investment opportunities in the highly fragmented logistics industry, but acquisitions should be modest in size and funded mostly out of internally generated cash flow, S&P added. Any sizable acquisitions are expected to be funded with an equity component.

Funds from operations to debt (adjusted for operating leases) was about 10% last year and is expected to improve to the mid-to-upper-teen percentage area this year, S&P said. Future operating performance is expected to benefit from cross-selling opportunities with existing customers as well as various cost-cutting initiatives underway. Debt leverage is expected to improve modestly over time, with debt to capital (adjusted for operating leases) expected to fall below 70% and remain in the 60%-70% area, depending on the timing of acquisitions.

S&P puts Alaska Communications on watch

Standard & Poor's put Alaska Communications Systems Group Inc. on CreditWatch with negative implications including its $150 million 9.375% subordinated notes due 2009 at B+ and its $150 million tranche A bank loan due 2006, $150 million tranche B bank loan due 2007, $160 million tranche C bank loan due 2007 and $75 million revolving credit facility due 2006, all at BB.

S&P said the watch placement is due to concerns that the company may not be able to achieve a low-4 times debt-to-EBITDA leverage ratio in the near term.

Alaska Communications' revenue levels and profit margins have been adversely affected by lower customer premise equipment sales, the impact of the weak economy, delays in implementation of the State of Alaska telecommunications services contract, and expenses associated with new customer-related initiatives, S&P said.

Based on the company's guidance of between $29 million and $31 million in EBITDA in the third quarter of 2002, Alaska Communications' total debt to EBITDA is likely to be in the mid-to-high-4x area for the full year of 2002, S&P said. Current ratings had incorporated the expectation that the company would be able to achieve a low-4x leverage level in the near term.

Moody's rates MedQuest loan B1, notes B3

Moody's Investors Service assigned a B1 rating to MedQuest, Inc.'s planned new $80 million senior secured revolver due 2007 and a B3 rating to its proposed $180 million senior subordinated notes due 2012. The outlook is stable.

Moody's said the ratings reflect MedQuest's high leverage and modest interest coverage and the risks associated with the company's aggressive growth strategy.

MedQuest also faces industry challenges including the potential for pricing pressures from both governmental and managed care payors, a shortage of technicians in some markets, a competitive operating environment and the capital intensive nature of the business, the rating agency said.

Rating positives include the company's leading local market positions, a proven business model, strong operating trends and favorable demographic and industry volume trends, Moody's added.

Additionally, Moody's said it considers management's level of experience and their long history with the company (since inception in 1993) a credit strength.

Moody's said the stable outlook reflects its expectation of continued growth in revenues and cash flow, though at a more moderate pace than in recent years.

Growth will be driven by a combination of an increase in same store volume, facility expansions, de novo projects and small acquisitions, Moody's said. The declining trend in price per scan, and the impact this may have on margins, remain a concern. However, Moody's said it believes that the adverse impact could be partially mitigated by the growth in volume and, given the company's ample utilization capacity, an improvement in operating efficiencies.

Also incorporated in the outlook is an aggressive strategy going forward, with free cash flow used primarily to fund the company's expansion, Moody's said.

S&P rates Headwaters loan B+

Standard & Poor's assigned a B+ rating to Headwaters Inc. planned $245 million senior bank financing. The outlook is stable.

The $220 million term loan portion of the bank financing combined with 2 million shares of Headwaters' common stock will fund the proposed acquisition of Industrial Services Group Inc., parent of ISG Resources Inc., including the repurchase of ISG's $100 million 10% subordinated notes due 2008.

The ratings for Headwaters reflect a relatively narrow scope of activities (pro forma combined revenues about $300 million) and a below-average financial profile stemming from an initially substantial debt load and exposure to longer term legislative risks associated with a sizable portion of the business, S&P said.

Those factors offset the firm's leading niche market positions, generally favorable demand prospects, and increasing cash flow generation, which should allow debt reduction in the intermediate term, S&P added.

The acquisition would complement Headwaters' operations by adding ISG's services in the post-combustion phase of the coal value chain to its own pre-combustion capabilities, S&P noted. Thus, there would be incremental revenue opportunities due to an expanded electric utilities customer base.

The ISG purchase would almost triple Headwaters' revenues, about double EBITDA, and lessen its dependence on the alternative fuels market, with the combined entity's cash flow derived about equally from Headwaters and ISG businesses.

However, Headwaters' activities are subject to legislative risks, since current tax incentives that support the business are due to expire in 2008, S&P said. While not expected, adverse developments would have a material impact on the business and its ability to service its financial obligations beyond 2008. In addition, uncertainty surrounding this issue is likely to limit the company's access to longer dated alternative sources of financing and results in an aggressive debt maturity profile.

The predominantly debt-financed ISG acquisition would significantly increase Headwaters' debt burden, compared with historical levels. Consequently, debt/EBITDA will rise to 3.4 times upon closing, with debt to capital about 70%, S&P said. However, increasing free cash flow of the combined company, aided by low capital requirements and good profitability, is expected to be applied to debt reduction. Headwaters' intended financial policy is to reduce debt/EBITDA to less than 2x. Other credit protection measures should also strengthen, with debt to capital improving to 50%-60% and EBIT and EBITDA interest coverage at 3x-4x and 4.5x-5.5x, respectively. Liquidity is enhanced by expected $50 million in cash and equivalents and a $25 million availability under the revolver at closing.

Moody's lowers Duane Reade outlook

Moody's Investors Service lowered its outlook on of Duane Reade, Inc. to stable from positive and confirmed its ratings including its $183 million secured credit facility at Ba2 and $381 million 3.75% cash to zero senior convertible notes ("CATZ") due 2022 at Ba3.

Moody's said it revised Duane Reade's outlook outlook because the economic slowdown in and around New York City has measurably impacted front-end sales.

But Moody's added that it expects that operations and financial measures likely will remain appropriate for the current ratings over the next 12 to 18 months.

Moody's raises Whole Foods Markets outlook

Moody's Investors Service raised its outlook on Whole Foods Market, Inc. to positive from stable and confirmed its ratings including its $220 million unsecured revolving credit facility at Ba2 and its $141.4 million 5% zero-coupon convertible subordinated notes due 2018 at B1.

Moody's said it raised Whole Foods' outlook because of its industry-leading operating performance, robust operating cash flow, successful business plan of rapidly growing store count through acquisitions and new store construction, and consistent policy of paying down debt.

If this pace of improvement continues, Moody's said it expects that the company's operational and financial performance will eventually support a higher rating.

The ratings acknowledge the company's well-recognized trade name, its leading market position within the fast expanding natural/organic niche of the supermarket industry, and the stores' broad geographic diversification, Moody's said. Also benefiting the ratings are the pace of growth in the natural/organic grocery segment relative to the general supermarket industry and the perception among a certain population of consumers that natural/organic foods are an integral part of their lifestyle.

Negatives include intense competition within the supermarket industry and the likelihood that larger supermarket companies will increase their natural foods merchandising efforts, Moody's said. The ratings reflect that proceeds from the exercise of employee stock options, in contrast to operating cash flow, have been the primary source of debt reduction.

Lease adjusted leverage of 2.4 times for the 12 months ending April 2002 represents material improvement over fiscal 2001 and 2000 with levels of 2.7 times and 3.1 times, respectively, Moody's said. Rolling fixed charge coverage has increased to about 4.6 times for the 12 months ending April 2002 versus fiscal 2001 coverage of 3.7 times.

S&P lowers PG&E National

Standard & Poor's lowered PG&E National Energy Group Inc. and put its on CreditWatch with negative implications.

Ratings lowered include PG&E National Energy Group's $1 billion 10.375% senior unsecured notes due 2011 and $625 million revolving credit facility tranche A due 2003, both cut to BB+ from BBB, Attala Generating Co. Inc.'s $258 million pass-through certificates due 2023 and GenHoldings I, LLC's $1.698 billion senior secured bank loan due 2006, both lowered to BB+ from BBB-, PG&E Gas Transmission-Northwest's $250 million 7.1% senior notes due 2005 and $150 million 7.8% senior debentures due 2025, both lowered to BBB+ from A-, and USGen New England, Inc.'s $100 million unsecured credit facility due 2003 and $413.643 million pass-through certificates, both lowered to BB+ from BBB.

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