S&P cuts Host Marriott

Standard & Poor's downgraded Host Marriott Corp. and removed it from CreditWatch with negative implications. The outlook is stable. Ratings lowered include Host Marriott's $400 million revolving credit facility due 2005, cut to B+ from BB- and $100 million 10% class B cumulative redeemable preferred stock, cut to CCC+ from B-, Host Marriott Financial Trust's $400 million 6.75% convertible quarterly income preferred securities due 2026, cut to CCC+ from B-, and Host Marriott LP's $1.2 billion 7.875% senior notes series B due 2008, $250 million 9.25% senior unsecured notes series F due 2007, $300 million 8.375% senior notes series E due 2006, $450 million 9.5% senior notes due 2007, $500 million 7.875% senior notes series A due 2005 and $500 million 8.45% senior notes due 2008, cut to B+ from BB-.

S&P said it expects the lodging environment will continue to remain challenging throughout 2003. As rates remain competitive and operating costs are increasing, lodging companies are anticipating additional operating margin deterioration.

S&P said it expects Host Marriott's operating-lease adjusted debt to EBITDA will be just under 7.0x at the end of Dec. 31, 2002 while interest coverage is expected to be under 2.0x.

Given its current expectations for 2003, S&P said it does not see Host Marriott's credit measures improving to levels consistent with the previous rating during the intermediate term, even assuming some success in selling assets.

The ratings for Host Marriott LP and its sole general partner, Host Marriott Corp. reflect the high quality of its hotels, the geographic diversity of its portfolio, its experienced management team and its satisfactory liquidity position. These factors are offset by high debt leverage for the rating and a weak lodging environment resulting from the slowing economy and the terrorist attacks of Sept. 11, 2001.

The stable outlook reflects the company's adequate liquidity levels and asset portfolio which is well positioned to benefit once a lodging recovery materializes, S&P said. The outlook does not factor in a drawn-out war in Iraq or significant terrorist activity in the U.S.

Moody's cuts AAR, still on review

Moody's Investors Service downgraded AAR Corp. multiple notches to junk including cutting its senior debt and senior unsecured bank facilities to B1 from Baa3, affecting $435 million of debt. The ratings remain on review for possible downgrade.

Moody's said the action reflects AAR's weakened performance as a result of the downturn in the civil aircraft market.

The downgrade also reflects Moody's concerns about AAR's business potential, even after the civil aircraft market begins to recover, due to fundamental changes in the company's business, which include a) the transition of its market from older technology engines to newer technology engines, and b) increasing competition from OEMs, which continue to aggressively pursue the aftermarket business through internal expansions, acquisitions and joint-ventures worldwide.

In addition, the rating action reflects the company's significant debt maturities over the near term and its need to secure new bank credit facilities to refinance this debt, Moody's said.

Moody's added that the senior debt is now rated one notch below the Ba3 senior implied rating because it expects new financing will be secured, effectively subordinating the company's existing unsecured notes.

AAR's credit metrics are weak, and are expected to remain weak over the intermediate-term, Moody's said. For the 12 months ending Nov. 30, 2002, the company almost broke even versus an operating profit of about $40 million for the year ending May 30, 2001. Meanwhile, for the same two periods, interest coverage deteriorated to very low levels, retained cash flow to total debt declined to 3.4% from 19.2%, and leverage rose to about 48% from 36%, but mainly due to the addition of about $33 million of non-recourse debt due to a recent purchase of a partner's 50% interest in a joint venture.

S&P cuts FelCor

Standard & Poor's downgraded FelCor Lodging Trust Inc. and removed it from CreditWatch with negative implications. The outlook is stable. Ratings lowered include FelCor Lodging LP's $125 million 7.625% senior notes due 2007, $175 million 7.375% senior notes due 2004, $400 million 9.5% senior unsecured notes due 2008 and $600 million 8.5% senior notes due 2011, cut to B+ from BB-, and FelCor Lodging Trust Inc.'s $150 million cumulative convertible preferred stock series A, cut to CCC+ from B-, and $250 million term loan, cut to B+ from BB-.

S&P noted that FelCor's operating cash flows were materially affected by the slowing economy and reduced demand from business travelers.

FelCor's 2002 RevPAR declined 8.1% year-over-year and its EBITDA of $306 million, declined 17%. For 2003, management expects flat RevPAR, and EBITDA of $277-$289 million, S&P noted. This represents a 6%-10% drop in EBITDA from 2002 as a result of competitive rates and higher operating costs.

Based on management's 2003 guidance, FelCor's credit measures are not expected to recover to levels consistent with the prior BB- rating in the intermediate term, S&P said.

S&P added that it expects FelCor's debt leverage, as measured by total debt to EBITDA (including 50% of debt from its unconsolidated subsidiaries), to be in the mid-6x area throughout 2003. Interest coverage was just under 2x at the end of 2002.

Moody's cuts Eagle Food

Moody's Investors Service downgraded Eagle Food Centers, Inc. and continued the negative outlook. Ratings lowered include Eagle's $63.2 million 11.0% senior notes due 2005, cut to Caa3 from B3.

Moody's said it lowered Eagle Food because of increased unease about the company's liquidity position due to a potential violation of borrowing facility covenants, use of excess cash for debt repurchases, and declining cash flow; likely further loss of market share as competitors add grocery square footage; and Moody's expectation that operating performance will remain weak during 2003.

Moody's said the negative outlook reflects its opinion that ratings will remain pressured unless the company demonstrates the ability to grow revenue and cash flow - in spite of the heightened competition - and the company arranges long-term access to adequate liquidity.

Ratings could eventually improve if the company establishes that it can reliably cover obligations such as interest expense, sufficient capital investment, and working capital seasonality, Moody's added.

The rating agency described Eagle Food's financial leverage as "unsustainably high" and added that it has uncertain access to adequate liquidity and small scale relative to efficient national grocery retailers.

S&P lowers Oregon Steel outlook

Standard & Poor's lowered its outlook on Oregon Steel Mills Inc. to negative from stable and confirmed its ratings including its $305 million 10% first mortgage notes due 2009 at BB- and $75 million revolving credit facility due 2005 at BB.

S&P said the outlook revision reflects its concern that soft industry conditions in some of Oregon Steel's key product segments and increased raw material costs could be prolonged and cause deterioration of the company's credit measures. Rising costs together with declining volumes and selling prices and a shift to a lower product mix will put significant pressure on the company's margins.

The ratings reflect Oregon Steel's diversified product mix and good market position, S&P added. Negatives are its aggressive capital structure and volatile operating performance due to exposure to cyclical industries, particularly the oil and gas transmission pipeline business.

Higher raw material and energy costs are expected to have a negative impact on Oregon Steel's operating income, S&P noted. Scrap costs have risen due to China's increased absorption of scrap to meet its surge in demand. It is currently unclear whether this heightened demand from China and higher scrap prices will be sustained. Oregon Steel has temporarily shuttered its melt shop and has increased its purchases of semi-finished steel in order to limit the affect of higher scrap prices.

Moody's puts Interstate Bakeries on review

Moody's Investors Service put Interstate Bakeries Corp. on review for possible downgrade including its $300 million senior secured revolving credit maturing 2007, $375 million senior secured term loan A maturing 2007 and $125 million senior secured term loan B maturing 2008 at Ba1. Moody's does not rate the $100 million senior secured term loan C maturing 2007.

Moody's said it began the review in response to Interstate's announcement of significantly weaker than anticipated operating performance and earnings in fiscal year 2003 due to lagging snack cake sales, competitive pressures in bread markets (particularly in the southeast U.S.), increased product returns, and higher commodity, insurance and fuel costs.

Moody's said its review will focus on Interstate's strategies to improve sales and profitability, the expected time required to restore operating performance, and the impact on the company's ability to improve financial flexibility and debt protection measures in the near term, which have been weak for the rating level.

S&P upgrades United Industries

Standard & Poor's upgraded United Industries Corp. including raising its $110 million revolving credit facility due 2005, $75 million term A loan due 2005 and $240 million term B loan due 2006 to B+ from B and its $150 million 9.875% senior subordinated notes due 2009 to B- from CCC+. The outlook is stable.

S&P said the upgrade reflects United Industries' improved credit profile and S&P's expectations that it will maintain credit protection measures consistent with the revised rating, despite the possibility of additional niche acquisitions.

United Industries' ratings reflect its high debt leverage, seasonal business characteristics, and competitive industry dynamics somewhat offset by the company's solid market positions in consumer lawn and garden pesticides and fertilizers, and in household insecticides, S&P noted.

Recent acquisitions have diversified United Industries' product portfolio and provided cross-selling opportunities that could lead to an improved customer mix, the rating agency noted.

United Industries' operating performance continued to show improvement in 2002, S&P added. As expected, the company's growth has come primarily from acquisitions but has also benefited from favorable demographics and new product introductions. Indeed, net revenues increased about 75% for the year ended Dec. 31, 2002, reflecting the fertilizer brands acquisition, the Schultz merger and, to a lesser extent, increased sales of the company's Spectracide products.

The company's EBITDA margin declined to about 14% in 2002 from about 19% in 2001, S&P said. This is primarily because of the lower margins of acquired businesses. Still, pro forma for the acquisitions, EBITDA coverage of interest increased to more than 2x in 2002 from 1.7x in 2001, and debt to EBITDA fell to about 5x in 2002 from 5.4x the previous year.

S&P keeps McDermott on watch

Standard & Poor's said McDermott International Inc.'s ratings remain on CreditWatch with negative implications including McDermott Inc.'s senior unsecured debt at B. S&P withdrew its ratings on J. Ray McDermott SA including its bank loan at B following cancellation of its old facility.

S&P said its comments come after McDermott said it entered into a definitive agreement with existing lenders for a new credit facility to replace two existing facilities.

While liquidity is improved with the new credit facility, S&P said it still has concerns regarding the near-term operating outlook for J. Ray McDermott, the company's marine construction services subsidiary. J. Ray McDermott is experiencing cost overruns on several projects, and the firm has hired outside consultants to review project estimating and bidding procedures.

Moreover, current geopolitical risks will likely delay some customer capital spending, S&P said. Therefore, the company's operations could be cash flow negative for the next few quarters.

S&P lowers IPC outlook

Standard & Poor's lowered its outlook on IPC Acquisition Corp. to stable from negative and confirmed its ratings including its senior secured debt at B+ and subordinated debt at B-.

S&P said the change reflects its expectation that IPC's credit protection measures will not improve over the near term.

While IPC generated good free cash flow in fiscal 2002, ended September, repaying about $35 million in bank debt, and is expected to generate sufficient free cash flow in fiscal 2003 to continue debt repayment, EBITDA is expected to decline amid challenging financial services end-markets, S&P said.

While IPC's customers view trading systems as critical, the company's narrowly focused product portfolio serves predominantly the financial-services end market, S&P noted. The company's competitors lack the scale and focus of IPC, which benefits from high barriers to entry given the importance of after-sales service and high customer switching costs.

New, potentially disruptive technologies in IPC's market include next-generation, voice-over Internet protocol (VoIP)-enabled turrets. To mitigate this risk, IPC has introduced its next generation VoIP-enabled turret, the IQmx.

Sales in 2002 declined 9%, to $267 million, from $292 million in 2001, S&P said. EBITDA in 2002 declined 23%, to $66 million, from $86 million in 2001. While free cash flow is expected to result in good levels of debt repayment, EBITDA levels are expected to decline modestly in 2003. As a result, credit protection measures are not expected to improve over the near term. Still, operating profitability is expected to remain above 20% through efficient expense management. Debt to EBITDA was 3.3x, and EBITDA interest coverage was 2.4x in 2002.

Moody's puts Genesis Health on developing outlook

Moody's Investors Service changed its outlook on Genesis Health Ventures, Inc. to developing from stable. Ratings affected include Genesis Health's $150 million senior secured revolving credit facility due 2006, $285 million senior secured term loan B due 2007 and $80 million senior secured delayed draw term loan due 2007 at Ba3 and $243 million senior secured second lien rollover facility due 2007 at B1.

Moody's said the outlook change follows Genesis Health's announcement that it intends to separate into two public companies through a spin-off of its eldercare business into a new company and the related uncertainty about the final structure of such a transaction and its corresponding impact on the company's credit profile.

While the company has stated that it has not yet determined the specifics with respect to the division of debt between the two companies, it did say it expects a greater share of the company's long-term debt to be allocated to the new spin-off company.

While this could have positive implications for Genesis' credit profile - and a reverse allocation of debt could have negative implications - the outlook for the ratings will likely remain uncertain until a final determination has been made by the company as to its eventual capital structure, Moody's said.

S&P keeps Tyco on watch

Standard & Poor's said Tyco International Ltd. remains on CreditWatch with negative implications including its corporate credit rating at BBB-.

But S&P said that recent refinancing activity - including the issuance of $4.5 billion of convertible debt and the establishment of a $1.5 billion 364-day revolving credit facility - has alleviated liquidity concerns.

The company has announced that it intends to execute guarantees relating to certain inter-company debt to address structural subordination concerns. If the guarantees are executed and S&P is is satisfied that they successfully address these concerns, the rating agency said it would like confirm Tyco's ratings. If not, the corporate credit ratings would likely still be confirmed, but holding company-level ratings would each be lowered one notch.

Fitch rates Solectron bank debt BB+

Fitch Ratings assigned a BB+ rating to Solectron Corp.'s new credit facility made up of a $200 million 364-day revolver and a $250 million multi-year facility due 2005 and confirmed the company's existing ratings including its senior unsecured debt at BB and ACES at B+. The outlook remains negative.

The new facility is $50 million smaller than the $500 million facility it replaces and is secured by the company's domestic assets and benefits from a covenant package that limits excess leverage, protects against ongoing operating losses, and requires a minimum liquidity profile.

Fitch said its rating of the secured bank facility also recognizes the senior position the facility has in the company's capital structure and the large amount of capital junior to the bank facility. If fully drawn, Fitch estimates the senior secured credit facility would represent approximately 10% of the company's capital structure.

Solectron's ratings continue to reflect the challenging demand environment for technology, especially telecommunications, pricing pressures for printed circuit board (PCB) fabrication, lower but improved capacity utilization levels, and event risk of restructuring programs, Fitch said. The ratings also consider Solectron's top-tier position in the electronic manufacturing services industry, consistent operating cash flow and free cash flow, diversity of end-markets and geographies, altered capital structure, solid cash position, and recent working capital improvements (mostly from increased inventory turns) albeit in an industry downturn.

The negative outlook indicates that if adverse market conditions persist, outsourcing contracts do not materialize from new customers, the company makes significant cash acquisitions, or if it is unsuccessful in execution of announced restructurings, the ratings may be negatively impacted, Fitch said.

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