Moody's rates Alaris notes B3, loan B1

Moody's Investors Service assigned a B3 rating to Alaris Medical Systems, Inc.'s planned $210 million senior subordinated notes due 2011 and a B1 rating to its new $30 million revolving credit facility and $235 million term loan B. The outlook is stable.

Moody's said the ratings are based on Alaris' proposed restructuring, in which it plans to raise additional equity of about $90 million and use it plus the proceeds of its new debt and balance sheet cash to retire a substantial amount of debt. The rating action also incorporates the company's improving prospects.

Moody's said the transaction will reduce debt and extend maturities, resulting in a positive impact on the company's credit profile. As a result of its capital restructuring, Alaris will reduce debt materially, improving its credit metrics. It will also simplify its capital structure, eliminating the need to channel funds from the former operating subsidiary to the holding company in order to service the latter's debt. Finally, it will extend the average life of its obligations.

The rating action also acknowledges the company's strong position in its niche, its improved operating performance and its brightening prospects for growth, Moody's said.

The stable rating outlook reflects Moody's belief that Alaris will continue to reduce debt, as improving growth prospects and operating efficiencies generate moderately growing cash flow.

As a result of the transaction, Alaris' debt will fall from $527.0 million as of fiscal 2002 to $432.0 million for (projected) 2003 and the weighted average maturity of its debt will also increase to 6.9 years from 3.6 years, Moody's said. The reduction in debt will cause the company's debt metrics to improve. Moody's estimates that total debt/EBITDA will fall to about 3.8 in 2003 from 5.5 in fiscal 2002. Moody's further estimates that EBIT/interest expense will rise to about 2.6x in fiscal 2003 from 1.2x in fiscal 2002 and total debt/book capitalization will drop to about 89% in the fourth quarter of 2003 from 106% as of the fourth quarter of 2002.

S&P puts Alaris on positive watch, rates notes B-, loan BB-

Standard & Poor's put Alaris Medical Inc. and its operating company Alaris Medical Systems Inc. on CreditWatch positive and assigned a B- rating to its planned $210 million senior subordinated notes due 2011 and a BB- rating to its new $235 million term loan due 2009 and $30 million revolving credit facility due 2008. Existing debt ratings are $170 million 11.625% senior notes due 2006 at B+, $200 million 9.75% senior subordinated notes due 2006 at B- and $165 million 11.125% senior discount notes due 2008 at B-.

Besides the additional financial improvement afforded by the new issues, the higher rating on Alaris would reflect its revitalized portfolio of advanced medication safety products, a product line that has strengthened the company's cash flows and enabled it to repay its debt, S&P said.

During the past few years, Alaris has addressed inefficiencies in its manufacturing processes and cost structure, revived what had been a relatively unprolific R&D program, and launched a number of well-received new products.

Alaris' ratings continue to reflect the company's relatively narrow operating focus, an exposure to competitive innovations in its core technologies, and its still-aggressive debt leverage, S&P said. However, these weaknesses are partly offset by Alaris' leading positions in certain strong niche medical businesses; its relatively stable earnings from recurring-sale consumable products (representing more than 60% of sales); and contracts with large, domestic group-purchasing organizations.

Given the strong sales levels of Alaris' product suite, its robust pipeline, and its success in managing costs, the company should be able to maintain profitability and cash flow protection measures that are in line with the rating, S&P said. Medium-term operating margins are expected to average in the low-20% area, return on capital in the high-teens, funds from operations to total debt in the mid-teens, and EBITDA interest coverage above 3.5x. Although global economic conditions will remain a factor for the 30% of sales generated outside of the U.S., financial hedges could partly mitigate foreign exchange exposure. Pro forma for the proposed debt and equity transactions, Alaris' capital structure will be delevered to below 4x total debt to EBITDA and a high-80% total debt to total capital ratio. These compare with 5.9x and 106%, respectively, at year-end 2002.

S&P puts TNP on watch

Standard & Poor's put TNP Enterprises Inc. and subsidiary Texas-New Mexico Power Co. on CreditWatch negative including TNP's $275 million 10.25% senior subordinated notes due 2010 and $185 million bank loan at BB+ and $100 million senior redeemable preferreds at BB and Texas-New Mexico Power's $175 million 6.25% senior notes due 2009 at BBB-.

S&P said the company's ability to achieve investment-grade financial ratios by the end of 2005 is doubtful.

The current rating was initially assigned at the time of the leveraged buyout of the company in 2000 based on expectations that debt would be significantly reduced with the proceeds from the sale of the company's only generating plant, TNP ONE, and subsequently by the securitization of stranded costs in 2005, which would pay down about $395 million, S&P noted.

The law deregulating electricity in Texas permits utilities to securitize unrecovered plant cost. However, in November 2002, TNP sold the plant for less than was originally anticipated, which leaves a greater amount of debt to be paid down in 2005, and a greater amount of interest expense to be paid over the interim.

Moreover, the business profile was expected to reflect that of an electricity distribution business with stable earnings from fees collected from sellers of electricity, S&P said. However, First Choice, the retail electric provider associated with Texas-New Mexico Power, incurred significant costs during the first quarter gas price spike - a cost that will slow the financial recovery of TNP Enterprises.

Fitch cuts TNP

Fitch Ratings downgraded TNP Enterprises, Inc. and Texas New Mexico Power Co. including cutting TNP's senior secured bank facility to BB from BB+, senior subordinated notes to BB- from BB and preferred stock to B+ from BB- and Texas New Mexico Power's senior unsecured notes to BB+ from BBB-. The outlook is stable.

S&P said the downgrades at TNP reflect the negative impact on consolidated financial results from expected losses at First Choice Power and slower than anticipated debt reduction. Due to a significant disruption in First Choice's hedging program during the fourth quarter 2002 through March of this year, TNP is likely to experience significant incremental purchased power costs during 2003, although this exposure is now limited by call options and contracts.

Texas New Mexico Power's rating is downgraded based on the constrained liquidity and reduced profits of TNP and First Choice and the financial links between Texas New Mexico Power and First Choice, Fitch said.

While there are numerous challenges facing TNP and First Choice, the stable outlook reflects significant improvements in hedging commodity risk and recent modifications to the parent's bank facility that reduces the likelihood of covenant defaults, Fitch added.

S&P rates Vertis notes B-

Standard & Poor's assigned a B- rating to Vertis Inc.'s new $350 million 9.75% senior secured second lien notes due 2009 and confirmed its existing ratings including its senior secured debt at B+ and senior unsecured debt at B-. The outlook is negative.

S&P said that on retirement of the term A and B loans using proceeds of the note sale S&P will raise the senior secured debt to BB- from B+.

The ratings are based on the consolidated credit quality of Vertis Holdings. The ratings reflect Vertis' high debt levels and the competitive market conditions, S&P said.

Consolidated operating lease-adjusted debt to EBITDA was in the low-6x area and EBITDA coverage of total interest was in the high-1x area, S&P noted. The mezzanine debt at the holding company does not pay cash interest through 2005. As a result, EBITDA coverage of cash interest is more than 2x.

These factors are offset by the company's leading market positions, long-standing customer relationships, and experienced management team.

Long-standing customer relationships, a diversified customer base, and a substantial recurring revenue and cash flow stream drive the company's leading market position in the advertising insert segment, S&P said.

Long-term contracts account for more than 50% of insert and newspaper product revenues, resulting in a more stable revenue base. While this segment accounts for more than 70% of consolidated cash flow, the company's entry into the higher-margin direct marketing and digital services segments has helped to diversify the cash flow base, and provides good growth prospects in the intermediate term, S&P said. However, the weak economy and lower advertising spending over the past few years have significantly affected retailers, which lowered volumes and sales for Vertis.

Still, in an effort to mitigate the effect of a weaker economic environment, the company has simplified its corporate structure, realigned its sales force to focus on cross-selling all of its products and services, and reduced its overall cost structure. At the end of 2002, Vertis' restructuring efforts eliminated approximately 1,500 positions and closed 26 facilities since January 2000. This has enabled the company to recognize significant costs savings.

Moody's rates Vertis notes B2

Moody's Investors Service assigned a B2 rating to Vertis, Inc.'s new $350 million 9.75% senior secured second lien notes due 2009 and confirmed its existing ratings including its $348 million 10.875% senior notes due 2009 at B3, $250 million senior secured revolving credit facility, $108 million senior secured term loan A and $184 million senior secured term loan B at B2 and $201 million outstanding 13½% senior subordinated notes due 2009 at Caa1. The outlook is stable.

Moody's said it expects to upgrade the revolver to B1 when the term loan A and B are retired from proceeds of the note sale. The upgrade would recognize stronger asset protection metrics afforded to the significantly reduced level of first lien secured bank creditors. However, this action will be contingent upon Vertis receiving covenant relief sufficient to remove any concern regarding prospective covenant tightness.

The ratings reflect Vertis's high leverage, competitive pressure, relatively narrow margins, and the dependency of its business upon customer insert and direct mail spending which has experienced a protracted slowdown since 2001, Moody's said.

The ratings are supported by Vertis's scale, its ability to maintain and grow EBITDA during 2002 largely through cost-cutting measures, its solid market position in the newspaper insert and direct mail businesses and the strength of its well-established customer relationships.

Vertis's total debt (including securitization and parent mezzanine debt) to EBITDA of approximately 6.7 times at the end of March 2003 represented a deterioration from the end of the prior quarter and prompted management to question ongoing covenant compliance should fragile economic conditions continue, Moody's said. Excluding parent mezzanine debt, leverage stood at 6.0 times EBITDA at the end of the first quarter of 2003. Current leverage covenants ratchet down from 6.15 times at the end of first quarter of 2003 to 5.75 times at the end of the fourth quarter of 2003, and there can be no assurance of continued access to undrawn revolver commitments, absent an amendment.

The company is presently engaged in discussions with its banks to relax the covenant structure of its existing credit facility, and to exclude $127 million of parent mezzanine debt from leverage covenant calculations.

The company will increase its interest expense burden following the proposed transaction, as it replaces bank debt with the significantly higher coupon public debt, Moody's added.

Moody's puts Scotts on upgrade review

Moody's Investors Service put The Scotts Co. on review for possible upgrade including its $575 million senior secured revolving credit facility due 2005, $107 million senior secured term loan A due 2005 and $241 million senior secured term loan B due 2006 at Ba3 and $323 million 8.625% senior subordinated notes due 2009 at B2.

Moody's said the review is in response to significant operating improvements in fiscal 2002, which have continued into fiscal 2003.

The benefits of Scotts' restructuring activities and sales growth since fiscal 2001 have resulted in meaningful gains to its profitability and asset efficiency measures, while a focus on debt reduction has improved the company's financial flexibility and credit metrics, Moody's noted.

Scotts has reinvested some of its cost savings in brand support and product development, which has allowed it to maintain leading domestic market share positions in its key product categories.

S&P cuts Compass Minerals, rates Salt notes B-

Standard & Poor's downgraded Compass Minerals Group Inc. including cutting its $135 million senior secured revolving credit facility due 2008 and $225 million senior secured term loan due 2009 to B+ from BB-, $325 million 10% senior subordinated notes due 2011 to B- from B and Salt Holdings Corp.'s $60 million senior discount notes to B- from B and assigned a B- rating to Salt Holding's new $179.6 million senior subordinated discount notes due 2013. The outlook is stable.

S&P said the downgrade reflects the increased debt leverage and a more aggressive financial policy by the company than previously anticipated.

The proposed subordinated discount notes are the company's second debt offering in six months, following on the heels of a $60 million discount notes in December 2002 to redeem the preferred stock held by its majority shareholder Apollo Management V, LP.

Compass' ratings reflect its leading position in the recession-resistant salt production industry, as well as its high margins, steady cash flow generation and high barriers to competitor entry, S&P said. These factors are more than offset by its aggressive financial profile and its limited product and mine diversity.

Compass improved its EBITDA levels to approximately $135 million for the last 12 months ended March 31, 2003, from $122 million in the previous 12-month period due to increased strong demand from inclement weather, good performance from non-weather-dependent businesses, and management's cost reductions, S&P said. The company had made good progress in the past year generating excess cash flows and reducing debt. Indeed, the company reduced its debt at its operating subsidiary by $70 million over the past year.

However, the company has more than offset such actions by its recent debt offerings used for its shareholders instead of reinvestment into the company, which have elevated the company's debt to its highest level, S&P said. As a result, its total debt to EBITDA increased to 4.6x from 4.0x for the last 12 months ended March 31, 2003. This measure is expected to modestly improve, as any additional debt repayments will be somewhat offset by the accretion in its discount notes.

S&P raises Dade Behring outlook

Standard & Poor's raised its outlook on Dade Behring Inc. to positive from stable and confirmed its existing ratings including its senior secured debt at B+ and subordinated debt at B-.

S&P said the action recognizes the small, but promising, improvements in Dade Behring's financial profile since its emergence from bankruptcy in the fall of 2002.

Moreover, concerns that customers would switch suppliers due to uncertainties about Dade's ultimate fate have not been borne out. Indeed, during this period the company's installed base of diagnostic instruments has grown at a 7% annual rate.

Dade Behring's ratings reflect its important position as a maker of medical diagnostic equipment, offset by the uncertainty of its performance in the face of formidable competition, S&P said.

Although Dade spends 8% of its revenue on R&D, technology risk remains a factor, as larger companies with greater financial capabilities compete in each of the company's markets, S&P noted. Performance success will ultimately hinge on how well Dade can continue to sell new instruments and, as the current installed base ages, launch its new generation of products and increase market penetration in the face of formidable competition.

An onerous debt burden, incurred as the company expanded its product offerings and geographic presence through acquisitions, led to a prepackaged bankruptcy filing in August 2002. The terms of the bankruptcy allowed Dade to eliminate roughly $700 million of pre-bankruptcy debt, reducing its total debt to about $800 million. Lease-adjusted debt to capital of 60% and total debt to EBITDA of about 3.3x indicate a leveraged, but much less aggressive, financial profile, S&P said.

Fitch rates Terra notes B-

Fitch Ratings assigned a B- rating to Terra Industries' new $200 million senior secured second priority notes and confirmed its existing ratings including its senior secured credit facility and senior secured notes at BB- and senior unsecured notes at B-. The outlook is stable.

Fitch said the ratings reflect Terra's major market positions in UAN solutions, ammonia, ammonium nitrate, and methanol; the company's high leverage; its exposure to natural gas price volatility; and its overall performance during the current cyclical downturn.

During the current downturn, the company has continued to reduce total debt, though EBITDA, cash from operations and net free cash flow have fluctuated with cash from operations and net free cash flow entering negative territory in some years, Fitch said. Over the past three years, credit statistics have been relatively stable for the current rating level.

The stable outlook indicates the likelihood that the company's near-term financial performance would not significantly deteriorate despite expected margin pressure in 2003, Fitch said. Financial performance is expected to be similar to 2002 levels due to higher average product pricing mitigated by higher average natural gas costs.

Fitch rates PolyOne notes B, off watch, upgrades bank debt

Fitch Ratings has assigned a B rating to PolyOne Corp.'s new 10.625% senior unsecured notes and confirmed its senior unsecured debt at B and upgrades its senior secured bank debt to BB-. The ratings were removed from Negative Rating Watch. The outlook is negative.

Fitch said it took PolyOne off watch since its refinancing plans are now complete and its liquidity situation has improved.

The ratings reflect PolyOne's continued weak financial performance, Fitch added. For the trailing 12-month period ended March 31, 2003, EBITDA-to-interest incurred was 1.9 times and total debt (including the A/R program balance)-to-EBITDA was 9.1x.

Post-refinancing, liquidity related to the credit agreement and the A/R program increased due to the initial change in availability of these facilities, particularly the A/R program which is a primary source of liquidity, Fitch said.

Fitch said it upgraded the credit facility to reflect the likelihood of principal recovery based on the facility's collateral in substantially all domestic inventory and intellectual property and some domestic PPE. The credit agreement was amended as part of the recent refinancing and now includes a condition precedent to each borrowing that limits borrowing to 95% of the maximum amount permitted by the public debt indentures that may be secured without requiring PolyOne to equally and ratably secure its public debt.

S&P raises CSK outlook, rates loan BB-

Standard & Poor's raised its outlook on CSK Auto Inc. to positive from stable, confirmed its existing ratings including its senior secured bank loan at BB-, senior unsecured debt at B and senior subordinated debt at B- and assigned a BB- rating to its planned $325 million bank facility.

S&P said the revised outlook reflects CSK's improved operating performance in 2002 as enhanced liquidity through a recapitalization in 2001 has allowed the company to better utilize vendor rebates and implement in-store initiatives to help improve sales trends.

Additionally, a secondary equity offering and free cash flow generation in 2002 reduced debt levels by about $145 million.

CSK's planned bank facility is expected to provide sufficient liquidity to fund operations and allow further flexibility to reduce debt levels, S&P said. If CSK can continue to improve operations and reduce debt levels over the next two years, an upgrade would be considered provided the company's growth strategy does not become significantly more aggressive.

Despite CSK's strong market presence in the western U.S., heightened competition in several of the company's key markets, such as California, continues to affect its business risk profile, S&P said. CSK competes primarily with AutoZone Inc., which has greater financial resources, in many of its markets. Because of this, CSK could face increased competitive pressure should AutoZone augment its presence in other key markets, such as the Northwest.

Same-store sales have increased 7% for fiscal 2002 as the company has improved in-stock positions and benefited from new merchandise offerings. Lease-adjusted EBITDA coverage of interest improved to 1.7x in 2002 from 1.3x in 2001 because CSK improved operations and reduced debt levels. Operating margins have improved to over 17% in 2002 compared with 16% in 2001 as CSK has benefited from merchandising initiatives and improved vendor allowances, S&P said.

S&P notes Regal ups special dividend

Standard & Poor's said Regal Entertainment Group's (BB-/stable) decision to increase its extraordinary dividend by $75 million to between $675 million and $700 million will not affect its ratings or outlook.

But, S&P said any negative surprises or additional moves that increase leverage or decrease discretionary cash flow are likely to lead to a revision of the outlook to negative or a ratings reassessment.

Regal will fund the additional dividend by boosting the new convertible offering to $200 million from $125 million. With the greenshoe, the issue may be further increased to $240 million, which would be retained to boost liquidity and be used for general corporate purposes.

Regal still plans on reducing its quarterly dividend by 20% as previously expected, which will offset some of the cash flow impact from the higher interest expenses, S&P said.

Pro forma lease-adjusted debt to EBITDA increases to about 4.5x, which is only marginally higher than previously expected. The company should still generate meaningful levels of discretionary cash flow and maintain substantial borrowing capacity under its $145 million revolving credit facility.

Even so, the transaction, and the shift in financial policy, will effectively cap Regal's corporate credit rating at BB- for some time. In addition, the company's capacity to add more debt at the current rating level is substantially reduced.

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