Moody's cuts Yellow, rates convertible (P)Ba1

Moody's downgraded the senior unsecured rating of Yellow Corp. to Ba1 from Baa3, commercial paper to Not Prime from Prime-3 and assigned a provisional Ba1 rating to the proposed convertible notes.

Long-term ratings also remain under review for possible downgrade.

The downgrade anticipates the proposed acquisition of Roadway Corp. will be completed as outlined by management and takes into account the additional debt required, Moody's said.

The downgrade reflects weakened debt protection measures, potential loss of revenue and possible business interruption as a result of the merger. Uncertainty over the timing and magnitude of restored industrial growth and limited history of trucking mergers also were factors in the downgrade.

Roadway's senior unsecured debt rating remains under review for possible downgrade.

According to Moody's, anticipated financing for the transaction would more than double the combined existing debt level of Yellow and Roadway. Pro forma debt to EBITDA for the last 12 months at June 30 would be approximately 2.7x. Also, Yellow and Roadway have significant off balance-sheet lease obligations.

Moody's noted the transaction requires review by the Justice Department, which could impose restrictions or conditions that change the financial profile of Yellow/Roadway.

Yellow contemplates using the convertible proceeds to prefund a portion of the acquisition funding. There are defined conditions for optional conversion, including a rating trigger of lower than a B2 on the convertibles.

S&P rates Yellow converts BBB

Standard & Poor's assigned a BBB rating to Yellow Corp.'s proposed $150 million 20-year senior unsecured convertible notes and placed the rating on negative watch.

S&P said it anticipates assigning a BBB- corporate credit rating to Yellow-Roadway Corp. upon completion of the Roadway Corp. (BBB/negative watch) acquisition. Ratings on both companies remain on negative watch pending the merger.

When the transaction is completed, the ratings will be lowered and a negative outlook will be assigned. S&P said the Yellow convertible notes would be cut to BB+, one notch below corporate credit, due to the amount of secured debt relative to assets.

The downgrade will be based on increased debt levels and weaker financial profile of the combined entity, S&P said. Pro forma June 30 lease-adjusted debt to capital will be around 56% versus 33% at Dec. 31 for Yellow, and debt to EBITDA will be 3.1x versus 1.4x.

Profitability and cash flow measures will also be affected, with pro forma pretax interest coverage of 2.5x versus 3.4x, EBITDA interest coverage of 4.3x versus 8.5x and funds flow to debt of about 26% versus 72%.

Yellow-Roadway's revenues and earnings are expected to increase with the recovering economy, though credit measures are expected to remain somewhat weak, with debt to capital remaining above 50% and debt to EBITDA over 2.0x over the intermediate term.

At June 30, Yellow had $50 million of cash and $148 million available under its $300 million unsecured bank credit agreement, which expires in April 2004, plus $150 million available under its $200 million securitization program. On closing, Yellow-Roadway is expected to have $82 million of cash.

Fitch confirms PMI ratings

Fitch Ratings confirmed The PMI Group Inc.'s ratings, including the 2.5% convertibles at AA- with a negative outlook, in response to its announcement that it will serve as the lead strategic investor of a consortium group assembled to acquire Financial Guaranty Insurance Co. from General Electric Co.

Other members of the consortium include The Blackstone Group, The Cypress Group, and CVIC Partners (owned by Bank of America).

For its $607 million investment, PMI will own approximately 42% of FGIC. The FGIC transaction furthers PMI's diversification strategy, in general, and its long-standing interest in financial guaranty, in particular.

About half of PMI's portion of the price will come from internal funds. The remainder will come from a $200 million mandatory convertible and a $100 million stock sale. The meaningful equity composition of this financing strategy results in only a modest increase in debt leverage, from 16.2% to 17.3%.

The outlook is negative, primarily indicative of a company trend towards more active management of the holding company's capital structure, including an expanded debt leverage appetite.

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