S&P rates new Valero notes BBB

Standard & Poor's assigned a BBB senior unsecured debt rating to Valero Logistics Operations L.P.'s offering of $100 million of senior notes due 2012. The guarantor is Valero LP.

The ratings reflect a solid capital structure, ample cash flow in excess of debt service requirements and integration with Valero Energy Corp., a very large, independent refining and marketing company.

Nevertheless, Valero LP's ratings are capped by the rating on Valero Energy, owner of the general partner, because of its dependence on Valero Energy for substantially all of its revenues and other operational, financial and corporate governance linkages.

Valero LP is a partnership that holds Valero Logistics Operations LP, which contains various crude oil, refined product, and terminal assets that support Valero Energy's refineries.

Valero Energy has an agreement with Valero LP not to challenge its tariffs until 2008 and to send at least 75% of the crude oil and refined product associated with those refineries through the Valero Energy system.

Although S&P considers the throughput agreement to be supportive of Valero LP's credit quality, its value is somewhat limited by provisions that still allow for moderate throughput volatility and do not control for throughput losses due to refinery closure or sale.

As important as the throughput agreement is, the good competitive positioning of the pipes and the financial incentives provided by the partnership structure, which has caused Valero Energy to use Valero LP for more than the minimum throughput amount.

Given its current capital structure, Valero LP's credit quality is supported by resilience to throughput volatility.

S&P estimates that a 50% reduction in throughput from projected 2002 levels would be needed to cause Valero LP to be in noncompliance with its financial covenants. S&P does not believe that cyclical factors are likely to cause such a reduction.

During first quarter, throughput declined only about 17% despite severe run cuts inspired by poor refining margins.

Valero LP's financial profile is strong, with total debt-to-total capital of about 27% and total debt-to-projected 2002 EBITDA of about 1.5 times, S&P said.

S&P believes that Valero should be capable of generating between $65 million and $75 million of EBITDA in 2002, which should greatly exceed annual interest expense of about $8 million and maintenance capital expenditures of $5 million to $10 million.

However, S&P expects Valero LP's robust credit metrics will converge on industry norms, about 40% to 50% debt leverage and average debt to EBITDA of 2.5 times to 3.0 times, as it acquires additional assets, which could also increase Valero LP's sensitivity to adverse changes in throughput.

Valero LP's liquidity is strong, despite the cash payout structure that is characteristic of partnerships.

In addition to free operating cash flow, sources of financial flexibility, pro forma for the notes offering, include an undrawn $120 million revolving bank credit facility.

Valero LP's closest meaningful debt maturity is its bank credit facility, which comes due in 2006.

Valero LP's bank credit facility has fairly restrictive financial covenants, including a total debt-to-EBITDA test of 3.0 times and an EBITDA interest coverage test of 3.5 times.

However, S&P believes that Valero LP is attempting to enlarge the credit facility and loosen the covenant package.

The outlook is stable.

Ratings reflect continued growth through debt-financed acquisitions, which will cause debt leverage to rise over time.

Until Valero LP becomes more diversified and has changes in its partnership structure that reduce Valero Energy's ability to exert substantial influence over it, the ratings on Valero Energy effectively are a ratings ceiling and downgrades of Valero Energy will trigger similar actions to Valero LP.

S&P eying effect of Mirant loan

Standard & Poor's said it is assessing the credit effect on Mirant Corp. (BBB-/stable) from the decision to term out its $1.125 billion, 364-day revolving credit facility, in terms of its liquidity position and management plan.

Although the facility was termed out for one year, according to the terms Mirant remains in negotiation with its bank group to refinance the term loan with a lower amount and on acceptable terms.

S&P would view Mirant's ability to obtain such a bank refinancing as positive.

If Mirant is unable to come to acceptable terms to refinance the term loan near term, S&P will look to Mirant to provide a sufficient and executable plan for maintaining its liquidity position and financial flexibility to support the current rating.

Moody's upgrades US Bancorp to Aa3

Moody's Investors Service upgraded the long-term senior ratings of U.S. Bancorp to Aa3 from A1, as well as other ratings, following the merger with Firstar Corp. The outlook is stable.

Moody's said successful merger with Firstar and acquisitions of complementary businesses such as NOVA produced a broad-based financial services enterprise with good prospects for continuing stable earnings growth.

An efficient operating platform and streamlined loan portfolio, augmented by economies of scale, a solid core deposit base and a wide range of operating products and services underlie strong profitability and positive earnings prospects.

The ratings also take into account exposure to small and medium-sized companies involved in basic manufacturing industries, which are particularly sensitive to economic cycles. For this reason, the bank's asset quality indicators deteriorated during the cooling economy in 2001.

An aggressive repositioning for disposal of certain non-strategic assets also contributed to the bank's weakening asset quality in the past year. Moody's noted, however, that for the past two to three quarters the bank's asset quality indicators have improved and that its credit discipline remains conservative.

Both the holding company and the operating bank benefit from sufficient liquidity.

The holding company's net short-term position is positive, as a matter of company practice, which allows it to satisfy all operating expenses and maturing debt obligations for at least one year without relying on dividends from regulated operating subsidiaries or access to capital markets funding.

The bank's net cash capital position is also positive, indicating that it could continue operating without major disruption, for a substantial length of time, should the wholesale markets become unavailable.

S&P notes CBRL stock buyback

Standard & Poor's said CBRL Group Inc.'s (BBB-/stable) completion of its 1.5 million share repurchase program and a new multi-year program to repurchase up to 1.0 million shares has no effect on the credit rating or outlook.

Historically, CBRL has maintained a prudent financial policy.

S&P believes the company will use internally generated funds to support store expansion, cash dividends and share repurchases, and the current program will be managed in such a way as to not alter the credit profile.

Moody's puts Arris on review for downgrade

Moody's placed the ratings of Arris International Inc., a unit of Arris Group Inc. formerly know as Antec Corp., on review for possible downgrade in response to concerns arising from Arris' ability to redeem or refinance its outstanding 4.5% convertible subordinated notes before reaching the deadline that senior lenders have imposed on it, while also preserving full principal value to investors.

In March, Arris offered to exchange each convertible note for 102 shares of common stock, then trading at about $9 a share, up to $70 million of principal value of the notes. The offer expired May 10 with $5.65 million of notes exchanged.

Based on the results of the exchange and other negotiated offers, there was around $100 million of the notes outstanding as of May 13.

In May, Arris and senior lenders amended the credit agreement to reduce the revolving credit facility from $175 million to $145 million, but Arris was given until March 31 to redeem or refinance $54 million of the remaining notes.

The focus of the review will be Arris' capacity to preserve liquidity while also redeeming or refinancing the convertible notes.

In addition, Moody's will review Arris' ability to grow its business based on its strategic focus on cable telephony in a marketplace qualified by muted capital expenditures from cable operators.

S&P ups Central Garden & Pet outlook

Standard & Poor's revised the outlook on Central Garden & Pet Co. to stable from negative and confirmed the credit ratings, including the B rated 6% convertible subordinated notes due 2003.

The company had $293 million in debt outstanding as of March 30.

The outlook is based on the extension of its primary credit facility through July 2004 and progress toward transitioning to higher-margin branded product sales from distribution sales.

Since the termination of its distribution agreement with the Scotts Co., the company has increased its focus on branded products. The transition has resulted in better operating performance and credit measures.

Operating margins for the 12 months ended March 30 rose to 9.9% from 7.0% in the comparable period of 2001, while EBITDA coverage of interest expense improved to 3.6 times from 2.5 times.

The ratings reflect intense competition, significant seasonality and customer concentration.

These risks are somewhat offset by the company's broad assortment of garden and pet products.

Leverage has shown improvement with total debt to EBITDA for the 12 months ended March 30 measuring about 4.0 times from 5.2 times from the comparable period in 2001.

Liquidity is provided by a $125 million revolving credit facility, which has been reduced from $200 million due to lower borrowing requirements, and $105 million of lines of credit through the company's subsidiaries.

Support for the rating is provided by improved profitability and credit measures resulting from progress in transitioning to higher-margin branded product sales from distribution sales.

However, the company is challenged by the intense competition and is vulnerable to its seasonality.

The outlook also considers acquisition risk as the company expands its branded product portfolio.

Fitch rates Orbital convertible at B-

Fitch Ratings said Orbital Sciences' senior secured bank debt remains at B+, but the agency assigned a B- rating to the convertible subordinated notes.

Orbital remains on negative watch due to concerns about liquidity regarding the $100 million convertible that matures in October and weak near-term cash flow from operations, estimated at a shortfall of $70 million in 2002.

Other than these near-term concerns, Fitch believes Orbital's overall situation is solidifying due to a strong position in missile defense applications, improving satellite manufacturing performance, significant debt reduction and solid backlog.

Orbital has potentially valuable assets and technology and credit quality could substantially improve if the company executes its operating plan and gets past the near term challenges.

At March 31, Orbital's liquidity position included unrestricted cash of $61 million and availability of $24.5 million under its credit facility, offset by current maturities of $101.8 million, for a net liquidity shortfall of $16.3 million.

Orbital's $60 million working capital credit facility and its cash on hand should be sufficient to cover the projected cash use from operations in 2002.

However, with $100 million of notes maturing in October, Orbital still faces a liquidity challenge.

As a result of asset sales in 2001, Orbital was able to reduce debt by $134 million, lowering debt-to-capital to 56% as of March 31 from 84.6% at Dec. 31.

Interest coverage for the last 12 months ending March 31 improved to 1.8 times from 0.9 times in 2001.

Leverage, or debt-to-EBITDA, of 4.6 times, excluding operating leases, also improved compared to leverage of 5.4 times in 2001.

Orbital projects negative operating cash flow of $70 million for the year, mainly from the payment of a $50 million vendor payable and the reduction of $20 million in deferred revenue.

Orbital also has two cash-negative satellite projects, both of which should be launched by year-end.

Cash on hand and proceeds from the credit facility should allow Orbital to fund operations and capital expenditures for the year, but failure to meet operating cash projections could not only pressure Orbital's resources, but also could affect the refinancing of the convertible subordinated notes.

Orbital reported first quarter earnings on April 23, showing good revenue growth and delivering positive operating income for the first time in two years.

Management expects more than $500 million in revenues in 2002, with 50% coming from missile defense work and small satellites. Orbital projects operating margins in the 45 to 5% range and EBITDA margins in the 7% to 8% range for 2002.

In addition to completing the satellite projects, the benefits of Orbital's cost cutting program should drive margin improvement.

S&P puts FEI on positive watch

Standard & Poor's placed the B+ corporate credit rating on FEI Co. and the B- rating for the $175 million of 5.5% convertible notes due 2008 on positive watch, following the agreement to be acquired by Veeco Instruments Inc. in a $989 million stock deal.

FEI is a leading niche player of metrology equipment to the semiconductor, data storage and scientific research end markets. Veeco produces similar capital equipment.

The combined business will have $400 million of total debt and would have had combined revenues of $771 million for the 12 months ended March 31.

The faster-growing but volatile semiconductor end market will account for an estimated 28% of the combined company's revenues, compared with nearly 50% for FEI as a stand-alone business.

While integration of the two companies, which are roughly the same in size, poses risks, a successful integration would also increase operating scale.

Previously identified limited operating scale for FEI and the volatility and technology risk of its end markets, particularly semiconductors, limits the rating.

S&P revises ICN outlook to negative

Standard & Poor's revised the outlook for ICN Pharmaceuticals Inc.'s rating, including the 6.5% convertible subordinated notes due 2008 at B+, to negative from stable.

The revision is due to ICN's announcement of a significant decrease in earnings, due to lower sales of its pharmaceutical products in the North American and Russian markets.

The ratings reflect a strong position in the hepatitis C treatment market and very moderate debt maturities over the next five years, offset by weakening in core pharmaceuticals and uncertainty surrounding the ongoing restructuring plan and ICN's ability to meaningfully broaden its product portfolio.

ICN generated over $850 million in revenues during 2001, with royalties from its antiviral drug, ribavirin, accounting for almost 20% of revenues.

However, ICN's pharmaceutical business is experiencing a slowdown in sales, as it actively reduces trade inventories. The company believes that sales will continue to be pressured well into 2003.

Furthermore, ICN may soon no longer benefit from royalties, as ICN is in the midst of a restructuring plan to provide for the completion of the spin-off of Ribapharm Inc.

Financially, ICN has very limited debt maturities over the next five years.

The company raised roughly $260 million from the partial initial public offering of Ribapharm and used proceeds to retire debt. Ribapharm is jointly and severally liable for ICN's $525 million of convertible notes.

ICN currently faces several uncertainties, including the slowdown in its pharmaceutical sales and resultant reduction to cash flows, recent management changes and ongoing restructuring efforts.

Given its roughly $300 million of cash on hand, ICN has a measure of financial flexibility.

However, erosion of financial performance could contribute to a downgrade in the foreseeable future.

Moodys' rates new Anthem debt at Baa2

Moody's assigned a Baa2 senior unsecured debt rating to Anthem Inc.'s debt offering of $950 million.

On April 29, Moody's confirmed Anthem's credit ratings following the merger aggreement with Trigon Healthcare Inc.

At the end of May, Anthem closed a $1.2 billion, nine-month bridge loan. In the event that Anthem draws upon the bridge facility to finance the acquisition, we expect that such borrowings will not exceed the excess cash available as of the closing date.

The bridge loan agreement contains various conditions to Anthem's ability to borrow, including a material adverse change clause, certain financial covenants and a requirement that Anthem and its unregulated subsidiaries have cash or cash equivalents on hand of at least $300 million at the time of the merger.

In early July Anthem amended its credit revolvers to increase available borrowings to $1 billion. The facilities contain no material adverse change clauses but have material adverse effect language and certain financial covenants.

On closing the new credit agreements, Anthem reduced the bridge loan facility by $600 million.

Moody's understands that if necessary, Anthem would draw on its new credit facilities before borrowing under the bridge loan. Moody's noted the financial risk associated with the transaction would rise in the event Anthem borrows under the bridge facility.

The Baa2 senior unsecured debt rating is based on Moody's belief that Anthem will be able to generate the cash portion of the acquisition price from the sale of up to $950 million of notes and excess cash available.

The rating is also based on a strong regional presence, improved strategic focus and a good quality investment portfolio.

These strengths are offset by an increasingly competitive health care market, the threat of federal and state health care reform initiatives and increasing capital demands.

Moody's anticipates the integration of a number of shared service arrangements will produce savings for the combined companies, but such savings are not critical to the success of the transaction.

After the new debt issue, Moody's anticipates Anthem's debt-to-capital ratio would rise to about 25% on a proforma basis. Moody's believes that the proforma debt-to-capital ratio and coverage of holding company fixed charges will be in line with the current ratings.

Moody's expects Trigon will pay off all of its $300 million U.S. commercial paper program at the merger closing.

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