S&P upgrades PDVSA Finance

Standard & Poor's upgraded PDVSA Finance Ltd.'s $3.3 billion and €200 million senior unsecured notes to B+ from B-.

S&P said the action follows the recent upgrade of the foreign currency ratings of the Bolivarian Republic of Venezuela to B- and Petroleos de Venezuela SA to B- both with a stable outlook.

S&P added that the action also reflects certain credit developments specific to PDVSA and the PDVSA Finance transaction, including a significant recovery in daily oil production and exports by PDVSA; improvements in the invoicing of exported production after a lengthy interruption in early 2003; a significant increase in the amount of funds flowing through the PDVSA Finance collection account and in the debt service coverage level of the transaction since February 2003; and improvement in PDVSA's liquidity and the normalization of its operations.

As a result of labor strife and the firing of thousands of PDVSA employees early in 2003, production and exports of oil by PDVSA plummeted, S&P noted. Crude oil production, which totaled 3.3 million barrels per day (bpd) in November 2002, collapsed to a low of about 0.8 million bpd in January 2003.

Approximately $700 million to $1.1 billion in monthly payments flowed through the PDVSA Finance collection account prior to the strikes, with the value of the shipments fluctuating based on the quantity of oil delivered by PDVSA to the designated customers and the price of the oil. These collection flows dropped to as low as $200 million in January 2003 before recovering slightly in February to $350 million and to a much stronger level of $960 million in March.

Matching the declines in production and deliveries, the debt service coverage ratio for the PDVSA Finance transaction dipped to a low of 4.88 in the month of February 2003 - near the 4.0x level that would allow investors to demand an early amortization of the rated notes.

Despite the significant loss of production and exports, however, PDVSA Finance made its February and May 2003 debt service payments on the rated securities out of collection account funds and without recourse to the transaction liquidity facility, S&P said.

Since March 2003, production has recovered sharply, reaching 3.2 million bpd in April 2003 and remaining roughly at that level through June. Collections flowing through the PDVSA Finance collection account totaled $2.6 billion in June 2003, yielding a debt service coverage ratio of 16.9x quarterly debt service due, S&P said.

S&P said it believes the rapid recovery in production, exports, and debt service coverage warrants a two-notch upgrade of the transaction. However, concerns regarding the sustainability of current production levels in the absence of greater capital investment by PDVSA, as well as the still highly polarized political environment in Venezuela, will likely continue to constrain the upward potential of the transaction rating for the near future.

Moody's cuts Atlantic Coast

Moody's Investors Service downgraded Atlantic Coast Airlines, Inc. including cutting its $46 million series 1997-A class A passthrough certificates to Baa3 from A2, $17 million series 1997-A class B passthrough certificates to Ba3 from Baa2 and $12 million series 1997-A class C passthrough certificates to B3 from Ba1. The outlook is negative.

Moody's said the downgrade reflects the increase in risk to debt holders as a result of the inability of the company and United Airlines, Inc., Atlantic Coast's primary customer, to come to an agreement on the terms of a new fee-for-service contract and the resulting announcement that the company will, at the termination of its contract with United, pursue an independent business strategy.

Risks to debt holders include the costs of the transition from a United Express carrier to an independently operated company, the ability of the company to achieve its low cost objectives and to attract a meaningful customer base in a short period of time and the burden of additional debt or lease obligations associated with the additional long range aircraft in the company's business plan, Moody's said.

Supportive of the rating is the company's current positive cash flow profile, the anticipation that current positive cash flow will continue through the end of 2003, Atlantic Coast's relatively low lease adjusted debt burden and good liquidity profile, as well as the company's control of numerous gates at its proposed hub at Dulles International Airport near Washington, DC.

The negative outlook reflects the high degree of uncertainty regarding the successful execution of the company's long term business plan.

S&P rates Armor notes B+

Standard & Poor's assigned a B+ rating to Armor Holdings Inc.'s proposed $150 million senior subordinated notes due 2013. The outlook is stable.

S&P said Armor's ratings reflect the company's modest size and active acquisition program, including the pending acquisition of Simula Inc, partly offset by leading positions in niche markets and moderate leverage.

Armor historically has demonstrated solid profitability, with operating margins (before depreciation) in the mid to high teens percent area, S&P said.

The subordinated notes offering will increase debt to capital to almost 35%, still moderate, from a minimal level in 2002. Total debt to EBITDA, including the contribution from the proposed Simula acquisition, should be in the range of 2x to 2.5x, S&P said. Funds from operations to debt, an important cash flow protection measure, is expected to be in the 25% to 30% range.

Although the company is expected to generate positive free cash flow, it likely will be used for further acquisitions, S&P noted. Armor also has used stock as partial consideration for acquisitions, as well as secondary public offerings to pre-fund or repay debt used to acquire companies.

Moody's rates Armor notes B1

Moody's Investors Service assigned a B1 rating to Armor Holdings, Inc.'s planned $150 million senior subordinated notes due 2013. The outlook is stable.

Moody's said the ratings reflect modest post-transaction debt levels, relatively strong and stable earnings and cash flow generation derived from a diverse products base and the company's brand and market leadership in its main products groups.

The ratings also consider a relatively small but rapidly growing revenue base, uncertainty about the size, frequency, and nature of future acquisitions undertaken by the company and integration risk associated with the acquisition of Simula and other potential transactions.

The stable ratings outlook reflects Moody's expectations that the company will be able to maintain its profit margins while growing both organically and via acquisitions.

Post-transaction, the company will carry a modest amount of debt. The $150 million in debt outstanding, entirely comprised of these notes, will represent about 2.5x pro forma EBITDA for the 12 months to March 2003 and 37% of total capital on $271 million in book equity ($172 million in tangible book equity). For the same period, EBIT covers estimated pro forma interest expense by over 5x.

Moody's cuts Ocean Spray

Moody's Investors Service downgraded Ocean Spray including cutting its short-term rating to Prime-3 from Prime-2, and its preferred stock to Ba2 from Baa3. The ratings remain on review for further possible downgrade.

Moody's said the downgrade reflects the significant senior management turmoil that the cooperative has experienced over the past 9 months; the continuing uncertainty regarding the cooperative's future strategic direction; the deterioration in the company's operating performance as a result of increased competition, and the reduction in the company's sales and earnings as it seeks to end past trade loading practices.

The continuing review will focus on whether Ocean Spray is likely to take any actions to enhance returns and liquidity for its cooperative members that could be detrimental to its credit profile and whether

Ocean Spray's debt protection measures could deteriorate further as competition in its markets further compresses margins and volumes.

S&P rates Sheridan notes B

Standard & Poor's assigned a B rating to Sheridan Group Inc.'s proposed $100 million senior secured notes due 2011. The outlook is stable.

Sheridan's ratings reflect the company's small cash flow base, expected ongoing growth strategy and competitive market conditions in the print industry, S&P said. These factors are tempered by the company's niche position in the scientific, technical and medical (STM) journal segment, diversified customer base, and long-term customer relationships and contracts.

Pro forma EBITDA for the 12 months ended June 30, 2003, was approximately $25 million, up 1% from 2002, S&P said. Steady performance in journals was offset by weakness in specialty magazines and short-run books. S&P expects that the performance will remain fairly stable during the remainder of 2003 given only modest anticipated improvement in the economy.

Pro forma for the transaction, leverage, as measured by total operating lease-adjusted debt to EBITDA, is about 4.3x, and EBITDA coverage of interest expense under 2.5x, S&P said. Credit measures are in line with the current ratings.

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